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Value-Maximizing Managers, Value-Increasing Mergers and



Some acquisitions can be viewed as a means for procuring proprietary technology. For such acquisitions, it may be just as important to block competitors from getting the technology as it is to obtain the technology. If a firm will be adversely affected by a competitor’s acquisition, then it can rationally “overpay ” for the target to avoid this outcome within a value-maximizing framework. We study the behavior of two bidders that enter a bidding contest for the target where the contest is modelled as a second-price auction with costly losing. In contrast to most of the existing literature, the model supports various outcomes that are consistent with empirical evidence within a rational and value-maximizing framework. The model reconciles two empirical regularities: mergers increase value through synergies, and acquirors earn zero or negative returns on average. It also is consistent with the recent empirical evidence suggesting that mergers come in response to an economic change, and tend to cluster within industries

Year: 2003
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