Designing optimal M&A strategies under uncertainty

The recent surge in M&A activities highlights firms' motivation to gain or maintain market leadership. Along with the unparalleled volume of M&As, more and more firms favor establishing acquisition programs that lead to multiple subsequent M&As over time. In this paper, we study the entrance in a market by means of M&A when different strategies to acquire a prominent incumbent are available to the acquirer. In particular, the firm might opt for a big leap, where it acquires the prominent incumbent; the alternative is to design an acquisition program that allows moving in small steps by acquiring a minor company first and the larger prominent player later on. We employ a dynamic game-theoretic real options model to investigate the effect of uncertainty and synergies on the strategy choices and also consider alternative contract designs for the acquisition program, such as hostile, friendly or mixed. Our findings reveal that firms prefer acquisition programs to big leap strategies when the industry exhibits high levels of uncertainty and can occur even when the acquisition of the first target destroys value. Moreover, some acquisition programs profit from a first mover pass-through where the acquirer can jointly utilize his first-mover advantage when negotiating with multiple targets. Finally, novel testable hypotheses are derived from the model. (C) 2019 Elsevier B.V. All rights reserved.This work was carried out within the funding with COMPETE reference no. POCI-01-0145-FEDER-006683 (Artur Rodrigues) and POCI-01-0145-FEDER-006890 (Paulo J. Pereira), FCT/MEC's (Fundacao para a Ciencia e a Tecnologia, I.P.), and ERDF through the Operational Programme on Competitiveness and Internationalization - COMPETE 2020 under the PT2020 Partnership Agreement. We thank the Editor and the three anonymous referees for their valuable comments and suggestions. We also thank Lenos Trigeorgis, Dean Paxson, Han Smit, Kuno Huisman, Shahriar Khaksari, Nick Huberts, Arkadiy Sakhartov, and participants of the 2017 Annual Real Options Conference in Boston for their helpful comments. Any remaining errors are the sole responsibility of the authors

Why Mergers Reduce Profits and Raise Share Prices: A Theory of Preemptive Mergers

We explain the empirical puzzle why mergers reduce profits and raise share prices. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. We also explain why shareholders of targets gain while acquirers typically break even. These results are derived in an endogenousmerger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared. ZUSAMMENFASSUNG - (Warum Fusionen Profite reduzieren und Aktienpreise steigen lassen) Es wird ein "Mechanismus der Gewinnung eines Vorsprungs durch Fusion" aufgezeigt, der eventuell das empirische Rätsel, warum Fusionen Profite reduzieren und Aktienpreise steigen lassen, erklären kann. Eine Fusion kann starke negative externe Effekte bei den Unternehmen auslösen, die nicht an der Fusion beteiligt sind. Wenn es besser ist ein "Insider" zu sein als ein "Outsider", kann es sein, dass Firmen Fusionieren um dem zuvorzukommen, dass ihre Partner mit jemand anderem fusionieren. Desweiteren ist der Wert eines fusionierenden Unternehmens vor der Fusion niedrig, da er das Risiko ein Outsider zu werden reflektiert. Diese Ergebnisse werden aus einem Modell endogener Fusionen abgeleitet, welches die Bedingungen unter denen eine Fusion stattfindet, wann sie stattfindet und wie der Überschuss verteilt werden wird, vorhersagt.Mergers, Acquisitions, Defensive Mergers, Coalition Formation

Behaviors That Impact the Economic Outcomes of Mergers & Acquisitions; The Premium Price Paid and Return on Investment

This quantitative study explores the impact of overconfidence bias, lying for strategic advantage, and co-operation (or non-cooperation) among 29 highly experienced private equity fund and investment managers. Using four structured experiments, M&A professionals were assigned buyer and seller roles and allowed to choose among investment opportunities. Within a game theory framework, the buyers and sellers bargained over the purchase price. The results of these experiments were explored using a linear regression format. The skill level of the participants was measured using a financial literacy test prior to the experiments and two overconfidence measures were constructed. Lying for strategic advantage was an embedded behavior, and co-operation versus non-cooperation was observed. Results suggest that more experienced buyers, along with more skilled buyers, were able to achieve a lower price paid and higher ROI. Lying for strategic advantage was not found to have an impact on the price paid by buyers. Cooperation was not found to have a statistically significant impact. However, results suggest that when lying and cooperation is employed by a buyer, they can achieve a lower price paid for an acquisition, thus a higher ROI. These findings contribute to our understanding of outcomes observed from private equity transactions

Mergers and acquisitions transactions strategies in diffusion - type financial systems in highly volatile global capital markets with nonlinearities

The M and A transactions represent a wide range of unique business optimization opportunities in the corporate transformation deals, which are usually characterized by the high level of total risk. The M and A transactions can be successfully implemented by taking to an account the size of investments, purchase price, direction of transaction, type of transaction, and using the modern comparable transactions analysis and the business valuation techniques in the diffusion type financial systems in the finances. We developed the MicroMA software program with the embedded optimized near-real-time artificial intelligence algorithm to create the winning virtuous M and A strategies, using the financial performance characteristics of the involved firms, and to estimate the probability of the M and A transaction completion success. We believe that the fluctuating dependence of M and A transactions number over the certain time period is quasi periodic. We think that there are many factors, which can generate the quasi periodic oscillations of the M and A transactions number in the time domain, for example: the stock market bubble effects. We performed the research of the nonlinearities in the M and A transactions number quasi-periodic oscillations in Matlab, including the ideal, linear, quadratic, and exponential dependences. We discovered that the average of a sum of random numbers in the M and A transactions time series represents a time series with the quasi periodic systematic oscillations, which can be finely approximated by the polynomial numbers. We think that, in the course of the M and A transaction implementation, the ability by the companies to absorb the newly acquired knowledge and to create the new innovative knowledge bases, is a key predeterminant of the M and A deal completion success as in Switzerland.Comment: 160 pages, 9 figures, 37 table

Resource-based theory and mergers & acquisitions success

Mergers & acquisitions (M&A) are most popular external growth strategies. While the number of M&A has been increasing during the past decades, on average, only the shareholders of target firms gain value during the acquisitions process, while acquirers do not receive abnormal positive returns. This paper analyses the impact of strategically valuable resources on the success of M&A decisions. We test complementary resource-based hypotheses regarding the value of M&A for the shareholders of both transaction partners. Our sample consists of transactions in the pharmaceutical and biotechnological industry. The results of our study show that the shareholders of both transaction partners will gain above average positive returns only when the acquirer and the target own and combine strategically valuable resources and capabilities. --

Playing at Serial Acquisitions

Behavioral biases can result in suboptimal acquisition decisions-with the potential for errors exacerbated in consolidating industries, where consolidators design serial acquisition strategies and fight escalating takeover battles for platform companies that may determine their future competitive position. To guide objective managerial judgment, and to rationally anticipate the irrational behavior of rival bidders or financial markets, this article proposes a modified option-game toolkit for serial acquisition strategy. It brings together insights from both strategy and finance, which quantify acquisition strategies, thus allowing executives to make rational intuitive decisions under uncertainty

From “Strategic Fit” to Synergy Evaluation in M&A Deals

The aim of this paper is to grasp the processes underlying the genesis and assessment of synergies in M&A deals. We proceed to an in-depth scrutiny of the foundations of synergies using Porter’s model of the value chain. A discernment of the nature of synergies and the mode of their emergence is helpful to clarify to what extent and under which boundary conditions it is appropriate to apply the DCF or the real option techniques for evaluating each type of synergy. Combining both financial tools, the methodology suggested for evaluating the synergies is able to: evaluate projects of M&As, orient the selection of target firms and the definition of the premium of acquisition, and drive the integration processes

A decision- theoretic model for M&A sale processes

A Work Project, presented as part of the requirements for the Award of a Masters Double Degree in Economics and International Business from the NOVA – School of Business and Economics and Insper Instituto de Ensino e PesquisaPRANDO, Thiago Gonzaga de Camargo Ferreira Prando. A decision-theoretic model for M&A sale processes. Dissertation (Mastership) – NOVA School of Business and Economics and Insper Instituto de Ensino e Pesquisa, São Paulo, 2016. When potential buyers receive invitations from target companies to engage in competitive M&A sale processes they face a challenging decision. Considering significant due diligence investments, target value uncertainty and unclear competitive environment, should they accept such invites? The main purpose of this study is to formulate a decision rule for prospective acquirers to enter takeover contests according to these relevant factors. In addition, this dissertation explores the formation of optimal bids in the decisive stage of controlled sales (sealed-bid auctions) with uncertain presence of one competitor. A decision-theoretic model is designed where a potential buyer (Player A) is invited to participate in an M&A sale process. Its due diligence investments are modeled as the purchase of real options and the optimal bid value is calculated according to its expected payoff maximization. The participant has incomplete information regarding the existence of rivals and their strength and takes decisions that seek robustness with respect to misspecifications. Due diligence investments decision rules are established according to Player A’s capabilities to create value through the acquisition, its beliefs regarding the potential rivalry, and required spending to analyze the target. Optimal bidding strategies ultimately depend on our participant’s beliefs concerning the potential competition. Our findings show that an uncertain strong second bidder might prevent Player A to place a higher offer. This is an exciting result that prompts re-thinking on competition’s threat. Sellers and their financial advisors should take these results into account when tailoring efficient sale processes, especially managing a proper perceived competitive environment