Merger negotiations with stock market feedback

Merger negotiations routinely occur amidst economically significant a target stock price runups. Since the source of the runup is unobservable (is it a target stand-alone value change and/or deal anticipation?), feeding the runup back into the offer price risks "paying twice" for the target shares. We present a novel structural empirical analysis of this runup feedback hypothesis. We show that rational deal anticipation implies a nonlinear relationship between the runup and the offer price markup (offer price minus runup). Our large-sample tests confirm the existence of this nonlinearity and reject the feedback hypothesis for the portion of the runup not driven by the market return over the runup period. Also, rational bidding implies that bidder takeover gains are increasing in target runups, which our evidence supports. Bidder toehold acquisitions in the runup period are shown to fuel target runups, but lower rather than raise offer premiums. We conclude that the parties to merger negotiations interpret market-adjusted target runups as reflecting deal anticipation.Merger negotiations; stock market feedback

Rational plunging and the option value of sequential investment : the case of petroleum exploration

Any investor in assets that can be exploited sequentially faces a tradeoff between diversification and concentration. Loading a portfolio with correlated assets has the potential to inflate variance, but also creates information spillovers and real options that may augment total return and mitigate variance. The task of optimal portfolio design is therefore to strike an appropriate balance between diversification and concentration. We examine this tradeoff in the context of petroleum exploration. Using a simple model of geological dependence, we show that the value of learning options creates incentives for explorationists to plunge into dependence; i.e., to assemble portfolios of highly correlated exploration prospects. Risk-neutral and risk-averse investors are distinguished not by the plunging phenomenon, but by the threshold level of dependence that triggers such behavior. Aversion to risk does not imply aversion to dependence. Indeed the potential to plunge may be larger for risk-averse investors than for risk-neutral investors. To test the empirical validity of our theory, we examine the concentration of bids tendered in petroleum lease sales. We find that higher levels of risk aversion are associated with a revealed preference for more highly concentrated (i.e., less diversified) portfolios

Diversification and the value of exploration portfolios

Conventional wisdom holds that dependence among geological prospects increases exploration risk. However, dependence also creates the option to truncate exploration if early results are discouraging. We show that the value of this option creates incentives for explorationists to plunge into dependence; i.e., to assemble portfolios of highly correlated exploration prospects. Risk-neutral and risk-averse investors are distinguished not by the plunging phenomenon, but by the threshold level of dependence that triggers such behavior. Aversion to risk does not imply aversion to dependence. Indeed the potential to plunge may be larger for risk-averse investors than for risk-neutral investors

Managing a portfolio of real options : sequential exploration of dependent prospects

We consider the impact of sequential investment and active management on the value of a portfolio of real options. The options are assumed to be interdependent, in that exercise of any one is assumed to produce, in addition to some intrinsic value based on an underlying asset, further information regarding the values of other options based on related assets. We couch the problem in terms of oil exploration, where a discrete number of related geological prospects are available for drilling, and management₂s objective is to maximize the expected value of the combined exploration campaign. Management₂s task is complex because the expected value of the investment sequence depends on the order in which options are exercised. A basic conclusions is that, although dependence increases the variance of potential outcomes, it also increases the expected value of the embedded portfolio of options and magnifies the value of optimal management. Stochastic dynamic programming techniques may be used to establish the optimal sequence. Given certain restrictions on the risk structure, however, we demonstrate that the optimal dynamic program can be implemented by policies that are relatively simple to execute. In other words, we provide sufficient conditions for the optimality of intuitive decision rules, like "biggest first," "most likely first," or "greatest intrinsic value first," and we develop exact analytic expressions for the implied value of the portfolio. This permits the value of active management to be assessed directly. Finally, the sufficient conditions we identify are shown to be consistent with plausible exploration risk structures

The determination of phosphates in sea water

The concentration of phosphates in sea water varies from 0.000 to about 2.00 microgram atoms (µg. atoms) phosphate-phosphorus per liter at 20° C. Occasionally a maximum of 3.00 µg. atoms may be found in some deep arms of the sea

The determination of nitrates in sea water

The concentrations of nitrite-nitrogen in sea water varies from 0.000 to 2.00 microgram atoms (µg. atoms) per liter of sea water at 20° C. In the open ocean nitrites are seldom found in depths below 100 meters, and even at these depths the water may be completely devoid of nitrites. When occurring in waters near the surface, the concentration is generally less than 0.10 µg. atom of nitrite-nitrogen per liter. The higher values are obtained at times in the waters on the continental shelf and in sounds, straits, fjords and estuaries

The determination of silicate in sea water

The normal range of silicate in sea water is from 0.0 to about 200 µg. atoms Si per liter at 20° C. It has not been fully demonstrated whether the silicate determined by the method described below is in the colloidal or ionic form or both

Notes on the determination of dissolved oxygen in sea water

The oxygen dissolved in sea water is usually determined by the classical method of Winkler. Probably because of the large number of investigators who have used this method, there have developed various modifications in the method of collecting samples, in the standardization of the sodium thiosulfate solution, and in the titration of the samples. It is the purpose of this paper to discuss these various methods, the sources of possible error, and to present the best procedure for standardization of the sodium thiosulfate solution

Merger Negotiations with Stock Market Feedback

Do preoffer target stock price runups increase bidder takeover costs? We present model-based tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value minus runup) that is greater than minus one-for-one and inherently nonlinear. If merger negotiations force bidders to raise the offer with the runup—a costly feedback loop where bidders pay twice for anticipated target synergies—markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while rejecting the costly feedback loop