The value of a merger and its optimal timing

Masaya Okawa and Motoh Tsujimura

Applied Financial Economics, 2009, vol. 19, issue 18, 1477-1485

Abstract: In this article, we study a firm's merger strategy. When two firms merge, there are two types of transaction costs: fixed and proportional. To study the firm's merger strategy, we formulate the problem faced by the newly merged firm's management as an optimal stopping problem. Then, we derive the optimal merger strategy; that is, we find the optimal value of the merger option. We also show that the optimal strategy is unique. Furthermore, we illustrate numerical examples and undertake a comparative static analysis of the merger option.

Date: 2009
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DOI: 10.1080/09603100902984319

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