Risk, Strategy, and Optimal Timing of M&A Activity

Jacco Thijssen

Economic Papers from Trinity College Dublin, Economics Department

Abstract: In this paper, the problem of mergers and acquisitions under pro t uncer- tainty is considered. A two rm model is developed where M&A activity is modelled as an act of risk diversi cation. We study the case where only the larger rm engages in M&A activity and the case where both rms do. It is shown that takeovers can be optimal during both economic expansions and contractions. The option value of M&A activity is determined. We argue that there is a minimum level of positive synergies for M&A activity to be optimal, which is increasing in the level of diversi cation. Furthermore, it is shown that under M&A competition, this option value vanishes completely and that hostile takeovers are never optimal. An analysis of optimal portfolio selection by a risk averse investor shows ambiguous wealth results of M&A activity.

JEL-codes: F (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (2)

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Working Paper: Risk, Strategy, and Optimal Timing of M&A Activity (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:200056

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