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Essays on Mergers and Acquisitions

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Chapter 1 examines the question of how to sell a firm when potential buyers do not know how many other potential buyers there are. The seller can choose to sell the firm either through bilateral negotiations or through an auction. In equilibrium, if the seller observes the number of buyers before choosing the mechanism, the choice can signal information about the number of buyers and lower expected revenue. Broadly speaking, the seller chooses an auction if the expected number of buyers is high and negotiations otherwise. Empirical implications of the theory are (i) The revenue is higher if buyer valuations are less volatile; (ii) More risk-averse sellers choose auctions more often; (iii) If the seller risk-aversion is above (below) a threshold value, the average transaction price in auctions is greater (less) than that in negotiations. Committing to a mechanism before seeing the number of buyers increases the seller's revenue. Chapter 2 considers the problem of optimal contracting with an M&A Advisor during the sale of a firm. Both the buyer and the seller are uninformed about the value of synergies, but they can hire an M&A Advisor. Suppose, though, that the seller and buyer face a moral hazard problem. If the advisor's effort is not observable, he has the option of not exerting effort and reporting any of the possible values. Should the seller and buyer hire an advisor and what is the optimal contract that they should sign with him? We find that the probabilities with which the buyer and seller hire their advisors and the optimal contracts are determined simultaneously in equilibrium. Both contracts depend on two variables- whether the transaction succeeds or not and, if it does, the value of the transaction. The seller's optimal contract with his advisor is unique, but the buyer's optimal contract can take a variety of forms. The compensation of the seller's advisor is monotonically increasing in the transaction value. Neither advisor is paid if the transaction fails. In equilibrium, both advisors exert effort, report truthfully and do not extract any information rents. However, the first best is not obtained because the transaction can fail even though it is socially optimal. Chapter 3 studies how merger decisions between public firms in the US are affected by the similarity between the product markets of the acquirer and the potential target. The relation between the likelihood of the merger and the product market similarity is non-monotonic, in the shape of an inverted U. We offer two reasons for this finding. First, when the product markets are very similar, there is a high chance that antitrust investigations will block the merger. We find that this effect is stronger in markets that are more concentrated and in years where antitrust regulatory intensity is high. Second, the synergies from the merger are less if the product markets are very related. Hence, firms are more likely to acquire targets with which they have a medium rather than a high level of product market similarity.

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  • 04/22/2019
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