Mergers and acquisitions with conditional and unconditional offers
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Mergers and acquisitions with conditional and unconditional offers Armando Gomes1 · Wilfredo Maldonado2 Accepted: 25 May 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This paper proposes a dynamic model for the process of industry consolidation by sequences of mergers and acquisitions that create synergy gains to merging firms and may impose positive or negative externalities on the remaining firms in the industry. We allow firms to make acquisition offers that are conditional and unconditional on acceptances of target firms, instead of the usual conditional offers. We show that this expansion of the offer set results in faster and more economically efficient industry consolidations, as acquirers do not have to trade-off surplus extraction and efficiency. The acquirer can make surplus maximizing merger offers conditional to acceptances, and simultaneously capture efficiency gains by making unconditional offers to the remaining firms. We characterize the Markov perfect equilibrium and show that equilibrium always exists and is Pareto efficient. Finally, to illustrate the model and our main findings, we show that the equilibrium is unique in industries with three firms, and we derive the closed-form solution for the equilibrium value and the merger dynamics. Keywords Mergers and acquisitions · Multilateral negotiations · Coalitional bargaining · Industry consolidations JEL Classification C71 · C72 · C78 · D62 · G34
* Armando Gomes [email protected] Wilfredo Maldonado [email protected] 1
Washington University in St. Louis, One Brookings Drive, St. Louis, MO 63130, USA
2
University of São Paulo and Federal University of Goiás, Avenida Professor Luciano Gualberto, 908, Butantã, São Paulo, SP CEP 05508‑010, Brazil
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A. Gomes, W. Maldonado
1 Introduction Industry consolidations by sequences of mergers and acquisitions have reshaped many industries such as the airlines, telecommunications, hospitals and banking industries. Mergers and acquisitions create synergies, for example, due to economies of scale and scope driving down costs, and also often impose externalities on the remaining firms in the industry. These externalities can either be positive, for example, in an setting with Cournot competition without significant cost savings, or negative, for example, if there are large savings on variable costs such as in the railroad mergers described in Esty and Millett (2005). This paper proposes a model for the dynamic process of industry consolidation and addresses its economic efficiency properties. In Sect. 2 we present the dynamic mergers and acquisitions game. The game starts with an industry with many firms (the players), and the mergers and acquisitions (or coalition formation) process is modeled as a dynamic non-cooperative game, where firms are randomly chosen to make offers to acquire or merge with other firms, followed by the target firms’ responses. Firms after a merger are allowed to make further acquisitions, and we assume that full industry
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