Determinants of IPO-firms’ merger appetite

Abstract

This paper proposes a model with mutual feedback effects to investigate IPO-firms’ information-related objectives to engage in post-IPO mergers in an economy with informational synergies. The model demonstrates that the probability of a post-IPO merger (merger appetite) positively affects the information production by a speculator in the financial market. This has two opposite effects on the IPO-firm’s value. (1) It exacerbates after-market illiquidity and thus increases underpricing in the primary market. (2) Simultaneously, it enhances expected net present value (NPV) of investment opportunities via two information-related channels: direct channel due to informational synergies among firms, indirect channel via the speculator’s information production. The model predicts a tradeoff between underpricing and expected NPV of investment opportunities determining the merger appetite of IPO-firms. In addition, the model endogenizes the merger price the IPO-firm expects to pay to shareholders of a private firm. It is demonstrated that the described tradeoff and the mutual feedback effects also determine the expected merger price.