Mergers and Acquisitions with Conditional and Unconditional Offers

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 to acceptances of target firms, instead of the usual conditional offers. We show that this minimum expansion allowing a more flexible 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 mergers offers conditional to acceptances, and simultaneously capture efficiency gains by making unconditional offers to the remaining firms, leading to a faster industry consolidation process. We characterize the Markov perfect equilibrium of the mergers and acquisitions game 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.