The timing of mergers along production chain, capital structure and risk dynamics

Tarsalewska, Monika (2012) The timing of mergers along production chain, capital structure and risk dynamics. Working Paper. Lancaster University, Lancaster.

Abstract

We examine the terms and timing of vertical mergers when the uncertainty concerning stochastic cost of production input provides incentives to integrate. We develop a dynamic model where the acquisition is motivated by cost efficiencies and endogenously derive a merger surplus. We show that during an economic downturn, merging is an alternative to bankruptcy as a solution for a downstream firm to stay in operation. The target in this model can delay the timing of a merger during an economic upturn by strategically postponing its default. Our results contribute to the evidence on a U-shaped pattern of merger waves. We identify industries in which pro- and counter-cyclical vertical mergers are more probable. We also provide asset pricing implications of a merger decision in different economic states.