Journal Article

Takeover Timing, Implementation Uncertainty, and Embedded Divestment Options

Luis H. R. Alvarez and Rune Stenbacka

in Review of Finance

Volume 10, issue 3, pages 417-441
Published in print September 2006 | ISSN: 1572-3097
Published online September 2006 | e-ISSN: 1573-692X | DOI: http://dx.doi.org/10.1007/s10679-006-9002-y
Takeover Timing, Implementation Uncertainty, and Embedded Divestment Options

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We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relation between the bargaining power of the acquiring firm and the takeover incentives. The takeover threshold is decreasing as a function of the expected primary takeover gain and the embedded divestment gain. Decreased implementation uncertainty stimulates takeover activity. This uncertainty concerns the delay until either primary takeover synergies or subsequent divestment gains are realized. We demonstrate how the relation between volatility and takeover timing depends on the functional form of the profit flow with implementation uncertainty.

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Subjects: Financial Law ; Financial Institutions and Services ; Financial Markets

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