M & A Dynamic Games , Threat Values and the Market for Corporate Control ∗

This paper builds on recent advances in the domain of option games under uncertainty and looks closer at determinants that drive friendly mergers. Each firm calculates its payoff resulting from either a friendly merger or hostile takeover that then serves as a credible threat when jointly negotiating the terms of a merger. In contrast to similar papers, we show that the firms still have an incentive to delay the merger. Moreover, the results indicate that threat values are important for the asymmetric firm case, i.e. when firms have different bargaining power. The weaker firm can improve its position in the merger as uncertainty increases, i.e. its share in the new entity increases. The same holds true if synergies increase.