2014 Volume 2 Pages 1-12
In this paper, we propose a real options model for determining the optimal timing of a merger and acquisition (M&A). The estimated increased firm value of the acquirer after a merger may need to be reassessed when the economic situations or the two firms’ individual circumstances change dramatically during the period for preparing an M&A. Focusing on this point, we model the changes in increased firm value by using a discrete stochastic process. As the cost of an M&A is related to the market price of the target, we assume that the cost varies to follow a geometric Brownian motion. We derive explicit formulas for the optimal timing and expected waiting time to announce an M&A under the 2-dimensional stochastic process. Furthermore, we analyze the effects on the optimal timing and the expected waiting time by changing parameters’ value.
