The Timing and Terms of Mergers Motivated by Economies of Scale

This paper analyzes the timing of mergers that are motivated by economies of scale. We show that the merger synergies are an increasing function of product market demand. Consequently, in the presence of fixed merger costs and stochastic demand, each firm's payoff from merging has call option-like features. Firms therefore have an incentive to merge in periods of economic expansion, which provides a rationale for the procyclicality of merger waves. Next, relaxing the assumption that firms are price takers, we find that market power strengthens the firms' incentive to merge and speeds up merger activity. Finally, comparing mergers with hostile takeovers we show that the way merger synergies are divided not only influences the acquirer's and the acquiree's return from merging, but also the timing of the restructuring.