A Model of Horizontal Merger Based on Shareholder-Competition and Firm Debt

Merger is a relatively rapid and convenient means for firms to expand and enhance competitive ability. The existing literatures take no account of the fact that there's debt in most firms' capital structure, whereas take the object of M&A as to maximize the firm value change. However, the decision-makers should be the stockholders of both firms, thus the merger object is to maximize the equity value. Applying the analysis method of contingent claim pricing, this paper constructs a merger model based on shareholders maximizing equity value, and finds the necessary conditions of merger, containing some linear or non-linear functions. The numerical results are significant, showing that the debt scale of the both firms affects the merger threshold, and the threshold grows higher as the debt scale grows. Although our study is only on horizontal mergers, it contributes to better understanding the effect of debt.