Value-Maximizing Managers, Value-Increasing Mergers, and Overbidding

Some acquisitions can be viewed as the quickest means to obtain a scarce resource required for restructuring in response to an economic shock. Such acquisitions can give the acquirer a competitive edge and hurt its competitors. In this paper, I first show that if a firm will be adversely affected by a competitor's acquisition, then it can rationally "overpay" for the target to avoid this outcome within a value-maximizing framework due to industry equilibrium effects. Next, I show that depending on the level of anticipation by the market, the magnitude of the cost of losing, and the competition between bidders, an acquirer can earn negative payoffs at the announcement of such an acquisition. Even though the merger is the best decision given the circumstances, negative returns incorporate the understanding that the target is a necessary resource to survive in this changing environment, losing it to a rival is costly, and there is a positive probability that the bidder may not win or win by paying more than the synergy value of the target. Finally, I extend the model to include 2 targets that become available sequentially to multiple bidders and show that when there are alternatives available for the target's resources, overbidding subsides.