A Theory of Young Firm Acquisitions

46 Pages Posted: 11 Jun 2007

See all articles by Masako Ueda

Masako Ueda

University of Wisconsin, Madison - School of Business; Centre for Economic Policy Research (CEPR)

Kyriakos Frantzeskakis

University of Wisconsin - Madison

Date Written: June 2007

Abstract

Evidence suggests that young firm acquisitions have outgrown both IPOs and established firm acquisitions. To study this phenomenon, we develop a dynamic equilibrium model of mergers and acquisitions as efficient reallocation of assets. A firm may build assets that it may not be able to manage successfully. If so, the firm may be acquired by an established firm that has proved its ability to manage such assets successfully. A young firm has not yet proved its ability to manage assets, and can only do so by remaining independent and managing assets. We find that when the transaction costs of acquisition decrease and/or the costs of building and managing assets increase, an established firm switches from building new assets internally to acquiring a young firm. We also find that when the young firm's attempt to manage assets are less likely to fail and/or assets obsolete sooner, more young firms become acquisition targets and the fraction of independent young firms such as IPO firms declines. Our model is consistent with some stylized facts of mergers and acquisitions such as the bidder discount, the target premia and the size distribution of acquirers and targets.

Keywords: mergers as reallocation, firm's life-cycle

JEL Classification: G34, D83, D92

Suggested Citation

Ueda, Masako and Frantzeskakis, Kyriakos, A Theory of Young Firm Acquisitions (June 2007). Available at SSRN: https://ssrn.com/abstract=992533 or http://dx.doi.org/10.2139/ssrn.992533

Masako Ueda (Contact Author)

University of Wisconsin, Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-262-3656 (Phone)
608-265-4195 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kyriakos Frantzeskakis

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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