The Timing of Takeovers in Growing and Declining Markets

Empirical studies have found that takeover activity is positively related to the absolute size of industry-level shocks. In this paper we develop a dynamic framework to analyze the timing of takeover which explains this pattern. Takeover may create value either by exploiting synergies or through fixed cost savings, the relative value of each approach being affected by shocks to an industry variable. With competing acquirers of different types, takeover occurs only when shocks are sufficiently large in either direction, with no activity taking place in between. We model both hostile takeover, for which the timing and terms are determined by competing bidders, and agreed takeover, where the target chooses when to open negotiations with one of the acquirers. We examine implications of our analysis for the efficiency of the market for corporate control, finding that the direction of inefficiency depends on the form of takeover. We also analyze the dependence of takeover activity on the degree of uncertainty about industry conditions.