Asymmetric information may explain why many mergers & acquisitions (M&A) fail to create shareholder value. Asymmetric information exists when a firm holds private information that other firms do not know of. This thesis argues there is an alternative way to the traditional direct M&A approach, which eliminates asymmetric information, before the final purchasing decision is taken. The alternative way is to set up a joint venture (JV) with a buyout option to the potential acquirer. In this way, the potential acquirer can use the JV with the potential target to eliminate asymmetric information, and in case the potential target should turn out to be a peach, that is a positive NPV investment, the potential acquirer could thus exercise his buyout option. In case the potential target turns out to be a lemon, that is a negative NPV investment, the potential acquirer will not exercise his buyout option, avoiding the great lost he would have incurred, in case he had engaged in direct M&A. In financial markets, “there is nothing such as a free lunch”, which is also the case, when we depart from the direct M&A and turn to the JV with buyout option approach. Nevertheless, this thesis presents a game theoretical model that outlines the implied game between the potential acquirer and the potential target firm, with the possibilities of engaging in a direct M&A or a JV with a buyout option to the potential acquirer. In the model, we solve for relevant equilibria, which forms the underlying understanding of the mechanisms between the potential acquirer and potential target firm. This thesis takes a further step by presenting empirical evidences, by use of an event study. In the study two samples are selected: A JV Sample where a potential acquirer has engaged in a JV with a buyout option, and a M&A Sample characterized by direct M&A. Each sample consists of 98 firms where industry and time period exposure are alike for the two samples. All observations take place in the period 01.01.1996-01.01.2003. The event study presents evidence of JV with a buyout option performing better than direct M&A. It furthermore presents results on the industry level as well as cross- and intra country differences, in order to gain a more profound understanding of the relative advantage in JV with buyout option compared to direct M&A. The empirical result in this thesis has not previously been seen in the academic literature, and adds to the existing ongoing discussion within corporate finance and M&A. Based on the findings in the game theoretical model and the empirical evidence we allow ourselves to set policy implications for managers, who wish to undertake M&As.
|Uddannelser||Cand.merc.aef Applied Economics and Finance, (Kandidatuddannelse) Afsluttende afhandling|