The Timing and Returns of Mergers and Acquisitions in Oligopolistic Industries∗

This article develops a real options model to study the interaction of industry structure and takeovers. In an asymmetric industry equilibrium, firms have an endogenous incentive to merge when restructuring decisions are motivated by operating and strategic benefits. The model predicts that (i) merger activities are more likely in more concentrated industries or in industries that are more exposed to industrywide shocks; (ii) returns to merger and rival firms arising from restructuring are higher in more concentrated industries; (iii) increased industry competition delays the timing of mergers; and (iv) in sufficiently concentrated industries, bidder competition induces a bid premium that declines with product market competition. JEL Classification Numbers: G13, G14, G31, G34.