The Optimal Medium of Exchange and Timing of Mergers and Acquisitions

This paper proposes a real options model of mergers and acquisitions motivated by synergies between two companies. We investigate the minimum synergies required to conduct the merger and how the balance between cash and shares as media of exchange affect this outcome. Based on this analysis we derive the payment that requires the smallest synergies, obtaining that in most cases a combination of cash and shares should be offered. The expected returns for bidders and targets as well as the division of merger benefits are derived and empirical hypotheses developed