Mergers and acquisitions with conditional and unconditional offers

This paper proposes a dynamic model for the process of industry consolidation by sequences of mergers and acquisitions that create synergy gains to merging firms and may impose positive or negative externalities on the remaining firms in the industry. We allow firms to make acquisition offers that are conditional and unconditional on acceptances of target firms, instead of the usual conditional offers. We show that this expansion of the offer set results in faster and more economically efficient industry consolidations, as acquirers do not have to trade-off surplus extraction and efficiency. The acquirer can make surplus maximizing merger offers conditional to acceptances, and simultaneously capture efficiency gains by making unconditional offers to the remaining firms. We characterize the Markov perfect equilibrium and show that equilibrium always exists and is Pareto efficient. Finally, to illustrate the model and our main findings, we show that the equilibrium is unique in industries with three firms, and we derive the closed-form solution for the equilibrium value and the merger dynamics.