Merger & Acquisition Pricing Using Agent Based Modelling

Abstract

<p>Merger & acquisition (M&A) transaction pricing is important to the growth of the global economy. If mergers are overvalued, when business cycle peaks, then the acquiring firms often have sub-optimal performance when the business cycle starts to reverse in a downward trend. Mergers & acquisitions are the main form of inorganic growth and allow companies to grow across geographical boundaries and across sectors rapidly. Traditional finance models do not consider the behavioural biases that exist in M&A pricing. This thesis intends to use agent based modelling to analyse behavioural biases that exist in M&A transaction pricing and to understand how changes in the business cycle, differing perception of synergies between the acquirer and the target firm or a situation of a hostile takeover can impact the pricing of such M&A transactions. </p> <p>This agent based model considers the behavioural characteristics of risk aversion versus risk taking and optimistic versus pessimistic for the acquirer and target firm respectively. Results show that behavioural characteristics of the seller and buyer do impact the price paid in the different circumstances. For example, in an improving business cycle, acquirers are willing to overpay to purchase target firms, while it is the opposite when the business cycle trough occurs. The agent based model introduced in this thesis shows that the best time to undertake an M&A transaction is when the economy is coming out of a business cycle trough because the acquirer will not overvalue the target firm, but will be able to obtain the full value of the acquisition as the business cycle turns up. This is contrary to the existing practice, where acquirers purchase target firms when the business cycle peaks and they are often stuck with overpayment for these M&A transactions. In another circumstance, where an acquirer wants to undertake a hostile takeover, the behaviour of the target firm has some impact on price paid. An optimistic target firm can help improve the price paid by rejecting the offer made by the acquirer.</p> <p>Finally, this thesis has developed an agent based model to analyse M&A transaction pricing while considering behavioural biases. The main contribution is that this is the first type of model to undertake such an analysis in relation to M&A transaction pricing. As a result, it provides a platform to extend this discussion further and will allow other researchers to look at other factors that may impact such prices, for example, additional behavioural factors (like greed, herding, fear etc.) or transaction costs that may impact M&A pricing.</p>