Acquiring growth

Abstract

I develop a model of mergers in which M&A deals are used to reallocate investment opportunities. In equilibrium, acquirers lack internal growth options and seek out projects from targets in the M&A market. The model is able to reconcile many features of the merger data that I document, including the high productivity, investment, and valuation of target firms. Furthermore, in my model, profitability is highly predictive of acquisition, and merger transactions naturally lead to a substantial drop in profitability despite creating value for the acquirer.