Bargaining Power Neutrality in Mergers and Acquisitions

ABSTRACT Bargaining power is essential to understanding how companies reach merger and acquisition agreements. However, recent literature tends to consider it as a secondary aspect that only determines the allocation of surplus between the negotiating parties. Our purpose is to show conditions under which bargaining power considerations can be set aside and the implications that such an assumption may have. To do so, we propose a simple and stylized model in which we introduce bargaining power asymmetries. We show that although bargaining power does not affect the acquisition outcome in the original framework, this is a consequence of assuming (implicitly) that payments are contingent on acquisition plans. We provide examples of when bargaining power influences the acquisition and show that, even if the bargaining power is neutral (it does not affect acquisition outcomes), it influences premerger decisions, highlighting that ignoring bargaining power narrows the scope and usability of models. We conclude by providing guidance on when we can safely ignore bargaining power without significantly influencing our conclusions.