Mergers and acquisitions between risk-averse parties

This paper evaluates mergers and acquisitions (M&A) in a supply chain involving risk-averse parties. In contrast to prior literature, the analysis presented herein suggests that, because of risk considerations, different types of M&A can yield different outcomes. Specifically, we distinguish among three types of M&A arrangements—merger, forward acquisition and backward acquisition—and compare each arrangement to a decentralized supply chain (i.e., before M&A). We further analyze an application of M&A in the software industry. The expected utility gained by each party is examined under each type of M&A, and the effect of each type of M&A on the consumer is evaluated in terms of price and quality of the software product. We find that a merger yields higher expected utility to the parties and leads to higher product quality compared with forward and backward acquisitions; however, it may yield a higher price for the consumer. Moreover, we show that a decentralized supply chain can be more beneficial for the parties than a centralized supply chain (formed by acquisition).