# The Q Theory Of Mergers

1491 Words Feb 19th, 2016 6 Pages
Model Introduction
The model used in this paper is derived from the model used in the paper “The Q-Theory of Mergers” by Boyan Jovanovic and Peter L. Rousseau (2002) and in the paper “The Q-Theory of Mergers” by Peter L. Rousseau (2006). Production function
With its state of technology as z and its capital stock as K, a firm’s production function is output = zK. It is important to note that the capital stock includes both labor and physical capital and that z stands for “the quality of organization capital” (Rousseau 2006) and other intangibles such as proprietary inventions or management skill.
The parameter z follows the Markov process
Pr⁡{z_(t+1) z^ ' |z_t=z}=F(z ',z) and it is firm-specific.
In the market, firms can buy new or dissembled used capital at a price of unity. Moreover, there is no markets for z so a firm must accept whatever z given.

Growth of capacity
Let X be the firm’s direct investment in unbundled capital and Y its acquisitions of bundled capital. The firm’s capital stock in next period will be:
K^ '=(1-δ)K+X+Y

Cost of growth
Aside from payment for X and Y, the firm also faces forgone-output cost of growth: c(x,y)K, where x=X/K and y=Y/K

Merger Gains
After purchasing new and used capital, a firm transfers its z to the new entity. Hence, the gain of a merger is largest when the difference between the target’s z and the acquirer’s z is biggest, that is, the target’s z is high and the acquirer’s z is low. Assume that the acquirer’s state is…