International merger strategy in a duopolistic market involving game options

This study presents an international merger valuation model based on a stochastic real exchange rate which employs the geometric Brownian motion and the square root of mean reverting process as a decision variable for assessing whether two domestic firms link with two foreign firms under two single-channel strategy alliances in a duopolistic foreign market. This study concludes that investment costs and returns influence merger decisions and the analytical results demonstrate that under high real exchange rate volatility, firms are unlikely to undertake international mergers. Additionally, large scale firm benefits from international merger much more than small scale firm does.