Why Mergers Reduce Profits, and Raise Share Prices: A Theory of Preemptive Mergers

We explain the empirical puzzle why mergers reduce profits and raise share prices. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. We also explain why shareholders of targets gain while acquirers typically break even. These results are derived in an endogenousmerger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared. ZUSAMMENFASSUNG - (Warum Fusionen Profite reduzieren und Aktienpreise steigen lassen) Es wird ein "Mechanismus der Gewinnung eines Vorsprungs durch Fusion" aufgezeigt, der eventuell das empirische Ratsel, warum Fusionen Profite reduzieren und Aktienpreise steigen lassen, erklaren kann. Eine Fusion kann starke negative externe Effekte bei den Unternehmen auslosen, die nicht an der Fusion beteiligt sind. Wenn es besser ist ein "Insider" zu sein als ein "Outsider", kann es sein, dass Firmen Fusionieren um dem zuvorzukommen, dass ihre Partner mit jemand anderem fusionieren. Desweiteren ist der Wert eines fusionierenden Unternehmens vor der Fusion niedrig, da er das Risiko ein Outsider zu werden reflektiert. Diese Ergebnisse werden aus einem Modell endogener Fusionen abgeleitet, welches die Bedingungen unter denen eine Fusion stattfindet, wann sie stattfindet und wie der Uberschuss verteilt werden wird, vorhersagt.

[1]  Richard S. Ruback,et al.  The Market for Corporate Control: The Scientific Evidence , 2002 .

[2]  Pehr‐Johan Norbäck,et al.  Investment Liberalization - Who Benefits from Cross Border Mergers? , 2001 .

[3]  Gunther Tichy,et al.  What Do We Know about Success and Failure of Mergers? , 2001 .

[4]  Andreas Stephan,et al.  Essays on the Contribution of Public Infrastructure to Private Production and its Political Economy , 2001 .

[5]  L. Persson,et al.  Endogenous Mergers in Concentrated Markets , 2001 .

[6]  Boyan Jovanovic,et al.  Mergers and Technological Change: 1885-1998 , 2001 .

[7]  L. Persson,et al.  The equilibrium ownership of an international oligopoly , 2001 .

[8]  Johan Stennek,et al.  Why Event Studies Do Not Detect Anti-Competitive Mergers , 2000 .

[9]  G. Gowrisankaran,et al.  A Dynamic Model of Endogenous Horizonal Mergers , 1999 .

[10]  T. Nilssen,et al.  Sequential horizontal mergers , 1998 .

[11]  E. Eckard,et al.  Are Mega-Mergers Anticompetitive? Evidence from the First Great Merger Wave , 1998 .

[12]  Kevin J. Murphy,et al.  Glamour, value and the post-acquisition performance of acquiring firms 1 We would like to thank Euge , 1998 .

[13]  J. Fred Weston,et al.  Takeovers, restructuring, and corporate governance = 接管、重组与公司治理 , 1998 .

[14]  Massimo Motta,et al.  Managerial incentives for takeovers , 1996 .

[15]  G. William Schwert,et al.  Markup Pricing in Mergers and Acquisitions , 1996 .

[16]  M. Mitchell,et al.  The impact of industry shocks on takeover and restructuring activity , 1996 .

[17]  Peter Funk,et al.  Auctions with interdependent valuations , 1996 .

[18]  David T. Levy,et al.  Price Discrimination and Mergers , 1995 .

[19]  J. Houston,et al.  The overall gains from large bank mergers , 1994 .

[20]  L. Schumann.  Patterns of abnormal returns and the competitive effects of horizontal mergers , 1993 .

[21]  M. Kamien,et al.  Monopolization by Sequential Acquisition , 1993 .

[22]  M. P. Narayanan,et al.  Motives for Takeovers: An Empirical Investigation , 1993, Journal of Financial and Quantitative Analysis.

[23]  D. Mueller.  U.S. merger policy and the 1992 Merger Guidelines , 1993 .

[24]  Sankarshan Acharya,et al.  Value of Latent Information: Alternative Event Study Methods , 1993 .

[25]  David B. Humphrey,et al.  Megamergers in Banking and the Use of Cost Efficiency as an Antitrust Defense , 1992 .

[26]  K. Boyer.  Mergers that harm competitors , 1992 .

[27]  David T. Levy,et al.  Anticompetitive Effects of Mergers in Markets with Localized Competition , 1992 .

[28]  Avinash Dixit,et al.  Investment and Hysteresis , 1992 .

[29]  M. Kamien,et al.  Competitively cost advantageous mergers and monopolization , 1991 .

[30]  W. Scott,et al.  Tracking the Giant Corporation@@@Scale and Scope: The Dynamics of Industrial Capitalism. , 1991 .

[31]  Joseph Farrell,et al.  Decentralization, Duplication, and Delay , 1990, Journal of Political Economy.

[32]  René M. Stulz,et al.  The Distribution of Target Ownership and the Division of Gains in Successful Takeovers , 1990 .

[33]  Vojislav Maksimovic,et al.  Consistent Estimation of Cross-Sectional Models in Event Studies , 1990 .

[34]  Richard S. Ruback,et al.  Does Corporate Performance Improve after Mergers? , 1990 .

[35]  Israel Zang,et al.  The Limits of Monopolization Through Acquisition , 1990 .

[36]  John C. Harsanyi,et al.  Общая теория выбора равновесия в играх / A General Theory of Equilibrium Selection in Games , 1989 .

[37]  Richard E. Caves,et al.  Mergers, takeovers, and economic efficiency: Foresight vs. hindsight , 1989 .

[38]  M. Dutz.  Horizontal mergers in declining industries : Theory and evidence , 1989 .

[39]  Joseph Farrell,et al.  Horizontal Mergers: An Equilibrium Analysis , 1988 .

[40]  Sankarshan Acharya,et al.  A Generalized Econometric Model and Tests of a Signalling Hypothesis with Two Discrete Signals , 1988 .

[41]  Michael Bradley,et al.  Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms , 1988 .

[42]  Andrei Shleifer,et al.  Value Maximization and the Acquisition Process , 1988 .

[43]  James A. Brickley,et al.  The Market for Corporate Control: The Empirical Evidence Since 1980 , 1988 .

[44]  Michael J. Fishman.  A theory of preemptive takeover bidding , 1988 .

[45]  Joseph Farrell,et al.  Coordination Through Committees and Markets , 1987 .

[46]  D. Fudenberg,et al.  Preemption and Rent Equalization in the Adoption of New Technology , 1985 .

[47]  Dennis C. Mueller,et al.  Mergers and Market Share , 1985 .

[48]  B. Espen Eckbo,et al.  Antimerger Policy under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis , 1985, The Journal of Law and Economics.

[49]  Robert H. Porter,et al.  Oligopoly and the incentive for horizontal merger , 1985 .

[50]  R. Deneckere,et al.  Incentives to Form Coalitions with Bertrand Competition , 1985 .

[51]  Drew Fudenberg,et al.  Preemption, Leapfrogging, and Co­mpetition in Patent Races , 1983 .

[52]  S. Salant,et al.  Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium , 1983 .

[53]  R. Stillman,et al.  Examining antitrust policy towards horizontal mergers , 1983 .

[54]  Michael Bradley,et al.  THE RATIONALE BEHIND INTERFIRM TENDER OFFERS Information or Synergy , 1983 .

[55]  B. Eckbo,et al.  Horizontal Mergers, Collusion, and Stockholder Wealth , 1983 .

[56]  Michael C. Jensen,et al.  The market for corporate control , 1983 .

[57]  Ferenc Szidarovszky,et al.  Contributions to Cournot oligopoly theory , 1982 .

[58]  Dennis C. Mueller,et al.  The Determinants and Effects of Mergers. , 1982 .

[59]  井手 秀樹,et al.  Dennis C. Mueller, ed., "The Determinants and Effects of Mergers" An International Comparison , 1981 .

[60]  G. Meeks,et al.  Disappointing Marriage: A Study of the Gains from Merger , 1977 .

[61]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[62]  F. Scherer,et al.  Industrial Market Structure and Economic Performance. , 1971 .

[63]  S. Fridolfsson.  Essays on endogenous merger theory , 2001 .

[64]  Silke Neubauer,et al.  Multimarket contact and organizational design , 2001 .

[65]  Johan Stennek,et al.  THE RESEARCH INSTITUTE OF INDUSTRIAL ECONOMICS , 2000 .

[66]  Horst Albach,et al.  Bankbeziehungen deutscher Unternehmen : Investitionsverhalten und Risikoanalyse , 2000 .

[67]  Tobias Miarka,et al.  Financial intermediation and deregulation : a critical analysis of Japanese bank-firm relationships , 2000 .

[68]  S. Finkelstein,et al.  Integrating Strategic, Organizational, and Human Resource Perspectives on Mergers and Acquisitions: a Case Study of Synergy Realization , 1999 .

[69]  Ch. Wey.  Marktorganisation durch Standardisierung: ein Beitrag zur Neuen Institutionenökonomik des Marktes , 1999 .

[70]  Dieter Köster,et al.  Wettbewerb in Netzproduktmärkten , 1999 .

[71]  H. Albach,et al.  Information processing as a competitive advantage of Japanese firms , 1999 .

[72]  Magnus Bild.  Valuation of takeovers , 1998 .

[73]  Nagpurnanand R. Prabhala,et al.  Conditional Methods in Event-Studies and an Equilibrium Justification for Standard Event-Study Procedures , 1997 .

[74]  J. Elston,et al.  US tax reform and investment: Reality and rhetoric in the 1980s , 1995 .

[75]  S. Rosenkranz,et al.  Intellectual property rights and global competition : towards a new synthesis , 1995 .

[76]  R. Radner.  Hierarchy: The Economics of Management , 1992 .

[77]  R. Radner.  Hierarchy: The Economics On Managing , 1990 .

[78]  Barton L. Lipman,et al.  Successful Takeovers without Exclusion , 1988 .

[79]  Frederic M. Scherer,et al.  Mergers, sell-offs, and economic efficiency , 1987 .

[80]  R. Roll,et al.  The Hubris Hypothesis of Corporate Takeovers , 1986 .

[81]  Sanford J. Grossman,et al.  The free-rider problem and the theory of the corporation , 1980 .

[82]  Dennis C. Mueller,et al.  The Determinants and effects of mergers : an international comparison , 1980 .

[83]  C. F. Phillips.  Industrial Market Structure and Economic Performance , 1971 .