A Theory of Strategic Mergers

• Main Authors: BERNILE, Gennaro, Lyandres, Evgeny, Zhdanov, Alexei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: horizontal mergers; competition; strategic interaction; real options; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3663; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4662/viewcontent/SSRN_id891311.pdf
• Institution: Singapore Management University

We examine firms’ strategic incentives to engage in horizontal mergers. In a real options framework, we show that strategic considerations may explain abnormally high takeover activity during periods of positive and negative demand shocks. Importantly, this pattern emerges solely as a result of firms’ strategic interaction in output markets. We show that the U-shaped relation between the state of demand and the propensity of firms to merge, documented in past studies, is driven by horizontal mergers in industries that are: (1) relatively more concentrated, (2) characterized by relatively strong competitive interaction among firms, and (3) characterized by relatively low merger-related operating synergies and restructuring costs. The empirical evidence, based on parametric and semi-parametric regression analyses, is consistent with these predictions.