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Why Mergers Reduce Profits, and Raise Share-Prices

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  • Fridolfsson, Sven-Olof
  • Stennek, Johan

Abstract

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 is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce the competitors' share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2357.

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Date of creation: Jan 2000
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Handle: RePEc:cpr:ceprdp:2357

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Keywords: Acquisitions; Coalition; Defensive Mergers; Mergers;

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Cited by:
  1. Duso, Tomaso & Gugler, Klaus & Yurtoglu, Burcin B., 2006. "EU Merger Remedies: A Preliminary Empirical Assessment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 81, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Michael Higl & Peter Welzel, 2005. "Intra-firm Coordination and Horizontal Merger," Discussion Paper Series, Universitaet Augsburg, Institute for Economics 269, Universitaet Augsburg, Institute for Economics.
  3. Norback, Pehr-Johan & Persson, Lars, 2007. "Investment liberalization -- Why a restrictive cross-border merger policy can be counterproductive," Journal of International Economics, Elsevier, vol. 72(2), pages 366-380, July.
  4. Duso, Tomaso & Gugler, Klaus & Yurtoglu, Burcin B., 2011. "How effective is European merger control?," European Economic Review, Elsevier, vol. 55(7), pages 980-1006.
  5. Norbäck, Pehr-Johan & Persson, Lars, 2002. "Investment Liberalization - Who Benefits from Cross Border Mergers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3166, C.E.P.R. Discussion Papers.
  6. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?," Journal of Industry, Competition and Trade, Springer, Springer, vol. 1(4), pages 347-394, December.
  7. Toxvaerd, Flavio, 2008. "Strategic merger waves: A theory of musical chairs," Journal of Economic Theory, Elsevier, vol. 140(1), pages 1-26, May.
  8. Berg, Aron & Norbäck, Pehr-Johan & Persson, Lars, 2012. "International Mergers with Financially Constrained Owners," Working Paper Series, Research Institute of Industrial Economics 927, Research Institute of Industrial Economics.
  9. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & Gilles Saint-Paul & Hans-Werner Sinn & John Kay & Jan-Egbert Sturm & Xavier Vives, 2006. "Chapter 5: Mergers and Competition Policy in Europe," EEAG Report on the European Economy, CESifo Group Munich, CESifo Group Munich, vol. 0, pages 101-116, 03.
  10. Norbäck, Pehr-Johan & Persson, Lars, 2001. "Investment Liberalization - Who Benefits from Cross-Border Mergers & Acquisitions?," Working Paper Series, Research Institute of Industrial Economics 569, Research Institute of Industrial Economics.

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