We demonstrate a "preemptive merger mechanism" which may explain the empirical puzzle why mergers reduce profits, and raise share prices. A merger may confer strong negative externalities on the firms outside the merger. If being an "insider" is better than being an "outsider", firms may merge to preempt their partner merging with someone else. Furthermore, the pre-merger value of a merging firm is low, since it reflects the risk of becoming an outsider. These results are derived in a model of endogenous mergers which predicts the conditions under which a merger occurs, when it occurs, and how the surplus is divided.
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Length: 38 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:iniesr:511
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Find related papers by JEL classification: G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
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Tomaso Duso & Klaus Gugler & Burcin Yurtoglu, 2006.
"EU Merger Remedies: A Preliminary Empirical Assessment,"
Discussion Papers
81, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
[Downloadable!]
Other versions:
Tomaso Duso & Klaus Gugler & Burçin Yurtoglu, 2006.
"How Effective is European Merger Control?,"
CIG Working Papers
SP II 2006-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
[Downloadable!]
Other versions:
Tomaso Duso & Klaus Gugler & Burcin Yurtoglu, 2006.
"How Effective is European Merger Control?,"
Discussion Papers
153, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
[Downloadable!]