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 externalilties 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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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number
511.
Length: 41 pages Date of creation: 12 Mar 1999 Date of revision:
03 Dec 2001 Handle: RePEc:hhs:iuiwop:0511
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden Phone: +46 8 665 4500 Fax: +46 8 665 4599 Email: Web page: http://www.ifn.se/ More information through EDIRC
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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.
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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!]
Other versions: