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Eat or Be Eaten: A Theory of Mergers and Merger Waves

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  • Gary Gorton
  • Matthias Kahl
  • Richard Rosen

Abstract

In this paper, we present a model of defensive mergers and merger waves. We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. A technological or regulatory change that makes acquisitions profitable in some future states of the world can induce a preemptive wave of unprofitable, defensive acquisitions. The timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11364.

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Date of creation: May 2005
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Publication status: published as Gary Gorton & Matthias Kahl & Richard J. Rosen, 2009. "Eat or Be Eaten: A Theory of Mergers and Firm Size," Journal of Finance, American Finance Association, vol. 64(3), pages 1291-1344, 06.
Handle: RePEc:nbr:nberwo:11364

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Cited by:
  1. Matthew Rhodes-Kropf & David T. Robinson, 2004. "The Market for Mergers and the Boundaries of the Firm," Working Papers, Utrecht School of Economics 05-18, Utrecht School of Economics.
  2. Jean-Charles Rochet, 2007. "Some economics of horizontal integration in the payments industry," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City.
  3. Mirella Daminai & Fabrizio Pompei, 2008. "Mergers, acquisitions and technological regimes: the European experience over the period 2002-2005," Quaderni del Dipartimento di Economia, Finanza e Statistica, Università di Perugia, Dipartimento Economia, Finanza e Statistica 46/2008, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
  4. Brown, Rayna & Sarma, Neal, 2007. "CEO overconfidence, CEO dominance and corporate acquisitions," Journal of Economics and Business, Elsevier, Elsevier, vol. 59(5), pages 358-379.
  5. Richard J. Rosen, 2004. "Merger momentum and investor sentiment: the stock market reaction to merger announcements," Working Paper Series, Federal Reserve Bank of Chicago WP-04-07, Federal Reserve Bank of Chicago.
  6. Russ Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," CPI Journal, Competition Policy International, Competition Policy International, vol. 3.
  7. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2007. "Cross-border Mergers and Acquisitions: On Revealed Comparative Advantage And Merger Waves," Tinbergen Institute Discussion Papers, Tinbergen Institute 08-013/2, Tinbergen Institute.
  8. Johan Stennek, 2006. "A new perspective on mergers and acquisitions: Evidence explained, policies prescribed," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 7(1), pages 3-8, 04.
  9. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2007. "Cross-border Mergers and Acquisitions: On Revealed Comparative Advantage And Merger Waves," Tinbergen Institute Discussion Papers, Tinbergen Institute 08-013/2, Tinbergen Institute.
  10. 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.
  11. Bart Lambrecht & Stewart C. Myers, 2005. "A Theory of Takeovers and Disinvestment," NBER Working Papers, National Bureau of Economic Research, Inc 11082, National Bureau of Economic Research, Inc.
  12. Frantzeskakis, Kyriakos & Ueda, Masako, 2007. "A Dynamic Equilibrium Model of Firm's Life Cycle and Mergers as Efficient Reallocation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6079, C.E.P.R. Discussion Papers.

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