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A model of conglomeration and synergy traps

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  • M. Àngels Oliva
  • Luis Rivera-Bátiz

Abstract

We present a model of conglomeration motivated by technology synergies and strategic reductions in variable costs in the face of competitive pressures. The resulting firm integration is neither horizontal nor vertical but rather congeneric integration of firms in related industries. We endogenize the industrial conglomeration structure and examine the effects of competition between conglomerates, and between a conglomerate and independent firms. We show that there is an equilibrium synergy trap in which conglomerates are formed to exploit economies of scope, but resulting profits are lower than under the status quo. We also show that strategic firm integration can occur even in the presence of diseconomies of scope. The model helps to explain features of recent mergers and acquisitions experience.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 232.

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Date of creation: Aug 1997
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Handle: RePEc:upf:upfgen:232

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Web page: http://www.econ.upf.edu/

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Keywords: Conglomerate; integration; synergy; strategy;

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  12. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
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  15. Alan J. Auerbach, 1988. "Corporate Takeovers: Causes and Consequences," NBER Books, National Bureau of Economic Research, Inc, number auer88-1.
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