IDEAS home Printed from https://ideas.repec.org/a/ucp/jnlbus/v72y1999i3p319-46.html
   My bibliography  Save this article

Why Do Firms Merge and Then Divest? A Theory of Financial Synergy

Author

Listed:
  • Fluck, Zsuzsanna
  • Lynch, Anthony W

Abstract

This article develops a theory of mergers and divestitures. The motivation stems from inability to finance marginally profitable projects as stand-alones due to agency problems. A conglomerate merger is a technology that allows these projects to survive a period of distress. If profitability improves, the financing synergy ends and the acquirer divests the assets. The authors' theory reconciles two seemingly contradictory empirical findings. Mergers increase the combined values of acquirers and targets by financing positive net present value (NPV) projects that cannot be financed as stand-alones. At the same time, because these projects are only marginally profitable, conglomerates are less valuable than stand-alones. Copyright 1999 by University of Chicago Press.

Suggested Citation

  • Fluck, Zsuzsanna & Lynch, Anthony W, 1999. "Why Do Firms Merge and Then Divest? A Theory of Financial Synergy," The Journal of Business, University of Chicago Press, vol. 72(3), pages 319-346, July.
  • Handle: RePEc:ucp:jnlbus:v:72:y:1999:i:3:p:319-46
    DOI: 10.1086/209617
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/209617
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    File URL: https://libkey.io/10.1086/209617?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:72:y:1999:i:3:p:319-46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.jstor.org/journal/jbusiness .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.