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Why Mergers Reduce Profits, and Raise Share Prices

  • Fridolfsson, Sven-Olof

    ()

    (The Research Institute of Industrial Economics)

  • Stennek, Johan

    (The Research Institute of Industrial Economics)

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.

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Length: 41 pages
Date of creation: 12 Mar 1999
Date of revision: 03 Dec 2001
Handle: RePEc:hhs:iuiwop:0511
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Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

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  2. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
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  17. Shleifer, Andrei & Vishny, Robert W, 1988. "Value Maximization and the Acquisition Process," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 7-20, Winter.
  18. Levy, David T & Reitzes, James D, 1992. "Anticompetitive Effects of Mergers in Markets with Localized Competition," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(2), pages 427-40, April.
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