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A model of conglomeration and synergy traps

  • M. Àngels Oliva
  • Luis Rivera-Bátiz

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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File URL: http://www.econ.upf.edu/docs/papers/downloads/232.pdf
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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
Contact details of provider: Web page: http://www.econ.upf.edu/

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  8. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
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  10. Devra L. Golbe & Lawrence J. White, 1988. "A Time-Series Analysis of Mergers and Acquisitions in the U.S. Economy," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 265-310 National Bureau of Economic Research, Inc.
  11. Alan J. Auerbach, 1988. "Corporate Takeovers: Causes and Consequences," NBER Books, National Bureau of Economic Research, Inc, number auer88-1, 07.
  12. Steurs, Geert, 1995. "Inter-industry R&D spillovers: What difference do they make?," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 249-276.
  13. Healy, Paul M. & Palepu, Krishna G. & Ruback, Richard S., 1992. "Does corporate performance improve after mergers?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 135-175, April.
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  16. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  17. 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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