Optimal and Strategic Terms of Mergers under Two-Source Uncertainty (original) (raw)

Merger Performance under Uncertain E¢ ciency Gains

In view of the uncertainty over the ability of merging …rms to achieve e¢ ciency gains, we model the post-merger situation as a Cournot oligopoly wherein the outsiders face uncertainty about the merged entity's …nal cost. At the Bayesian equilibrium, a bilateral merger is pro…table provided the non-merged …rms su¢ciently believe that the merger will generate large enough e¢ ciency gains, even if ex post none actually materialize. The e¤ects of the merger on market performance are shown to follow similar threshold rules. The …ndings are broadly consistent with stylized facts. An extensive welfare analysis is conducted, bringing out the key role of e¢ ciency gains and the di¤erent implications of consumer and social welfare standards.

Mergers with Product Market Risk

Journal of Economics <html_ent glyph="@amp;" ascii="&amp;"/> Management Strategy, 2006

This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty. JEL Classification: D43 (Oligopoly and Other Forms of Market Imperfection); G34 (Mergers and Acquisitions); L41 (Monopolization and Horizontal Anticompetitive Practices).

Merger performance under uncertain efficiency gains

International Journal of Industrial Organization, 2009

In view of the uncertainty over the ability of merging firms to achieve efficiency gains, we model the post-merger situation as a Cournot oligopoly wherein the outsiders face uncertainty about the merged entity's final cost. At the Bayesian equilibrium, a bilateral merger is profitable provided that non-merged firms sufficiently believe that the merger will generate large enough efficiency gains, even if ex post none actually materialize. The effects of the merger on market performance are shown to follow similar threshold rules. The findings are broadly consistent with stylized facts, and provide a rationalization for an efficiency consideration in merger policy.

Option Pricing and the Probability of Success of Cash Mergers

SSRN Electronic Journal, 2011

When a cash merger is announced but not yet completed, there are two key unobserved variables involved in the target company stock price: the probability of success, and the fallback price, i.e., the price conditional on merger failure. We propose an arbitrage-free model involving these two sources of uncertainty which prices European options on the target company. We empirically test our formula in a study of all cash mergers between 1996 and 2008. The formula matches well the observed volatility smile. Furthermore, as predicted by the model, we show empirically that the volatility smile displays a kink, and that the kink is proportional to the risk-neutral probability of deal success.

On the welfare effects of mergers: Short run vs. long run

The Quarterly Review of Economics and Finance, 1998

We use a two-period moo!& to analyze the short run and long run pro&b&y and welfare consequences of horiwntnl mergers, where the equilibrium responses to a merger can d@eer over time. Although firms can anticipate the merger, they can only adjust their capa@ in the long run. We Jind a greater range of profitable mergers than in static modek. For a merger to raise welfare, a is su&ent thut the short run welfare effects are positive and necessary that the long run effects are positive. We relate these conditions to the inside jirms' musket shares and the Herfindahl index. J 2 QUARTERLY REVIEW OF ECONOMICS AND FINANCE Recent theoretical work has suggested that horizontal mergers can raise welfare even though concentration is increased. These papers follow the lead of Williamson (1968), who argued that a merger may allow participating firms to lower production costs through economies of scale, synergy gains, sharing technology or information, or a shift from less to more efficient producers (rationalization of production).4 Several of the recent mergers mentioned above featured claims of increased efficiency from the merger. For example, Rite Aid estimated it would save $156 million annually with the merger (WuU Street Journal, 30 November 1995, p. A3). Farrell and Shapiro (1990) find that a horizontal merger can increase welfare even if it causes price to rise, so long as the combined pre-merger market shares of the firms involved in the merger is sufficiently small relative to a weighted average of the other firms' market shares, and the merger is privately profitable.5 In a model where firms have constant but possibly different marginal costs, Levin (1990) finds that any profitable merger between firms whose combined market shares do not exceed 50% will be welfareenhancing. In a model with increasing marginal costs that depend upon a firm's assets, and where a merger combines assets, McAfee and Williams (1992) show that mergers leading to a more symmetric distribution of market shares increase welfare. In contrast to Farrell and Shapiro and Levin, however, they find that no merger involving the largest firm in the industry, or one that creates a new largest lit-m, can be socially desirable. Baik (1995) analyzes a model in which firms first choose capacity and then compete by setting prices. Following a merger, the merged firm is allowed to set capacity prior to capacity choice of other firms. He shows that a merger can result in lower prices, which raises welfare. These models focus on static one-shot games. They do not distinguish between short run and long run effects of a merger. However, firms not involved in the merger may not be able to fully react to the merger in the short run. Empirical evidence suggests there are important differences between short and long run effects. Generally, the combined stock prices of merging firms increase in the short run as a result of the merger. Over the longer term, these gains tend to disappear (

Endogenous Mergers in Vertically Differentiated Markets

2015

This paper studies the incentives for …rms competing in vertically di¤erentiated markets to sign binding collusive agreements, as in the case of mergers and alliances. Empirical investigations show that …rms involved in mergers and acquisitions revise prices and qualities as to maximize their joint pro…ts. In a few cases merging …rms are also observed shutting down some lines of activities (so called market pruning). In this paper we attempt to test these predictions by modelling a three-stage game in which, at the …rst stage, three …rms selling goods independently in a vertically di¤erentiated market can commit to sign either a full or a partial voluntary agreement (with a subset of …rms) via a sequential game of coalition formation while, at the second and third stage they can optimally revise their qualities and prices, respectively. In such a setting we study whether some binding agreements (as full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game. Moreover, we analyse the …nal e¤ects of di¤erent coalition structures on equilibrium qualities, prices and pro…ts accruing to …rms. We obtain the following results: (i) initial …rms' heterogeneity appears a crucial factor for mergers to arise; (ii) although pro…table, the grand coalition of …rms (i.e. the whole market merger) is not the outcome of the …nite-horizon negotiation, where only partial mergers arise; (iii) all stable mergers comprehends the …rm producing the bottom quality good; (iv) all stable mergers reduce the number of variants on sale (market pruning); (v) stable mergers always increase the quality gap among variants. All model …ndings seem compatible with the existing empirical observations.

Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers

2005

We explain the empirical puzzle why mergers reduce profits and raise share prices. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. We also explain why shareholders of targets gain while acquirers typically break even. These results are derived in an endogenousmerger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared.

Merger waves: a model of endogenous mergers

The RAND Journal of Economics, 2007

We develop a model of endogenous mergers to study their dynamic process. Firms choose whether, when, and with whom to merge. Two necessary conditions are identi…ed for mergers to occur: …rm heterogeneity and negative demand shocks. We show that mergers are strategic complements and therefore tend to occur in waves. Moreover, some mergers occur for strategic reasons in order to precipitate further mergers.

Merger stability in a three firm game

Working Papers, 2006

We compare different notions of stability in three firm merger games. We discuss some of their shortcomings and introduce an alternative notion of stability which overcomes them. The paper concludes with an illustrative example.