DP2357 Why Mergers Reduce Profits, and Raise Share-Prices

Author(s): Sven-Olof Fridolfsson, Johan Stennek
Publication Date: January 2000
Keyword(s): Acquisitions, Coalition, Defensive Mergers, Mergers
JEL(s): C78, G34, L13, L41
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2357

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 is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce the competitors' share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.