Why Mergers Reduce Profits, and Raise Share Prices

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IUI Working Paper ; No. 511

Classification and Topics

• Classification: Wirtschaft ; Bargaining Theory; Matching Theory ; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance ; Oligopoly and Other Imperfect Markets
• Subject: Mergers & acquisitions ; definsive merger ; coalition formation ; antitrust policy ; Übernahme ; Fusion ; Wettbewerbsstrategie ; Spieltheorie ; Verhandlungstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fridolfsson, Sven-Olof ; Stennek, Johan
• Event: Veröffentlichung
• (who): The Research Institute of Industrial Economics (IUI)
• (where): Stockholm
• (when): 1999

Further information

• Handle: http://hdl.handle.net/10419/95030
• Last update: 10.03.2025, 11:42 AM CET