A Theory of Conglomerate Mergers

Abstract

produce some increase in market power, when they produce a technological or managerial economy of scale, or when the managers of the acquiring firm possess some special insight into the opportunities for profit in the acquired firm which neither its managers nor its stockholders possess.3 While these synergistic effects and managerial insights are often said to be present in various merger situations, their existence in sufficient strength to warrant the high premiums paid for other firms, often appears implausible when the merger is between firms in seemingly unrelated or loosely related industries. This is especially true when, as frequently happens, the acquired firm is left to operate as an autonomous division of the larger unit, operated by the same management team that controlled it before the merger. * This paper was written with the support of the Brookings Institution under a grant from the Alfred P. Sloan Foundation. Alfred E. Kahn and John E. Tilton made a number of important suggestions which improved the paper, although they are not responsible for any errors that remain. The views presented here are those of the writer and do not necessarily represent those of the other staff members, officers, or trustees of the Brookings Institution.