Growth by Merger and Takeover

Abstract

It is generally agreed that mergers and takeovers have played an important role in shaping the modern capitalistic economies. Yet, until recently, economists did not attempt to develop a formal theory of mergers and takeovers, explaining the decision of one firm to merge with or take over another. There is an enormous literature on mergers and acquisitions, but it is mostly descriptive. At a theoretical level economists were mostly preoccupied with the examination of mergers and takeovers at the industry level. The interest was centred on the effects of mergers and takeovers on market structure and market conduct, and their consequences for market performance (allocation of resources). To a large extent this is the result of the general concern about the social desirability of large firms that possess significant market power, which distorts the market mechanism by reducing competition and leads to misallocation of resources. At the firm level, economic literature contains a number of scattered suggestions about the motives for mergers and acquisitions, without a systematic attempt to relate these motives to specific behavioural hypotheses.