Operational implications of yield uncertainty in mergers and acquisitions

Abstract

In this paper, we study the implications of yield uncertainty in firms' mergers and acquisitions, which interfaces between economics and production management. Specifically, we explore three sources of merger effects (i.e., the competition effect, the yield uncertainty effect, and the cost synergy effect) in a Cournot oligopolistic market. The yield uncertainty effect refers to a statistical reduction of yield uncertainty for the post-merger firm in a horizontal merger. This yield improvement acts as a competitive advantage to motivate the firms' merger behavior. Regardless of the cost synergy, the post-merger profit of the merging firms would increase, provided that the firms experience a high yield uncertainty. Moreover, we find that the yield uncertainty effect complements the cost synergy effect, and both have opposite impacts on the post-merger outcomes compared to the competition effect. This relationship reveals novel insights into the aggregate merger effects on the firms' performance, total output, and consumer surplus. For example, after considering the yield uncertainty, the cost synergy effect need not be as significant as the conventional merger theory predicts, to realize a higher total output and a lower market price in the post-merger market. Also, the merger benefits are more easily passed on to consumers in this case. Finally, we also explore the social welfare implications of a merger under firms’ yield uncertainty.