Telecommunications Deregulation and Motives for Mergers

Abstract

This paper is an event study analysis of alternative theories on the motives behind the cluster of merger following the passage of the Telecommunications Act of 1996. The evidence that mergers after telecommunications deregulation generate positive announcement abnormal returns to the stockholders of the merging firms is consistent with both collusion and efficiency theories. The negative announcement abnormal returns to bidders suggest hubris as a possible motive. I examine these alternative theories by studying the announcement abnormal returns to rivals of merging firms, including the Nynex/Bell Atlantic merger challenged by the FCC on collusion concerns. I find strong support for anticipation and signaling of potential synergies between rivals and subsequent bidders through telecom bidding activity. The markets’ response to the announcement of the Nynex/Bell Atlantic merger shows little evidence that the merger would have had collusive or anticompetitive effects.