Future Mergers Research Articles

The Deterrence Effects of US Merger Policy Instruments

We estimate the deterrence effects of US merger policy instruments with respect to the composition and frequency of future merger notifications. Data from the Annual Reports by the US Department of Justice and Federal Trade Commission allow industry-based measures over the 1986–99 period of the conditional probabilities for eliciting investigations, challenges, prohibitions, court wins, and court losses: Deterrence variables akin to the traditional conditional probabilities from the economics of crime literature. We find the challenge rate to robustly deter future horizontal (both relative and absolute) merger activity, and the court-loss rate to moderately affect absolute levels of horizontal-merger activity; however, the investigation rate, prohibition rate, and court-win rate do not significantly deter future horizontal mergers. Accordingly, the conditional probability of eliciting an antitrust challenge (i.e. remedies and prohibitions) is unique among the different merger policy instruments as it yields a robust deterrence effect. (JEL L40, L49, K21)

The Deterrence Effects of U.S. Merger Policy Instruments

We estimate the deterrence effects of U.S. merger policy instruments with respect to the composition and frequency of future merger notifications. Data from the Annual Reports by the U.S. Department of Justice and Federal Trade Commission allow industry-based measures over the 1986-1999 period of the conditional probabilities for eliciting investigations, challenges, prohibitions, court wins and court losses: deterrence variables akin to the traditional conditional probabilities from the economics of crime literature. We find the challenge rate to robustly deter future horizontal (both relative and absolute) merger activity, and the court-loss rate to moderately affect absolute levels of horizontal-merger activity; however, the investigation rate, prohibition rate and court-win rate do not significantly deter future horizontal mergers. Accordingly, the conditional probability of eliciting an antitrust challenge (i.e., remedies and prohibitions) is unique among the different merger policy instruments as it yields a robust deterrence effect.

EU Competition Law Developments in the Aviation Sector from July 2010–15 April 2011

Since July 2010, there have been a number of important decisions in the aviation sector. In particular, the judgment of the General Court of the European Union (hereinafter 'General Court') in relation to the Ryanair/Aer Lingus prohibition decision affirmed the practices of the European Commission (hereinafter 'Commission') with regard to market definition, competition assessment, the assessment of efficiencies, and remedies and is instructive as to the approach that will be taken by the Commission in future airline merger cases. Since that judgment was handed down, the Commission has also issued its second prohibition decision in an airline merger case under the Merger Regulation in the Olympic Air/Aegean Airlines case. The Commission investigation into price-fixing in Airfreight services has also finally been concluded and the industry has been shocked by the level of fines imposed. This article, first summarizes the judgments of the European Courts and the decisions and ongoing investigations of the Commission in the period under review. It then considers some of the significant themes arising from the cases as well as the guidance provided by the Commission and US Department of Transportation (hereinafter 'DOT') joint report on competitive issues and regulatory approaches to transatlantic airline alliances.

Performance efficiency of offshore business groups in China - How Taiwanese firms perform

China's strong economy and its growing market demand have attracted the investments of numerous offshore entrepreneurs. This paper describes diverse efficiency measures to characterize the productivity efficiency of offshore entrepreneurs in China. Productivity efficiency ratings should be considered as a key element for achieving greater business performance and a better market position. This study applies the Data Envelopment Analysis (DEA) approach combining ”operating flexibility” to measure the magnitude of performance differences between the entrepreneurs. Thirty-four leading firms of Taiwan in China were used as samples for analysis. The empirical result reveals that the overall technical inefficiencies of the firms are primarily due to pure technical inefficiencies rather than scale inefficiencies. A scale problem really does exist in these Taiwanese firms in China, which can be treated as support for future mergers and acquisitions between the firms as well as for public policy making for offshore investments. A benchmark-learning roadmap is constructed for those inefficient groups in order to improve their efficiency progressively. In addition, the analysis of the operating performance by DEA can provide the offshore entrepreneurs' operations with insights into resource allocation and competitive advantage as well as help with strategic decision-making, especially regarding operational styles under an intense competitive environment.

Idiosyncratic Risk, Governance and Equity Performance

We use a sample of democratic firms (with 5 or less anti-takeover provisions) from the Investor Responsibility Research Center (IRRC) database and use idiosyncratic volatility as a proxy for information from the market of corporate control as in Ferreira and Laux (2007) to link the equity performance, market of corporate control and corporate governance. We find that firms which are the least vulnerable to takeover threat (the least idiosyncratic risk) outperform the others. We also find that market information of takeover vulnerability is negatively related to future merger and acquisition shocks. All these effects are mitigated by the Sarbanes-Oxley Act 2002.

BANKING CONSOLIDATION PROCESS AND IMPACT TO FINANCIAL STABILITY

Globalization promotes financial market participants to seek opportunities for efficient management of available resources and maximize benefits. In recent years, took place in the con­solidation process is mainly due to both macroeconomic and microeconomic factors. Most often leads to consolidation pro­cesses in order to gain economies of scale, market power and X-efficiency. Market consolidation and financial sector stability studies have shown that concentrated financial intermediaries market have a negative impact on the region/country/sector financial stability. In the future countries and regions (EU) must find ways and means to smoothly manage the inevitable process of globalization under the supervision of future merger transac­tions in order to guarantee the efficiency and sustainability of the financial sector.

Settle for Now but Block for Tomorrow: The Deterrence Effects of Merger Policy Tools

Abstract Antitrust policy involves not just the regulation of anticompetitive behavior but also an important deterrence effect. Neither scholars nor policy makers have fully researched the deterrence effects of merger policy tools because they have been unable to empirically measure these effects. We consider the ability of different antitrust actions—blocked mergers, negotiated settlements, and monitorings—to deter firms from engaging in mergers. We use cross‐jurisdiction/pantime data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find that blocked mergers lead to decreased merger notifications in subsequent periods and that negotiated settlements weakly increase future merger notifications; in other words, blocked mergers involve a deterrence effect, but negotiated settlements do not.

Switching Costs and the Timing of Merger-Induced Price Changes

This paper formalizes a non-cooperative explanation for pre-merger price increases. When consumers face switching costs, firms have strong incentives to offer bargain prices to lock in consumers whom they can exploit in the future. A future merger reduces a firm's incentive to gain current market share, however, because the firm anticipates sharing future profits. Focusing on near-term profit, it chooses pre-merger prices higher than prices absent a merger. This obtains for both horizontally related and unrelated merging partners. Mergers are profitable in both cases. Price dynamics depend on the horizontal relationship. These results have implications for empirical work on mergers.

Dynamic Merger Review

We analyze the optimal dynamic policy of an antitrust authority toward horizontal mergers when merger proposals are endogenous and occur over time. Approving a currently proposed merger may affect the profitability and welfare effects of potential future mergers, whose characteristics may not yet be known. We identify conditions under which discounted expected consumer surplus is maximized by using a completely myopic merger review policy that approves a merger if and only if it does not lower consumer surplus given the current market structure. We also discuss a number of extensions as well as factors that undermine the optimality of myopic merger review policies.

The Comparative Productivity Efficiency of Taiwan's Integrated Circuits Packaging/Testing Firms

ABSTRACTThis paper reconciles diverse efficiency measures to characterize the productivity efficiency of Taiwan's integrated circuits (IC) packaging/testing firms. Productivity efficiency ratings should be considered as a key element for achieving greater business performance and a better market position. This study applies the Data Envelopment Analysis (DEA) approach with the classical radial measure, non-radial efficiency measure and efficiency achievement measure, respectively, combining multiple outputs and inputs to measure the magnitude of performance differences between the IC firms. The empirical result reveals that the overall technical inefficiencies of the firms are primarily due to pure technical inefficiencies rather than scale inefficiencies. A scale problem really does exist in these IC packaging/testing firms, which can be treated as support for future mergers and acquisitions between the firms. The operating efficiency of the IC packaging/testing firms is negatively related to the market-entry time of these firms. In addition, the empirical results in this study indicate that the non-radial efficiency model and the efficiency achievement model can provide more discriminate efficiency measures for the IC firms, while the traditional radial efficiency model can rank the firms by their scale efficiencies as well as analyze the scale profits of the firms.

Bank Mergers and Small Firm Finance: Evidence from Lender Liability

As a merger approaches, the value of repeat business for the target bank can drop sharply, so loan relationships between this bank and small businesses are often disrupted. Small firms sometimes experience serious value destruction as a consequence of this sudden lack of credit. This paper shows that lender liability may result from bank mergers and bankers involved in mergers often engage in aggressive, scorched‐earth defense tactics to discourage further litigation. I summarize six lender liability cases to illustrate these points. Bank mergers have been shown to reduce credit availability in a number of studies. Since small firms depend on credit for their daily existence, owners of small firms do have a reason to fear a merger of their bank with a larger institution. Analyzing merger effects with survey data of firms obtained after a bank merger, an empirical strategy used in a number of studies, raises problems since the only firms considered are the ones that survived the bank merger. Suggesting that the problem will cure itself in the long run, an argument advanced in other studies, ignores small firms' daily dependence on credit. In the long run we are all dead. Bank examiners need to evaluate an institution's litigation experience and measure a bank's organizational architecture – its ethical climate. Banks which are repeatedly involved in lender liability lawsuits should be denied future mergers until there is a change in organizational architecture. To assist in evaluating organizational architecture, banks should be required to report their litigation expense on their call reports. Furthermore, regulators should seriously consider the recent suggestion of Carow, Kane and Narayanan (2006) that they take steps to ensure that participants in bank mergers preserve target bank relationships. Otherwise negative effects on small business lending and economic growth will continue as bank consolidation proceeds.

Financial Regulation: What Should Be Done?

AbstractThe 2007 credit crisis is making us take a second look at regulating the financial sector. Has regulation failed? And what will be the impact on future merger and acquisition activity? © 2008 Wiley Periodicals, Inc.

The Impact of Mergers and Acquisitions on the Efficiency of the US Banking Industry: Further Evidence

Abstract: Using the Stochastic Frontier Approach (SFA), this study investigates the cost and profit efficiency effects of bank mergers on the US banking industry. We also use the non‐parametric technique of Data Envelopment Analysis (DEA) to evaluate the production structure of merged and non‐merged banks. The empirical results indicate that mergers have improved the cost and profit efficiencies of banks. Further, evidence shows that merged banks have lower costs than non‐merged banks because they are using the most efficient technology available (technical efficiency) as well as a cost minimizing input mix (allocative efficiency). The results suggest that there is an economic rational for future mergers in the banking industry. Finally, mergers may allow the banking industry to take advantage of the opportunities created by improved technology.

Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools

Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.

Move Over Synergies Make Way for Financial Engineering

This paper compares the merger of AOL-Time Warner with the LBO of Hertz. AOL was a classic case where a strategic buyer sought to diversify its business following the perennial principal of bigger is better. The later transaction was structured as a stock purchase transaction where a large portion of the acquisition was funded by securitizing Hertz's US and international car and equipment rental fleet. Securitization, when structured as a true sale, is a process of accelerating future cash flow from illiquid receivables without creating additional liability. Increased familiarity among the issuers and growing popularity among the investors is encouraging potential acquirers to look beyond the traditional sources of fund and engineer acquisition financing through innovative use of structured finance products. Financial engineering is driving both a strategic buyer and a financial buyer to hustle together when it comes to making an acquisition. There seems to be a gradual shift as more acquisitions are being structured in a deal room on Wall Street instead of the corporate board room of a strategic buyer. Given the cost advantage of incorporating securitization in a LBO, the use of asset backed securities is expected to become increasingly prevalent in future. There lies no doubt that during the current and future merger waves financial engineering would play a more significant, if not dominating, role than the age old argument of unraveling synergies.

Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data

This paper presents empirical evidence about the ability of event studies to capture future mergers' profitability measured by accounting data. We use a sample of large horizontal concentrations during the period 1990-2002 involving 459 firms either as merging firms or competitors, and contrast a measure of the mergers' profitability based on event studies with one based on balance sheet profit data. We show that using a long window around the announcement date (25 or 50 days before the event) increases the ability of capturing the ex-post merger effect: the pair wise correlation coefficient is positive and highly significant.

Island-terminus evolution related to changing ebb-tidal-delta configuration: Texel, The Netherlands

Historical maps of southwest Texel and the adjacent ebb-tidal delta, supplemented with quartz OSL (Optically Stimulated Luminescence) ages of dune sand, span four centuries and show several links between coastal development and ebb-tidal-delta behavior. Updrift inlet migration governed recurved-spit formation, and changes in ebb-tidal-delta size and shape resulted in the formation of a bulge at the island terminus. Sustained updrift migration of the ebb-tidal delta resulted in a commensurate position shift of the bulge and eventually in flattening of the coastline. Regional coastal-management measures have had a strong influence on tidal-inlet and ebb-tidal-delta behavior, and therefore also on the changing shape of southwest Texel. Identification of relationships between ebb-tidal-delta behavior and changing barrier-terminus erosion-and-accretion patterns on a decadal to century time scale contributes to our understanding of coastal-system dynamics. Any barrier terminus with preserved sets of dune ridges holds a potential record on past ebb-tidal-delta orientations, which provide clues on past changes in tidal prisms and wave versus tide dominance. Under the current ebb-tidal-delta configuration, the entire westward-oriented coast of southwest Texel is too exposed for lasting accretion. Bulges resulting from future merger of shoals with the coast in this area will be eroded rapidly.

Spectroscopic Confirmation of Multiple Red Galaxy-Galaxy Mergers in MS 1054-03 ( z = 0.83)

We present follow-up spectroscopy of the galaxy cluster MS 1054-03 (z = 0.83) confirming that at least six of the nine merging galaxy pairs identified by van Dokkum et al. in 1999 are indeed bound systems: they have projected separations of Rs L*, σ1D > 200 km s-1); these bound galaxy pairs must evolve into E/S0 members by z ~ 0.7. These results, combined with MS 1054's high merger fraction and reservoir of likely future mergers, indicates that most, if not all, of its early-type members evolved from (passive) galaxy-galaxy mergers at z 1.

NPM merger maniaLessons from an early case

A central doctrine of NPM requires the adoption of commercial management techniques to address the espoused goals of saving money and improving collaboration and service co-ordination. This article examines the evidence base for NPM mergers and uses study data to explain how two ingrained features of professional work helped to produce unintended outcomes at an early UK case involving a specialist mental health provider and an acute trust. The emergence of a de facto mental health trust within the merged entity arose from senior professionals' capacity to ‘buffer’ the work of colleagues from the rationalizing spectre of the merger. The persistence of ‘loosely coupled’ practices and structures restricted improvements in collaboration and service co-ordination. It is argued that these two enduring characteristics of professional organization will shape the outcomes of future NPM mergers in mental health care e.g. the creation of social care trusts and mental health ‘super-trusts’) and in other fields such as higher education.

An investigation into the level and impact of merger activity amongst hospitals in the UK's National Health Service.

Since 1990 the National Health Service (NHS) has undergone a sustained period of change. This change has been necessary to prepare the NHS for the task of meeting a demand for services that continues to rise more rapidly than the availability of resources. Anecdotal evidence suggests that one of the most popular ways for trusts to improve their ability to meet demand is through mergers with other trusts. However, little rigorous research has been conducted to assess the extent or effectiveness of this strategy. A research project was, therefore, initiated to better understand the extent and impact of merger activity within the NHS. A questionnaire was developed and distributed to the chief executive, finance director, medical director and human resources director in all the 460 trusts that are currently members of the NHS confederation. In total the survey generated 459 responses out of a possible total of 1,840; an encouraging response rate of 25 per cent. The results of this research provide significant new evidence that "merger mania" has taken hold within the NHS. While 46 per cent of all responding trusts indicated that they had already merged, are actively involved in a merger, proposing to merge or are talking to prospective partners, a further 18.7 per cent of all trusts are forming strategic alliances rather than opting for a full merger. The dominant justification for merging are the beliefs that it will facilitate the reconfiguration of services and ultimately improve patient care. The paper concludes with a discussion of the significance of these results, before making recommendations with regard to their implications for future merger activity within the NHS.