Merging Firms Research Articles

Judicial Response to the 2010 Horizontal Merger Guidelines

We study how the courts have responded to the 2010 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission. Looking at decided cases, we find that both the government and merging parties rely on the 2010 Guidelines in presenting their cases, each side respectively arguing that it should win if the court properly follows them. The 2010 Guidelines had the strongest effect on the case law in the area of unilateral effects, where a number of courts have embraced them in ways that clearly depart from earlier decisions. The case law now exhibits much greater receptivity to a government showing that the merger will lead to higher prices simply due to the loss of direct competition between the two merging firms. The courts also have followed the 2010 Guidelines by more willingly defining markets around targeted customers. We do not detect any effect on decided cases of the higher concentration thresholds found in the 2010 Guidelines. Both the average pre-merger level of market concentration and the average increase in market concentration alleged by the government in litigated cases to date declined after 2010.

Horizontal Mergers under Yield Uncertainty

We study a horizontal merger in an oligopolistic market in which firms compete on production quantities. Each firm has its own in‐house manufacturing facility, and the production is subject to random yield. After the consolidation of two firms, the merged entity can use both manufacturing facilities that belong to the merging firms. It is well known that diversification can reduce the aggregate supply uncertainty of a firm, but this diversification benefit has not been explored in a merger analysis. We model the effects of reduced competition, cost synergy, and supply diversification from a merger and characterize their combined impact on firms’ production quantities and expected profits. Our analysis highlights the importance of yield correlation. In the postmerger model, although an increase in yield correlation intensifies end‐market competition and lowers the diversification benefit, it can increase the merged firm's expected profit. This is more likely to occur as the synergy effect increases, the number of competing firm increases, and the yield variance decreases. We also compare the premerger and postmerger equilibrium production quantity and expected profit of each firm. We show that there exists threshold levels of cost synergy above (or below) which the postmerger equilibrium profits or quantities exceed their premerger counterparts. We also show that, under yield uncertainty, firms may have an incentive to merge even without cost synergy due to the diversification benefit. With deterministic demand, cost synergy is necessary to justify a merger.

Merger, Product Repositioning and Firm Entry: The Retail Craft Beer Market in California

We study the effects of merger on firm entry, product variety and prices in the retail craft beer market in California. We develop a new method to estimate multiple-discrete choice models in order to recover fixed costs. The method is based on bounds of conditional choice probabilities and does not require solving a game. Using the estimated model, we simulate a counterfactual merger where a large brewery acquires multiple craft breweries. In most markets, we find that new firms enter, non-merging incumbents add products, and merging firms drop products. However, the net effects of product variety from new firm entry and incumbent product portfolio adjustment differ considerably across markets. Larger markets are more likely to see an increase in product variety, which moderates the loss of consumer surplus from the merger's price effects. In a majority of smaller markets, product variety decreases, exacerbating the welfare loss from the price effects.

소유구조에 따른 합병기업의 경제적 성과의 차이에 대한 분석

소유구조에 따른 합병기업의 경제적 성과의 차이에 대한 분석

The Effects of Technological Similarity and Diversity on Merger and Innovation

This paper examines drivers of merger partner selection and impacts of those factors on post-merger innovation outcomes analyzing 1,432 merger transactions in U.S. ICT industries. Throughout the paper, technological similarity between merging firms and technological diversity of an individual firm are important factors affecting firms' merger partner choice. In order to show their impacts on merger partner selection, we use a two-sided matching model as a theoretical framework and employ a maximum score estimation as an empirical methodology. With these empirical strategies, our findings are summarized as follows. First, technological similarity between merging firms has positive effects on merger value creation. This implies that similar technologies between merging firms plays an important role in choosing their merger partners. Second, technological diversity of an individual firm increases expected merger values. This means that firms tend to choose their deal partners with diverse technologies for the purpose of maximizing their expected merger values. Lastly, we estimate post-merger innovation impacts for actual merger transactions. As a result, estimated merger values created by technological similarity and diversity increase the number of merged firms' patents after merger. This implies that expected merger values are realized through the channel of post-merger innovation outputs.

Mergers and Innovation Portfolios

This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms’ investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project. Merging firms internalize these positive and negative externalities they impose on each other. We show that when the project that is relatively more profitable for the firms is also the more appropriable, then a merger increases consumer welfare by reducing investment in the most profitable project and increasing investment in the alternative (less profitable) project. For the case of linear demand and constant marginal costs, the portfolio effect of mergers makes them consumer welfare improving. With constant elasticity of demand and constant marginal costs, a merger increases consumer welfare if the more profitable project corresponds to the market with the higher elasticity of demand. The portfolio effect of mergers may dominate the usual market power effects of mergers.

Can Post-Merger Integration Costs and Synergy Delays Explain Leverage Dynamics of Mergers?

The integration of two merging firms takes time to complete, and synergy gains from a merger can be captured only after the firms go through a costly and often lengthy post-merger integration period. This paper presents a dynamic model of capital structure for the target firm and the acquirer to examine the effects of the integration period on acquiring firms’ financing behavior around mergers. The model generates predictions that provide rational (non-behavioral) explanations for documented empirical evidence regarding leverage dynamics around mergers. When anticipating a longer and costlier integration period, acquiring firms strategically plan ahead by choosing a lower leverage prior to and at the time of the merger, and gradually lever up as the post-merger integration process nears completion. Deals with longer integration periods are financed with a larger fraction of equity. The model also implies that acquiring firms optimally time takeovers of underleveraged firms that experience negative shocks to their earnings.

Firm mergers and acquisitions (M&As)

Firm mergers and acquisitions (M&As)

Mergers in Medicare Part D: Assessing market power, cost efficiencies, and bargaining power

We empirically examine horizontal mergers amongst Part D insurers with the aim of assessing how market power, cost efficiencies, and bargaining power affect premiums and coverage characteristics, including drug access and out-of-pocket (OOP) cost. Our results reveal that market power raises premiums, but this is only a local effect that occurs in markets where the merging firms overlap. Mergers alter the bargaining process with upstream suppliers at both local and national levels, affecting drug access and OOP cost. We find evidence of cost efficiencies when firms restructure by consolidating their plan offerings.

Sequential Mergers and Competition Policy under Partial Privatization

This study assesses the conditions under which sequential mergers can emerge in a partially privatized oligopoly with differentiated goods. In particular, it examines: (i) the optimal merger strategies by potential merging firms, (ii) optimal merger policy, and (iii) privatization policy of policymakers. First, under the subgame perfect Nash equilibrium, sequential mergers either completely emerge or do not emerge at all. The parameter range that leads to complete sequential mergers becomes larger as the market is more privatized. Second, policymakers can halt privatization, diminishing the private incentive for further sequential mergers and thus leading to higher welfare. Furthermore, given that some mergers have already taken place, further mergers may actually improve welfare. These welfare-improving mergers may not be privately profitable, however, implying that there may be room for merger-friendly policies. Third, policymakers are better off partially privatizing the public firm unless the goods are perfect substitutes or independent. Our results are applicable to the Japanese life insurance industry and the partial privatization of Japan Posting Insurance.

The impact of country-dyadic military conflicts on market reaction to cross-border acquisitions

Our work examines the impact of country-dyadic military conflicts on market reaction to cross-border acquisitions (CBAs). Building on intergroup relations research, we theorize that country-dyadic military conflicts, weighted by their severity, trigger intergroup conflicts between the merging firms and, in so doing, hamper market reaction to CBA. Drawing on a sample that comprises 7321 CBAs between 1988 and 2011, we find that country-dyadic military conflicts reduce acquirer returns following CBA announcements and that cultural similarity between acquirer and target countries weakens the relationship between military conflicts and market reaction to CBA while colonial ties between the countries, the target country’s national pride, and the target’s firm size reinforce the relationship. Our study contributes to an emerging body of work that examines the role of international politics/relations in international business.

Merger effects with product complementarity: Evidence from Colombia’s telecommunications

Mergers of firms producing complementary products entail two opposing effects: Lower prices, because they may internalize the impact of the complementarity, and higher prices, because the firms gain the ability to price discriminate. I use Colombian data to analyze mergers between firms providing complementary telecommunication services. I estimate a discrete choice model of demand for bundled fixed-line and mobile internet services, in which the degree of either substitutability or complementarity among products is a parameter of interest. Counterfactual experiments using the estimated model indicate pro-competitive effects of mergers with complements: despite a small increase in the price of standalone goods, consumer surplus increases.

Does client industry importance affect auditor independence?

Purpose The purpose of this paper is to examine whether client industry importance affects auditor independence. Design/methodology/approach This study analyzes audit firm merger data from China Stock Market and Accounting Research and uses a difference-in-difference model to find whether client industry importance is associated with auditor independence. This study uses discretionary accruals and propensity to issue modified audit opinions as proxies for auditor independence. Findings Results show that the greater the decline in client industry importance, the more significant the increase in auditor independence. In addition, the magnitude of decline in client overall importance is also positively associated with the extent of increase in auditor independence; however, this result disappears after controlling for client industry importance. Research limitations/implications The authors acknowledge that this study has limitations. First, audit firm mergers provide a unique research setting. However, the findings of this study in such setting may not be generalizable to other situations. Second, this study has a limited sample size because of data availability, which could impact the robustness of the results. Originality/value Results from this study are important because investors and regulators have increasing concerns over auditor independence since the Enron scandal. To the best of the authors’ knowledge, this study is the first to examine the impact of client industry importance on auditor independence and in a unique setting of audit firm merger to separate auditor independence from auditor competence, and hence controlling for self-selection bias. Results of this study provide evidence that client industry importance has significant influence over auditor independence.

Upstream horizontal mergers involving a vertically integrated firm

We study upstream horizontal mergers when one of the merging parties is vertically integrated. Under observable contracting in the pre-merger case, we show that such type of mergers always harm consumers. However, under unobservable contracting in the pre-merger case, the input price may decrease and consumer surplus may increase as a result of the merger even in the absence of exogenous cost-synergies between merging firms. A necessary condition for this finding is that the unintegrated downstream firm is more cost-efficient than the downstream division of the integrated firm.

Corporate political strategies in Europe: The determinants of firms' access to the European Commission

AbstractCorporate political strategies have been used extensively by firms attempting to shape their political environments. In this context, access to targeted policymakers is essential to allow their deployment. Thus, we propose to study the determinants of access to the European Commission representatives. This research builds on the resource-based view (RBV) of firms to argue that political knowledge is a valuable resource to increase firms' degree of access to the European Commission. To test our hypotheses, we built a novel dataset merging firms characteristics with lobbying meetings information, and analyze it through negative binomial regression. The results suggest the importance of political knowledge, emphasizing that it may represent a source of sustainable competitive advantage. This study highlights interesting information that broadens the understanding of corporate political strategies in the European Union.

Audit report lag, audit fees, and audit quality following an audit firm merger: Evidence from Hong Kong

This paper examines whether the clients of a merged audit firm have shortened report lag, increased audit fees, or reduced audit quality following the merger. These questions are important for a balanced investigation of a firm merger because regulators focus more on the downside of a merger than on its upside. Using a merger of audit firms in Hong Kong as a setting, this paper reports that clients of the merged firm have shorter audit report lag post-merger in the property industry in which the merged firm subsequently obtained more than one-half of the market share. Simultaneously, the evidence does not suggest that clients of the merged firm are charged higher audit fees or provided with lower quality audits after the merger. Thus, the results suggest that the merger of audit firms can benefit clients without corresponding disadvantages. Because this is a case study where the market share, industry specialization, expertise, and professional development of the audit firms may be unique, more research is needed on audit firm mergers to determine if these results are generalizable.

Impact of Airline Mergers on Environmental Externalities

The U.S. airline industry has experienced consolidation in the last decade. At the same time, global environmental concerns have continued to grow. This paper examines the impact of three recent airline mergers on the environment by comparing per-departure NOX emission and the total NOX emission from merging firms at a given airport versus those emitted by non-merging firms at the same airport, by focusing on emissions from airplane flight landing/take-off cycles. The regression results suggest that mergers overall have no impact on either per-departure NOX emissions or total NOX emissions, while some individual mergers resulted in decreased emissions. However, this study finds that mergers have a negative impact on NOX emissions in the medium term when flight destinations are hub airports and a positive impact on NOX emissions in the medium term when flight destinations are non-hub airports.

CEO-CFO Relative Optimism and Firm Mergers and Acquisitions

Our paper examines two critical members in the top management “subteam” – CEO and CFO – in firms’ merger and acquisition (M&A) decision. We propose a concept of CEO-CFO relative optimism, measured by CEO’s optimism relative to CFO’s pessimism, to capture the subteam’s collective cognitive schema in attentional focus and information processing, and study their conjoined influence on corporate decisions. We posit that firms with high CEO-CFO relative optimism will undertake more acquisitions than firms with low CEO-CFO relative optimism because optimistic CEOs are less attentive to risk associated with acquisitions in the absence of CFOs high in pessimism. In addition, the role of CEO-CFO relative optimism in affecting M&A intensity is more pronounced when CFOs are board members at focal firms and firms face a dynamic external environment, because CFO’s opinions are more salient in these situations. Furthermore, acquisitions by firms with high CEO-CFO relative optimism will have a more negative influence on firm operating performance than those with low CEO-CFO relative optimism. Using a sample of U.S. public firms over the period of 2002-2013, we find empirical support for our arguments.

Institutional Arbitrages, Institutional Change, and Reverse Merger Firms' Performance

Although lax disclosure requirements for reverse mergers (RMs) expose investments in RM firms to a significant lemons problem and uncertainty, RM remains as a popular method of going public, and RM...

Sweetening the Pill: a Theory of Waiting to Merge

Merger policy is a permission-granting activity by government in which there may be disincentives to seek permission because of the benefit from having other firms merge. We set up a sequential merger game with endogenized antitrust policy to study one aspect of these disincentives. In particular, we delineate a pill-sweetening motive for waiting to merge: a small firm may choose to let other bigger firms move first, in order to get more mergers approved by government. We report the prevalence of pill sweetening to occur in equilibrium and find it to hinge on efficiency gains from a merger, differently sized firms, firms’ production technology, the presence of an antitrust authority, the alignment of interests between antitrust authorities and firms, and the number of firms in the industry.