The timing of mergers along the production chain,capital structure,and risk dynamics

I demonstrate that the timing of vertical mergers is generally dependent on industry characteristics. My predictions are consistent with empirically observed patterns of vertical mergers. I show that merger activity during economic upturns tends to be motivated by operating efficiencies, while merger activity during economic downturns tends to occur as a means of keeping production chain operational. Mergers allow firms to capture synergies and improve efficiencies in order to survive economic contractions. The pricing framework implies that a vertical merger decision usually reduces risk during two different economic states.     

Consistent estimation of cross-sectional models in event studies

Event studies often include cross-sectional regressions of announcementeffects on exogenous variables. If the event is voluntary andinvestors are rational, then standard OLS and GLS estimatorsare inconsistent. Consistent ML estimators are constructed fora cross-sectional model of horizontal mergers relating announcementeffects to exogenous characteristics of firms and industries.The OLS and ML estimates differ dramatically for bidders butnot for targets. The evidence suggests that manager of bidders,but not targets, have valuable private information about thepotential synergies from proposed mergers.     

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.     

Management across boundaries: A municipal dilemma

Public sector mergers have the potential of being viable alternative to other public sector reforms in the striving toward making public service provision more equipped to confront some of the challenges faced today. Mergers however often fail to deliver promised results. Previous research point to the importance of post‐merger integrating processes for realizing the synergies expected from mergers. However, so far these studies have focused on what occurs inside organizations and less on the interplay between different levels. By adopting a governance and top management perspective, this study increases our understanding of the importance of political decisions on the outcome of a merger in the public sector context. Further, this study increases our understanding of how organizational boundaries on different levels of merging organizations influence post‐merger integrating processes and the role of different actors as boundary spanners. The results of this study are based on five case studies of public sector mergers at the local level in Sweden.     

Bank Mergers, Competition, and Liquidity

We model the impact of bank mergers on loan competition, reserve holdings, and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank.     

The price effects of cross‐market mergers: theory and evidence from the hospital industry

We consider the effect of mergers between firms whose products are not viewed as direct substitutes for the same good or service, but are bundled by a common intermediary. Focusing on hospital mergers across distinct geographic markets, we show that such combinations can reduce competition among merging hospitals for inclusion in insurers' networks, leading to higher prices (or lower‐quality care). Using data on hospital mergers from 1996–2012, we find support that this mechanism operates within state boundaries: cross‐market, within‐state hospital mergers yield price increases of 7%–9 % for acquiring hospitals, whereas out‐of‐state acquisitions do not yield significant increases.     

Efficiency and Market Power Gains in Bank Megamergers: Evidence from Value Line Forecasts

This paper examines whether gains in bank megamergers occur due to efficiency improvements or the exercise of market power using financial statement line item forecasts from Value Line to infer the effect of the merger on prices and quantities. The average megamerger is associated with cost‐efficiency improvements. In the cross‐section, efficiency gains are limited to market expansion mergers while market overlap mergers and Too‐Big‐To‐Fail (TBTF) mergers exhibit monopoly gains. Efficiency gains dissipate when the resulting megabank size exceeds $150 billion in assets or 1.5% of gross domestic product indicating that banks thought to be TBTF are likely to be “Too‐Big‐To‐Be‐Efficient.”     

Foreign Ownership and Market Power in Banking: Evidence from a World Sample

The nexus between ownership and competition in the banking sector is a major concern to policymakers around the world but one that is rarely comprehensively examined. For 131 countries and 13 years we match bank ownership with over 50,000 bank‐year estimates of individual bank market power. We find that ownership does not explain market power at the individual bank level. However, at the country level, foreign bank ownership has a positive and significant impact on market power mainly because foreign banks enter through mergers or acquisitions and not through greenfield investments. The observed increases in market power primarily originate from decreases in the marginal cost.     

Price Pressure around Mergers

This paper examines the trading behavior of professional investors around 2,130 mergers announced between 1994 and 2000. We find considerable support for the existence of price pressure around mergers caused by uninformed shifts in excess demand, but that these effects are short‐lived, consistent with the notion that short‐run demand curves for stocks are not perfectly elastic. We estimate that nearly half of the negative announcement period stock price reaction for acquirers in stock‐financed mergers reflects downward price pressure caused by merger arbitrage short selling, suggesting that previous estimates of merger wealth effects are biased downward.     

Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance

Multiple activities may be separated financially, allowing each to optimize its financial structure, or combined in a firm with a single optimal financial structure. We consider activities with nonsynergistic operational cash flows, and examine the purely financial benefits of separation versus merger. The magnitude of financial synergies depends upon tax rates, default costs, relative size, and the riskiness and correlation of cash flows. Contrary to accepted wisdom, financial synergies from mergers can be negative if firms have quite different risks or default costs. The results provide a rationale for structured finance techniques such as asset securitization and project finance.     

The timing and terms of mergers motivated by economies of scale

This paper analyzes the timing of mergers motivated by economies of scale. We show that firms have an incentive to merge in periods of economic expansion. Relaxing the assumption that firms are price takers, we find that market power strengthens the firms’ incentive to merge and speeds up merger activity. Finally, comparing mergers with hostile takeovers we show that the way merger synergies are divided not only influences the acquirer's and the acquiree's returns from merging, but also the timing of the restructuring.     

Scale economies,bank mergers,and electronic payments: A spline function approach

This paper demonstrates the importance of using a flexible cost function specification when analyzing economies of scale and estimating the cost effect of banking mergers. The inflexibility of the translog cost function is illustrated and results are compared to more flexible spline and Fourier cost functions. Using these different approaches we predict the ex ante effect on average cost from mergers over 1987–1998 using a balanced panel of 130 Norwegian banks. On average mergers are predicted to lower costs. Predictions using the Fourier or spline approach are in overall agreement with computed actual average merger-cost changes ex post. Cost effects of electronic payments are also estimated and exceed cost reductions associated with mergers.     

Liquidity mergers

We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions “liquidity mergers,” since their purpose is to reallocate liquidity to firms that are otherwise inefficiently terminated. We show that liquidity mergers are more likely to occur when industry-level asset-specificity is high and firm-level asset-specificity is low. We analyze firms' liquidity policies as a function of real asset reallocation, examining the trade-offs between cash and credit lines. We verify the model's prediction that liquidity mergers are more likely to occur in industries in which assets are industry-specific, but transferable across firms. We also show that firms are more likely to use credit lines (relative to cash) in industries in which liquidity mergers are more frequent.     

Avoiding the “Synergy Trap”: Practical Guidance on M&A Decisions for CEOs and Boards

When a major acquisition is announced, investors try to understand where the value is going to come from and whether the acquirer has a plan to achieve that value. Deals are often brought to market with one big synergy number and a statement that the deal will be “accretive” to earnings. The problem, however, is that investors can't understand or track one number. Going to market with just one number also suggests that the acquirer has no credible plan, which in turn gives investors more reason to sell shares than to buy, particularly when a significant premium is being offered. According to academic studies, the acquiring company's stock price has fallen upon the announcement of more than half of the large corporate M&A deals that have been transacted since the early 1980s. And as the authors find in their recent study of the merger boom of 1995–2001, such negative stock price reactions are a fairly reliable predictor of future disappointing operating performance and, in many cases, further stock‐market underperformance. But as the authors also point out, such studies focus mainly on average results. And whether or not mergers pay on average doesn't really matter‐at least not to well‐informed executives and boards. What matters is that the executives who make these major capital investment decisions, and the boards that monitor them, have the tools that can help them distinguish the good deals from the bad before committing shareholder capital. For any proposed transaction requiring a significant premium over market, the authors present a simple, earnings‐based model for the target that yields combinations of cost reductions and revenue enhancements that would j ustify that premium. The authors go on to present a capabilities/market access matrix that can be used to assess the potential sources of synergies in any deal. Their methodology can be used to inform and guide detailed discussions about the combination of revenue and cost synergies that management believes it can achieve in a potential deal, and that should become the main focus of management's communication to investors. While no substitute for a carefully considered DCF valuation, the authors' method is a complement to DCF and effectively translates DCF merger criteria into the operational language that is familiar to most corporate managers and investors. In so doing, it can help boards avoid obvious mistakes of overpayment, particularly when “accretive” deals clearly fall short on economic grounds.     

Efficiencies brewed: pricing and consolidation in the US beer industry

Merger efficiencies provide the primary justification for why mergers of competitors may benefit consumers. Surprisingly, there is little evidence that efficiencies can offset incentives to raise prices following mergers. We estimate the effects of increased concentration and efficiencies on pricing by using panel scanner data and geographic variation in how the merger of the brewers Miller and Coors was expected to increase concentration and reduce costs. All else equal, the average predicted increase in concentration led to price increases of 2%, but at the mean this was offset by a nearly equal and opposite efficiency effect.     

How Does Cross‐Border Activity Affect EU Banking Markets?

Cross‐border activity in the EU is widely viewed as a necessary condition for the implementation of a single banking market and therefore as a positive factor for the enhancement of competition and cost performance in the region. In this paper, we analyse the relevance of this view by investigating whether cross‐border activity really promotes competition and cost efficiency in EU banking markets. We also consider the potential role of a bank's mode of entry by comparing existing domestic banks that foreign banks take over (mergers and acquisitions) with new branches created by foreign banks, often through subsidiaries (greenfield operations). We consider the impact of cross‐border banks on cost efficiency (measured by the stochastic frontier approach), profitability (assessed through return on assets) and competition (measured by the Lerner index). We find that greenfield banks enhance cost efficiency and competition, while mergers and acquisitions hamper competition and cost efficiency. Therefore, our results suggest that EU authorities should promote only greenfield banks rather than all cross‐border entries.     

Does divestiture crowd out new investment? The “make or buy” decision in the U.S. electricity generation industry

An empirical model of the “make or buy” decision faced by independent power producers (IPPs)in restructured U.S. wholesale electricity markets is derived to analyze power plant investment decisions by major IPPs from 1996 to 2000. The estimated investment cost and expected profit functions are used to evaluate the effectiveness of divestiture programs (which sold utility power plants to IPPs)in encouraging greater IPP participation. The estimates and counterfactual simulations indicate that a minimal amount of new plant investments were “crowded out” by divestiture and that divestiture encouraged greater (short‐run)entry, especially among utility‐affiliated IPPs.     

The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico

We apply specifications of the random parameters stochastic frontier cost function model to estimate bank efficiency. This class of model appears to resolve the long standing problem of confounding inefficiency and heterogeneity. Mean cost efficiencies from random models are higher by as much as eleven percentage points compared to pooled OLS estimates. Whilst tests show efficiencies are not drawn from the same population, rank order efficiencies are strongly associated. In a second step, we employ the estimated efficiencies to determine the effect of foreign acquisitions on bank cost efficiency following legislative reforms made as part of Mexico's bank restructuring programme in 1995. Foreign bank acquisition does not significantly affect efficiency whereas consolidation of local banks yields significant long-term improvements in efficiency. We recommend random parameters stochastic frontier models since they better accommodate heterogeneity and produce more precise estimated efficiencies.     

The value of access to finance: Evidence from M&As

We examine synergies in mergers and acquisitions (M&As) generated by firms’ comparative advantages in access to bank finance. We find robust evidence that greater access to bank finance increases firms’ attractiveness as acquisition targets. Targets’ comparative advantage in bank finance improves bank credit supply and reduces financing costs for the merged firms. These effects are more pronounced for acquirers with greater frictions in accessing bank loans and acquirers with greater growth opportunities. Overall, this paper reveals that targets, not just acquirers, contribute to financial synergies in M&As.     

SYNERGY,DIVERSIFICATION, AND INCENTIVE EFFECTS OF CORPORATE MERGER ON BONDHOLDER WEALTH: SOME EVIDENCE

The theory relating to the effects of a merger on the wealth of bondholders implies countervailing results. On the one hand, bondholders might share the benefits of operating synergies and diversification with shareholders. On the other hand, they might suffer from an incentive effect—the expropriation by the shareholders. Studies by Kim and McConnell (1977) and Asquith and Kim (1982) find that the wealth of bondholders is not significantly affected by conglomerate mergers. Using a more inclusive sample and a different methodology, this study finds that the wealth of bondholders is affected positively by merger, which implies synergies to bondholders and/or a diversification effect. Furthermore, an incentive effect would be inferred if leverage were increased substantially after merger and if the size of the increase were inversely related to bondholder gains. Since neither of these events is observed, this study finds no evidence for an incentive effect.