Impact of Horizontal Mergers on Research & Development and Patenting: Evidence from Merger Challenges in the U.S.

This paper contributes further empirical evidence on the effects of mergers on innovation using company level data. Evidence on this issue has implications for the relationship between innovation and market concentration. Our departure from previous work is that we focus on a sample of horizontal mergers whose market concentration impacts were flagged by U.S. antitrust authorities as potentially posing a problem for antitrust law compliance. We employ propensity score matching and difference-in-differences estimation to compare the innovation activities of challenged and non-challenged merger firms to a control group of non-merged firms. We use R&D, patent grants, and citation-weighted patent grants to measure the innovation activities of firms before and after a merger. Our results indicate that the post-merger innovation outcomes of firms whose mergers were challenged are lower than they would have been had the firms not merged. But for non-challenged mergers, or mergers that do not raise concerns about market concentration, post-merger innovation outcomes are not significantly different from what they would have been without a merger.     

Small firms and the merger mania

Empirical research has found an average or even superior performance of small firms. This seems to be at variance with the secular concentration process and the recurrent merger waves. This paper tries to integrate size and merger research. Higher profitability of small firms is explained by their incentive structure and shorter decision lags but also by lower wages and higher individual risk (premia). Their faster growth in the eighties was, in addition, fostered by diversification of demand, miniaturization of technology, and a need for flexibility under uncertainty. The merger wave on the other hand does not necessarily prove that large firms are superior. Managers and shareholders may be seduced by stockmarket optimism, a sizeable industry of banks, agents and lawyers have their own interests in mergers, mergers may be important in declining markets and for the acquisition of technology. On average, mergers do not improve efficiency, profits or internal growth. Small and large firms serve different purposes. Performance depends on the market, incentives and technology. The establishment, growth and closure of small firms as well as mergers are attempts to find the optimal organization for utility maximization in a world of severe uncertainty and diverse needs.     

Sequential Mergers and Antitrust Authority’s Decisions in Stackelberg Markets

This paper analyses a sequential merger formation game in a setting where: (i) firms compete à la Stackelberg; (ii) mergers may give rise to endogenous efficiency gains; and (iii) every merger has to be submitted for approval to the Antitrust Authority (AA). Two different types of AA are studied: first, we assume a myopic AA, which accepts or rejects a given merger without considering that this merger may be followed by other mergers; and, second, a forward looking AA, which anticipates the final industry structure a merger will give rise to, if approved. We conclude that these two types of AA adopt similar decisions whenever a merger would not trigger the exit of outsider firms. Their decisions are, however, shown to be very different when evaluating exit-inducing merger proposals.     

Barbarians at the Gates: State Control of Global Mergers and Acquisitions

Cross‐border mergers and acquisitions are a major and often politicised component of foreign direct investment. Using data on individual transactions between 1970 and 2006, we examine the restrictions countries place on mergers and acquisitions, whether they use these controls to discriminate against foreigners seeking to acquire domestic firms, and what factors may predict the propensity to block foreign entry by this method of direct investment. Drawing partly on the existing literature, we test hypotheses that state intervention can be explained by characteristics of the countries whose firms are targeted by acquirers, including per capita income, democracy, trade exposure, market size, government share of national income and industrial structure. Although democracy, trade exposure and high government expenditure are associated with more stringent merger control laws, none of these attributes cause states to discriminate against cross‐border mergers. Countries with high per capita incomes, large markets and strict merger control laws, do use those regulations to discourage foreign acquirers. A second set of tests, based on observations of individual deals, rather than national aggregates, reveal that governments are particularly averse to foreigners acquiring firms that are bankrupt or in the defence sector. Overall, governments do treat cross‐border mergers and acquisitions differently, and use their merger control laws to discriminate against foreign investors, particularly with respect to certain types of transactions.     

Industry Merger Intensity and Cost of Capital

Using a panel of industry‐average implied cost of equity capital and the value of prior year aggregate industry mergers, we find strong evidence that the industry cost of equity capital is negatively associated with industry merger activity. Our evidence is consistent with greater media coverage, analyst following, or increase in investor attention associated with industry merger activity lowering the required return on equity for firms in an industry that is not involved in merger activity via the ‘information risk’ or ‘incomplete information’ channels.     

Horizontal Mergers and Successive Oligopoly

This paper considers a successive oligopoly setting in which a set of upstream firms sell output non-exclusively to a group of downstream firms using a linear tariff. If the concavity of retail demand is constant then the profitability of horizontal merger at either the upstream or the downstream stage is shown to depend on the number of firms in the stage experiencing the merger and not on the number of firms in the other stage. Furthermore, the profitability of merger at either stage is the same as the profitability of merger amongst a set of vertically integrated firms in a setting in which all firms are vertically integrated. Finally, mergers at either stage are shown to reduce the sum of producer and consumer surplus. Moreover the negative effects of merger on surplus are unambiguously increased by increases in concentration in the merging stage and ambiguously affected by increases in concentration in the non-merging stage.JEL classification: L10, L20, L40     

Company Taxation and Merger Incentives in International Oligopoly: on International Policy Coordination with Strategic Trade

We analyse how national taxation of firms is likely to affect merger incentives in international markets. In particular, we ask whether non-coordinated trade policies stimulate cross-border mergers that are overall inefficient, and if this then is an argument for international coordination of such policies? We address this issue in a setting where policy makers use two-part tariffs to tax exporting firms. The analysis reveals that while non-coordinated policies may induce cross-border mergers by allowing the firms in question to play national policy makers out against each other, this can nevertheless be overall welfare enhancing compared to market outcomes under coordinated policy making.     

Are Bank Mergers Good News for Shareholders? The Effect of Bank Mergers on Shareholder Value in Japan

This study investigates the effects of bank mergers on the welfare of affiliated client firms. The findings demonstrate that, in general, bank mergers increase the welfare of client firms. However, there are significant differences in the impact of a bank merger on client firms across different merger, bank, and firm characteristics. Client firms of banks involved in mega‐mergers do not enjoy an increase in welfare. Client firms of undercapitalized banks in fact suffer significant welfare losses. In the long‐run, weak “zombie” firms also in many cases experience welfare losses following the announcement of a merger by their main bank.     

Mergers Among German Cooperative Banks: A Panel-based Stochastic Frontier Analysis

Based on an unbalanced panel of all Bavarian cooperative banks for the years of 1989--97, which includes information on 283 mergers, we analyze motives and cost effects of small-scale mergers in German banking. Estimating a frontier cost function with a time-variable stochastic efficiency term, we show that positive scale and scope effects from a merger arise only if the merged unit closes part of the former branch network. When we compare actual mergers to a simulation of hypothetical mergers, size effects of observed mergers turn out to be slightly more favorable than for all possible mergers. Banks taken over by others are less efficient than the average bank in the same size class, but exhibit, on average, the same efficiency as the acquiring firms. For the post-merger phase, our empirical results provide no evidence for efficiency gains from merging, but point instead to a leveling off of differences among the merging units.     

What Do We Know about Success and Failure of Mergers?

Collecting the most important results of about 80 empirical merger studies, this study condenses the bewildering spectrum of results to 18 stylized facts. Most important, no more than a quarter of the mergers increase consumer welfare; another quarter increase profits at the cost of consumers; half of the mergers reduce the value of the firm. Targets' shareholders win, while bidders' shareholders break even upon the announcement of a merger, but lose significantly in the long run. Seen relatively, horizontal mergers fare best, especially if they are focus-increasing. Cash-financed mergers fare better than stock-financed and strategic mergers fare better than financial ones. Confronting the stylized facts with existing merger theory reveals some major paradoxes; confronting them with existing competition policy reveals the need for a modification and intensification, as mergers increase concentration, and corporate policy strives towards still higher concentration. As a summary ten lessons are extracted on what we may have learnt, and on what is still open.     

Merger drivers and the change of bidder shareholders' wealth

A growing number of merger studies concern the causality of firm performance and merger activity in the last decade, but with mixed results. Assuming semi-strong efficiency, this article argues that firms with good stock performance are more likely to acquire other firms. With 412 US-listed bidders, results from the event study method clearly support our hypothesis by showing a strong upward movement of cumulative abnormal returns across groups in the pre-merger period. Results also suggest that bidders of different characteristics have different preference for payment methods and thus the market reactions to them are different, despite the noise that frequently accompanies merger activity. These empirical outcomes are important to both investors and financial services companies including investment banks when knowledge about the market reactions to their clients in mergers is required.     

The Effects of Market Concentration and Horizontal Mergers on Hospital Costs and Prices

Antitrust advocates believe that horizontal consolidation in hospital markets can reduce competition and increase prices while merger advocates believe it can benefit consumers by reducing service duplication. This study analyzed the market conditions, operating characteristics, and costs and prices of approximately 3500 short-term general hospitals (including 112 within-market-area mergers) from 1986 to 1994 to investigate the effects of market concentration, hospital mergers, and managed care penetration. The results show: a shift away from non-price competition toward price competition in health care markets; that this shift was fueled by increased market penetration by price-sensitive buyers; that horizontal hospital mergers produced average cost savings of approximately 5%, which were generally passed on to consumers as lower prices; that cost savings were generally greater for mergers of similar-size hospitals, with a higher degree of duplicative services, and with lower pre-merger occupancy rates; and some evidence that post-merger price reductions were smaller in less-competitive markets.     

Simulating Partial Asset Divestitures to 'Fix' Mergers

In this paper, we apply and extend merger simulation methodology to analyze the effectiveness of partial divestitures as a 'fix' to remedy the possible anticompetitive effects of horizontal mergers. Typically, antitrust agencies require merging firms to divest assets so that the status quo before the merger is restored, that is, they favor a 'full divestiture'. We focus on the effectiveness of a partial divestiture as an antitrust remedy (where a subset of products owned by the merging firms is spun off). Although this is not the type of full divestiture favored by antitrust agencies, we argue here that a partial divestiture could leave consumers better off after the merger than they were before - under certain conditions. Using a real-world example, we show how divesting a relatively close substitute creates competition that offsets the anticompetitive effects of combining products that are relatively distant substitutes. This result stands even when the divestee is moderately inefficient.     

What Do We Know about Success and Failure of Mergers?—Rejoinder

Responding to the comments of Coscelli, Lyons and Weston, I argue: (1) The aim of my paper was not primarily to discuss recent competition policy, but to extract stylized facts and compare them to theory; (2) utilizing all empirical merger studies published in refereed journals, instead of only the sound ones, does not appear to influence the results; (3) economies to scale—and consequently endogenous merger motives—are of less importance for mergers dealt with by the competition authorities; (4) a post-merger number of competitors of less than four to five steeply raises the likelihood of tacit collusion and conscious parallelism; (5) concentration is already high and still increasing in quite a number of markets; (6) mergers in network sectors are more dangerous than in manufacturing, as the number of potential competitors is small in most cases; (7) I agree with my critics that strictly banning the critical categories of mergers may be too harsh; I still hold, however, that competition authorities should take account of these critical types in a more formal way (e.g. by merger rules).     

Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment

This analysis evaluates the impact of corporate debt in influencing mergers of local exchange companies in the United States telecommunications industry between 1988 and 2001. Firms’ financial structures significantly affect behavior and performance; yet no evidence has shown how firms’ financial structures influence their merger activities. The impact of corporate debt levels on the various mergers that took place during the merger wave in the sector is significantly negative for the first set of mergers carried out, and significantly negative, but with smaller impact, for the second set of mergers. The results support the idea that firms with high debt levels can be monitored carefully, precluding engagement in potentially-risky mergers so as to not engender negative financial outcomes.     

The impact of mergers in banking : Evidence from a nationwide sample of federally chartered banks

Spurred by deregulation, cost, and risk factors, commercial bank mergers have accelerated sharply in recent years. Many banks appear to be positioning themselves for the advent of interstate banking through holding company or reciprocal branching arrangements. Yet, the performance effects of mergers among operating U.S. banks (as opposed to holding company acquisitions) have been examined both infrequently and inconclusively. This study focuses upon the characteristics and performance effects of national bank mergers occurring during the 1970–1980 period. Acquiring national banks were found to have lower operating efficiency and productivity than nonmerging banks and their profitability did not increase following the mergers, but credit availability, productivity, loan losses, deposit service charges, and interest-rate risk did rise. Frequency of merger activity did not significantly influence bank profitability or growth, but did augment stockholder risks and increase business and real-estate credit. In the aggregate, national bank mergers appeared to result neither in significant service benefits nor in significant service costs to the public.Spurred by deregulation of the industry, rising cost pressures, and increased operating risk, merger transactions among U.S. banks have soared in recent years. During the 1982–1986 period, for example, banking led all other industries in the number of consummated mergers and consistently was among the ten leading U.S. industries in the estimated market value of merger agreements. Moreover, the recent upsurge in reciprocal interstate banking agreements and proposals for fully legalized interstate banking hold out the prospect for a further acceleration in bank merger transactions in the years ahead. In view of the fact that legislation in more than 30 states now permits some form of interstate banking by merger or de novo entry and a June 1985 ruling of the U.S. Supreme Court has legitimized regional banking compacts, the public and private impact of bank mergers becomes of much greater importance as a research focus.Despite the magnitude of recent bank merger transactions and their implications for the public, the research literature in this area is surprisingly meager and often contradictory. This article is an attempt to focus more sharply on recent research findings, provide additional evidence concerning the effects of mergers on the financial performance of banks, and assess their impact on the public's interest in an adequate supply of financial services.     

Service bundling and strategic equilibrium in the information services industry

The information service industry is characterized by successive levels of access; e.g., network service and data base service. Within this structure firms may have incentives to bundle services and exclude independent service providers from media access. This multilevel structure is incorporated into mathematical models that can be used to characterize interactions between unregulated firms in a variety of industries, including switched network services, software, and television.Incentives for vertical merger between complementary service providers are evaluated for several cases. We show that cross subsidy occurs under vertical merger, and that the likelihood of merger is greatest when one of the firms can unilaterally exclude other complementary firms from media access. In this case the access controlling firm is in a position to enforce bundled pricing and limit the availability of independently supplied services. This ability to bundle services leads to cross subsidy and merger, even in the absence of economies of scale or scope.     

Trade Liberalisation,Market Structure and the Incentive to Merge

In this article, we consider whether a movement towards freer international trade generates incentives for firms to merge and if so what forms of merger are most profitable. In a linear Cournot framework, we show that a reduction in trade costs may, but will not necessarily, encourage mergers. Both market structure and the level to which trade costs fall are shown to play a decisive role. Domestic mergers will be encouraged only if the product market is not highly concentrated and trade costs fall below a threshold level. International mergers can be encouraged in any market structure, and are generally more profitable than domestic mergers.     

Domestic transport infrastructure and firms’ export market participation

Investment in transport infrastructure reduces the cost of distance and enables firms to establish contacts over larger distances. Using data from a panel of Spanish manufacturing firms and geographic information system techniques, this article studies the impact of domestic transport cost reductions on firms’ export market participation, taking into account the role of entry costs and other firm characteristics. We estimate dynamic probability models, controlling for the unobserved heterogeneity of firms and for the simultaneity of firms’ export and location decisions. Our results demonstrate a positive effect of domestic transport infrastructure improvements on small and medium-sized firms’ probability of exporting.     

Free in-network pricing as an entry-deterrence strategy

This paper analyzes the entry-deterring power of free in-network pricing with multiple incumbents. Free in-network pricing may deter entry since it creates network externality that intensifies competition. One may expect that a particular entry-deterrent strategy adopted by all incumbents would have more entry-deterring power than when it is adopted by some incumbents only. However, we show that when free-in network plan has entry-deterrence power with two incumbent firms, sometimes one incumbent offering free in-network plan may have more entry deterrence power than both firms offering free in-network plans. In other words, we find that an asymmetric adoption of entry-deterrence strategies by the incumbent firms may be the best for entry deterrence. This result highlights the importance of the strategic choice of the pricing plan as a function of not only the likelihood/cost of entry but also of the plan choices of other firms, and may partially explain the asymmetric strategies used by competing firms.