A Multi-Product Framework Generating Waves of Mergers and Divestitures
James D. Gaisford
University of Calgary - Economics
University of Manchester - School of Economic Studies
July 1, 2007
ICER Working Paper No. 36/2007
Recent waves of corporate mergers followed by divestitures have sparked new interest in economic analyses of these issues. We take the merger paradox from the standard oligopoly literature as a starting point and show that in the absence of any cost-synergies of merger activities, firms do have an incentive to divest further instead of joining mergers. We then analyze conditions where mergers may emerge endogenously as a result of a market game. Due to the nature of the interaction of market-share and market-concentration effects in Cournot oligopolies, a stable internal equilibrium where mergers arise endogenously and simultaneously requires both cost synergies and cost dissynergies. Endogenous merger size is then a function of market parameters as well as cost synergy parameters. Hence anticipated changes in market size or cost synergies attainable through mergers lead to reconfigurations of merger sizes. If ex-ante expectations about merger-promoting changes are not fully realized ex-post, merger waves will be followed by divestiture waves. Firm valuation - based on ex-ante expectation - may increase while actual profits and efficiency of the merged entity - according to the ex-post realization - may fall.
Number of Pages in PDF File: 29
Keywords: MNE, FDI, divestitures, product differentiation, multi-product firms, economies of scope
JEL Classification: L1, L4, F12, F23working papers series
Date posted: May 18, 2009 ; Last revised: June 2, 2009
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