Industry Shocks and Merger Activity: An Analysis of U.S. Public Utilities

Abstract

We study the utility industry from 1980 to 2004 to discern the time series impact of industry shocks and their relation to mergers as modeled by Gort (1969) and Jensen (1993). Our sample period permits tests of the effect of utility deregulation in 1992 and related industry shocks on the rate of merger activity and the level and sources of the wealth changes from 384 utility mergers. We find the rate, size, geographic scope and operational focus of utility mergers all increase after deregulation and utility mergers create wealth for the combined firm. The announcement returns to the rivals of the merging firms decline between the pre- and post-deregulation periods and are larger for rivals that are future takeover targets. Announcement returns to rivals in the same geographic region as the target and bidder are no larger than returns to rivals not in the same region. In addition, the returns to rivals at the announcement of withdrawn deals are significantly positive. We also examine the relation of merger activity to electric utility pricing. Contrary to collusive or anti-consumer effects of mergers, we find that prices are significantly negatively related to industry concentration or merger activity. We interpret this evidence to be consistent with the synergy and anticipation hypotheses and inconsistent with the hypotheses that utility mergers are an outcome of bidder hubris or that mergers prompted by deregulation have enabled greater collusion in the utility industry.

Keywords: Industry shock, mergers, collusion, synergy

JEL Classification: G34, G38, G14