Why Mergers Reduce Profits, and Raise Share Prices: A Theory of Preemptive Mergers
43 Pages Posted: 11 Sep 2000
Date Written: January 2000
We explain the empirical puzzle why mergers reduce profits, and raise share prices. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce their share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.
JEL Classification: L13, L41, G34, C78
Suggested Citation: Suggested Citation