Mergers Aren't So Black & White

Abstract

Economic research reveals that merger activity frequently results in price increases. Such price increases often negatively affect consumers and may represent a net harm to society. While economists, antitrust scholars, and regulators have made extraordinary contributions to understanding and mitigating the impact of such price increases on consumers, our understanding of the impact of these price increases on shareholders is comparatively weak. This Article begins to fill that gap. It demonstrates that, in situations where M&A induces price increases, even significantly positive merger premiums and abnormal returns due to the merger may hide concrete harms to a firm’s shareholders. In this sense, the best efforts of the board of directors to maximize share price through a merger may perversely generate negative net wealth effects for a significant number of shareholders.

These negative wealth effects arise because the categories of “shareholder” and “consumer” are not mutually exclusive. Rather, a growing number of consumer-shareholders pay for the goods and services of companies in which they invest, either directly or indirectly. This is especially likely with larger companies, which generally have a more sizable customer base; with publicly traded companies, which generally have a much larger number of shareholders; and with ownership of highly diversified funds, which own shares in hundreds, sometimes thousands, of firms. As this Article demonstrates, increases in the price of a firm’s products can produce economically significant impacts for consumer-shareholders. The magnitude of such impacts is frequently significant enough to change a seemingly substantial merger premium into a net loss.

This Article uses financial models to demonstrate the impact of product price increases following M&A on shareholders with a variety of characteristics. These models serve as a useful guide for corporate boards to estimate the impact of a merger on shareholders for a range of investment levels, product price increases, and merger gains, as well as for fund managers as they contemplate their fiduciary responsibility to vote in the best interests of the investors in their fund. These models also provide a tool for shareholders as they attempt to discern their own economic interests.

The empirical models provided in this Article reveal that mergers often result in net harms for shareholders. Shareholders have a greater interest in the net impact on their wealth than in the nominal share price being offered, particularly when share price gains mask significant, quantifiable losses. Boards, fund managers, and shareholders contemplating a merger ought to consider potential price increases resulting therefrom as an important factor impacting shareholder wealth. Additionally, shareholder awareness of the significant negative impact of price-increasing merger activity may mean that, in the future, corporate boards will have to justify price increases not only to antitrust regulators, but also to their own shareholders.

Keywords: Mergers, Acquisitions, M&A, Corporate Law, Shareholders, Consumers, Corporate Governance, Antitrust, Price Increases, Passive Investing, Index Funds, Shareholder Wealth Maximization

JEL Classification: K2, K20, K21, K22, G3, G11, G23, G34, L21, L41