The Worst of Both Worlds: Megamergers are Anticompetitive and Inefficient

Abstract

There is no consensus in the literature regarding the financial consequences of megamergers in part due to the difficulty in establishing a good counterfactual. By comparing the performance of these deals to the performance of synthetic mergers constructed using a novel matching procedure, we find no significant changes in return on assets after megamergers. This apparent non-result is driven by merged firms subsidizing their increased operating inefficiencies with higher markups. We show that this cross-subsidization effect is stronger in larger deals and in more concentrated industries, suggesting that our findings are driven by market power and quiet life considerations.

Keywords: Mergers and Acquistions; Megamergers; Merger Gains

JEL Classification: C51; G34