Eat or Be Eaten: A Theory of Mergers and Merger Waves

66 Pages Posted: 24 Jun 2005 Last revised: 22 Jul 2021

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Matthias Kahl

University of California, Los Angeles (UCLA) - Anderson School of Management

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: May 2005

Abstract

In this paper, we present a model of defensive mergers and merger waves. We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. A technological or regulatory change that makes acquisitions profitable in some future states of the world can induce a preemptive wave of unprofitable, defensive acquisitions. The timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry.

Suggested Citation

Gorton, Gary B. and Kahl, Matthias and Rosen, Richard J., Eat or Be Eaten: A Theory of Mergers and Merger Waves (May 2005). NBER Working Paper No. w11364, Available at SSRN: https://ssrn.com/abstract=727144

Gary B. Gorton (Contact Author)

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Matthias Kahl

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Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research ( email )

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