How Successful Are Mergers? Studies of past merger waves have shown that two of every three merger deals have not worked Why? Real world problems like 1. Linking distribution systems is often difficult 2. Information systems often very difficult to mesh together 3. Clash of corporate cultures
How Successful Are Mergers? • Studies of past merger waves have shown that two of every three merger deals have not worked. • Why? • Real world problems like. 1. Linking distribution systems is often difficult. 2. Information systems often very difficult to mesh together. 3. Clash of corporate cultures
The Merger paradox Assume firms are merging to decrease competition(no cost advantages). For horizontal mergers only 2 motives economies of scale or decreasing competition Start with a basic cournot model If firms are symmetric, then profit of each firm is(a c)/b(n+1) in a cournot Nash equilibrium( Check in the Classnotes)
The “Merger Paradox
The Merger paradox Now suppose, m of the firms merge together to make(n-m +1 firms in the market. After merger profits for each firm are T=(aC)2/b(nm+2)2 Less competition but have profits for the combined firm increased or decreased? Is(a-c)/b (n-m+2)greater than or less than m*(a c)2/b(n+1)2?
The “Merger Paradox
The Merger paradox Get rid of the(a-c)/b terms on both sides and rearrange to get this condition Only profitable for the combined firm if (n+1)>m(n-m+2) Mergers cannot raise the profitability of the firms engaged in the merger even if 50% of the firms are involved in the merger. We usually do not see such large chunks of the firms in the market getting together
The “Merger Paradox
The Merger paradox According to this model almost no mergers are profitable Those that are probably wouldn 't make it past the antitrust authorities Intuition behind the model Free-rider effect--decreasing the number of firms raises industry profit and per firm profit but combined firms get relatively smaller share of the industry. Relevant Question: Why is this not the best model to look at? Assumes firms are identical and that the merged firm has no advantages other than it is facing fewer competitors
The “Merger Paradox