A Multi-Product Framework Generating Waves of Mergers and Divestitures
ICER Working Paper No. 36/2007
29 Pages Posted: 18 May 2009 Last revised: 2 Jun 2009
Date Written: July 1, 2007
Abstract
Recent waves of corporate mergers followed by divestitures have sparked new interest in economic analyses of these issues. We take the merger paradox from the standard oligopoly literature as a starting point and show that in the absence of any cost-synergies of merger activities, firms do have an incentive to divest further instead of joining mergers. We then analyze conditions where mergers may emerge endogenously as a result of a market game. Due to the nature of the interaction of market-share and market-concentration effects in Cournot oligopolies, a stable internal equilibrium where mergers arise endogenously and simultaneously requires both cost synergies and cost dissynergies. Endogenous merger size is then a function of market parameters as well as cost synergy parameters. Hence anticipated changes in market size or cost synergies attainable through mergers lead to reconfigurations of merger sizes. If ex-ante expectations about merger-promoting changes are not fully realized ex-post, merger waves will be followed by divestiture waves. Firm valuation - based on ex-ante expectation - may increase while actual profits and efficiency of the merged entity - according to the ex-post realization - may fall.
Keywords: MNE, FDI, divestitures, product differentiation, multi-product firms, economies of scope
JEL Classification: L1, L4, F12, F23
Suggested Citation: Suggested Citation
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