Merger Failures

Abstract

This paper proposes an explanation as to why some mergers fail, based on the interaction between the pre-merger gathering of information and the postmerger integration processes. Rational managers acting in the interest of shareholders may still lead their firms into unsuccessfully integrated companies. Firms may agree to merge and may abstain from putting forth integration efforts, counting on the partners to adapt. We explain why mergers among partners with closer corporate cultures can have a lower success rate and why failures should be more frequent during economic booms, consistent with the empirical evidence. Our setup is a global game (integration process) in which players decide whether to participate (merger decision). We show that private signals need to be noisy enough in order to ensure equilibrium uniqueness.

Keywords: Mergers, synergies, information, uncertainty, organizational culture

JEL Classification: D74, D82, L20, M14