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

Gary B. Gorton · Matthias Kahl · Richard Joseph Rosen

84 citations0/0 files storedNational Bureau of Economic Research

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Corporate Finance and Governance Merger and Competition Analysis Law, Economics, and Judicial Systems

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.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Agency costs of free cash flow, corporate finance, and takeovers 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1983The market for corporate control 1986The Hubris Hypothesis of Corporate Takeovers 2001New Evidence and Perspectives on Mergers 1981Risk Reduction as a Managerial Motive for Conglomerate Mergers 2008Who makes acquisitions? CEO overconfidence and the market's reaction☆

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