Effects of Mergers and Acquisitions on the Economy: An Industrial Organization Perspective

Once upon a time, study of the effects of mergers was clearly the province of specialists in industrial organization. But then, following two upheavals, this turf was lost. The first change was the shift (in the United States; less in other industrial countries) toward diversifying mergers and away from those combining competing or vertically related companies. The second change was the development of "event studies": the method of inferring the profitability of mergers ex ante from changes in stock-market values at the time when the transaction is announced. The first change removed the bulk of acquisitions from categories for which microeconomic theory possesses strong models. We have lacked equally strong theories to explain the causes and the consequences of diversification. Some models can explain why diversifying mergers might improve the efficiency of resource use, while others show that they might facilitate collusive or rent-seeking behavior. But the yea-saying models have not attracted much interest except in business administration; and the nay-saying models, resting on stringent assumptions and hard to test empirically, have made only a modest impression. The second change allowed the study of mergers to be annexed in a bloodless coup by the finance specialists. "Event studies" seem to have everything going for them. They focus directly on the primary question of whether mergers improve the use of scarce resources. 1 They avoid the vexing controlled-experiment problems that plague any attempt to infer the consequences of mergers from ex post data. And their authors possess deadly weapons for repelling skeptics who fear slippage between