A Multi-Product Framework Generating Waves of Mergers and Divestitures

James Gaisford and Stefan Lutz

ICER Working Papers from ICER - International Centre for Economic Research

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 (search for similar items in EconPapers)
JEL-codes: L1 L4 F12 F23 (search for similar items in EconPapers)
Date: 2007-03
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