Why Do Firms Merge and Then Divest? A Theory of Financial Synergy

Zsuzsanna Fluck and Anthony W Lynch

The Journal of Business, 1999, vol. 72, issue 3, 319-46

Abstract: This article develops a theory of mergers and divestitures. The motivation stems from inability to finance marginally profitable projects as stand-alones due to agency problems. A conglomerate merger is a technology that allows these projects to survive a period of distress. If profitability improves, the financing synergy ends and the acquirer divests the assets. The authors' theory reconciles two seemingly contradictory empirical findings. Mergers increase the combined values of acquirers and targets by financing positive net present value (NPV) projects that cannot be financed as stand-alones. At the same time, because these projects are only marginally profitable, conglomerates are less valuable than stand-alones. Copyright 1999 by University of Chicago Press.

Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (89)

Downloads: (external link)
http://dx.doi.org/10.1086/209617 full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:72:y:1999:i:3:p:319-46

Access Statistics for this article

More articles in The Journal of Business from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().