New Evidence and Perspectives on Mergers

The Institute's reading

The authors update the empirical record through the 1990s and then do something more valuable, which is to lay out the competing explanations for why mergers happen at all: efficiency and synergy, market power, disciplining poor management, managerial self-interest and over-expansion, and diversification. Each explains some mergers in some periods, and none explains all of them. The honest conclusion is that the field knows a good deal about what happens and much less about why.

For an owner the practical lesson is the distribution of the gains. If most of the value in the average transaction goes to the seller, then being the buyer requires a specific reason to believe you are not the average buyer. The Institute keeps returning to the same question, and this paper is the reason: what do you have that makes this business worth more to you than to anyone else bidding for it?

Key propositions

• Event studies consistently show mergers create shareholder value in aggregate, with most gains going to target shareholders.
• Merger activity clusters in waves and is related to industry-level shocks such as deregulation, input price changes and foreign competition.
• Multiple theories of merger motive each explain part of the record, and their relevance varies by period; no single explanation dominates.

In practice

• Assume the seller captures most of the gain unless you can state precisely why this deal is different.
• Notice when your sector is in a wave. Doing a deal because everyone in the industry is doing deals is one of the documented patterns, not a thesis.

Where authorities disagree

This paper is built on public-company data, and Fuller, Netter and Stegemoller on this shelf show that acquirers of private targets fare better than acquirers of public ones. A private-company buyer should read the pessimism here as the base rate for a different game, and should also not assume the private-target premium is automatic.

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