Recent Empirical Evidence on Mergers and Acquisitions

• Date: 01 December 1993
• Author: Robert P. O'Quinn,Paul A. Pautler
• DOI: 10.1177/0003603X9303800401
• Published date: 01 December 1993
• Subject Matter: Article

The Antitrust Bulletin/Winter 1993 741

Recent empirical evidence on mergers

and acquisitions

BY PAUL A. PAUTLER* and ROBERT P. O'QUINN**

1.

Introduction

This article provides a brief summary of the state of the empirical

economics literature regarding merger and acquisition issues.

Much

of

that literature has direct or indirect implications for com-

petition policy. Other parts

of

the literature go beyond "competi-

tive effects" to discuss innovations in the market for corporate

assets or general merger trends (sections VI and VII). This article

provides a broad brush treatment of all these areas.

Of most direct interest to merger aficionados are three types

of

empirical

studies on the effects

of

mergers and acquisitions:

*Economist,

Federal

Trade

Commission.

** Formerly Financial

Analyst,

Federal

Trade

Commission.

AUTIIORS' NOTE: The views expressed are those

of

the authors

and

do not

necessarily reflect those

of

the Federal Trade Commission or any indi-

vidual Commissioner. Charissa Wellford provided the information incor-

porated in the section on experimental economics. Lynn Carpenter. Dolly

Howarth. and Vera Chase prepared the data tables and graphs.

e1994 by Federal Legal Publiealions. Inc,

742 : The antitrust bulletin

accounting data studies, stock market studies, and econometric

case studies. In sections III through V, we discuss briefly the

strengths and weaknesses of each type

of

study prior to our dis-

cussion of specific recent studies in each category.

In

addition to these empirical studies that directly use data on

mergers, we may gain some indirect insight into the potential'

effects of mergers by examining the relationship between market

concentration and the profits or prices of firms in a market. These

structure-conduct-performance studies will be examined in a sepa-

rate section (VIII). Our literature summary concludes with a brief

examination of the merger-related results that have been obtained

in markets conducted in a laboratory setting (section IX).

A final section of data tables provides information on merger

and acquisition activity over the past two decades. Some of these

data reveal general merger trends and some relate more directly to

Federal Trade Commission (FTC) and Department

of

Justice

(DOJ) activity in the merger area (e.g., merger filings under the

Hart-Scott-Rodino Act and FTC and DOJ requests for additional

information concerning the merger).

We begin our tour through the literature with a short laundry

list

of

possible motives for mergers.

II. Merger

and

acquisition motives

A. Efficiencies

Firms may combine their operations through mergers and

acquisitions

of

corporate assets

.toreduce

production costs,

.improve product quality, or provide entirely new products. Among

the potential efficiency benefits from mergers and acquisitions

include both operating and managerial efficiencies. Operational

.efficiencies may arise from economies

of

scale,'

production

..

1Economies of scale refer to the long-run reduction in the per unit

cost

of

making aproduct as the volume

of

production rises, allowing all

inputs to be varied optimally.

Mergers &acquisitions:

743

economies of

scope,>

consumption economies of scope," improved

resource allocation, improved use

of

information and expertise,

and reductions in transportation and transaction,costs. It may be

that mergers or acquisitions are the quickest or cheapest (or only)

way to attain these benefits. The gains from mergers and acquisi-

tions are not limited to operating efficiencies, however. The abil-

ity

of

one firm to merge with another firm or acquire its assets

also creates a market for corporate control. Many economists con-

sider an active market for corporate control an important safe-

guard against inefficient management.4

B. Financial and tax benefits

Mergers and acquisitions may lead to financial efficiencies.

For

example, firms may diversify their earnings by acquiring

other firms or their assets with dissimilar earnings streams. Earn-

ings diversification within firms may lessen the variance in their

profitability, reducing the risk

of

bankruptcy and its attendant

costs.!

2Production economies of scope refer to the reduction in overall

costs from the joint production of complementary products.

3Consumption economies of scope refer to the increased consumer

welfare from thejoint consumption of complementary products.

4

If

a firm is poorly managed, its market value will be less than its

potential value

if

the same firm were well managed. The market for cor-

porate control allows more efficient management teams to profitably

takeover such firms. Mitchell and Lehn suggest this as one explanation

for the "bust-up" acquisitions of the 1980s, where heavily diversified

firms were purchased and the parts resold to firms specializing in each

industry. See Mitchell &Lehn, Do Bad Bidders Become Good Targets?

98 J.

POL.

ECON. 372 (1990). More generally, Romano reviews the eco-

nomics/finance literature and finds the operating efficiency and manage-

ment control explanations for mergers to be consistent with the evidence.

See Romano, A Guide to Takeovers: Theory. Evidence. and Regulation, 9

YALE

J. on

REG.

119 (1992).

SIn the absence of bankruptcy costs, investors may be able to effi-

ciently diversify by purchasing shares in a number of unrelated firms,

thereby reducing any benefits from diversification within a single firm.