Merger Clusters During Economic Booms

WZB Markets and Politics Working Paper No. SP II 2006-17

36 Pages Posted: 21 Nov 2006

See all articles by Albert Banal-Estañol

Albert Banal-Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics

Paul Heidhues

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Rainer Nitsche

E.CA Economics

Jo Seldeslachts

KU Leuven - Faculty of Business and Economics (FEB); German Institute for Economic Research (DIW Berlin)

Date Written: September 2006

Abstract

Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target - by setting the takeover price - screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively "bad fit" acquirers, leading to a hike in merger activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term - a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher merger profits during "merger waves" than outside of waves, which is also in line with empirical evidence.

Keywords: Mergers, Merger Waves, Screening

JEL Classification: D21, D80, L11

Suggested Citation

Banal Estañol, Albert and Heidhues, Paul and Nitsche, Rainer and Seldeslachts, Jo, Merger Clusters During Economic Booms (September 2006). WZB Markets and Politics Working Paper No. SP II 2006-17, Available at SSRN: https://ssrn.com/abstract=931383 or http://dx.doi.org/10.2139/ssrn.931383

Albert Banal Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Paul Heidhues (Contact Author)

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Rainer Nitsche

E.CA Economics ( email )

Schlossplatz 1
Berlin, 10178
Germany

Jo Seldeslachts

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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