Telecommunications deregulation and the motives for mergers

We study mergers in the regulated telecommunications industry to test theories of merger gains. We find that mergers yield positive returns to the combined firms. Because this effect is consistent with the collusion, competitive advantage and anticipation hypotheses, we study returns to rivals to differentiate the hypotheses. Our results indicate that rival firms earn positive abnormal stock returns upon the announcement of an industry merger and that returns exhibit substantial cross-sectional dispersion. Rivals that become targets in subsequent mergers earn significantly greater announcement returns than do subsequent non-targets. Financial characteristics of initial target firms and subsequent targets are statistically indistinguishable. Finally, rival abnormal returns are insignificantly related to market concentration and horizontal vs. vertical deal status. These results are consistent with predictions of the anticipation hypothesis and inconsistent with collusion. Thus, our findings indicate that deregulation did not foster collusion in mergers in the telecom industry but, instead, merger gains are due to merger-induced efficiencies.