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A Theory of Strategic Mergers

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  • Gennaro Bernile
  • Evgeny Lyandres
  • Alexei Zhdanov

Abstract

We examine firms' strategic incentives to engage in horizontal mergers. In a real options framework, we show that strategic considerations may explain abnormally high takeover activity during periods of positive and negative demand shocks. Importantly, this pattern emerges solely as a result of firms' strategic interaction in output markets. We show that the U-shaped relation between the state of demand and the propensity of firms to merge, documented in past studies, is driven by horizontal mergers in industries that are: (1) relatively more concentrated, (2) characterized by relatively strong competitive interaction among firms, and (3) characterized by relatively low merger-related operating synergies and restructuring costs. The empirical evidence, based on parametric and semi-parametric regression analyses, is consistent with these predictions. Copyright 2011, Oxford University Press.

Suggested Citation

  • Gennaro Bernile & Evgeny Lyandres & Alexei Zhdanov, 2011. "A Theory of Strategic Mergers," Review of Finance, European Finance Association, vol. 16(2), pages 517-575.
    • Handle: RePEc:oup:revfin:v:16:y:2011:i:2:p:517-575
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    File URL: http://hdl.handle.net/10.1093/rof/rfr013
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    Cited by:

    1. Tarsalewska, Monika, 2015. "The timing of mergers along the production chain, capital structure, and risk dynamics," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 51-64.
    2. Tarsalewska, Monika, 2018. "Buyouts under the threat of preemption," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 39-58.

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