Economic shocks, competition and merger activity
Okoeguale, Kevin I.
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Why mergers occur remains to some extent a puzzle in corporate finance. The merger literature presents a good number of alternative theories on the drivers of merger activity. Some of these theories are clearly linked to efficiency and others are not. One well documented phenomenon is that merger activity clusters at the industry-level. Much of this industry-level clustering has been linked to economic shocks from deregulation and technological changes. It is important to better understand the role that efficiency plays in how economic shocks from deregulation and technological changes drive merger activity. In the first essay of my dissertation, I investigate the role of the competitive mechanism in how economic shocks from deregulation and technological changes drive merger activity, controlling for the effect of valuations. I show that these shocks drive merger activity by increasing industry competition. Deregulation drives merger activity by increasing entry and cash flow volatility. Technological changes drive merger activity by increasing entry and inter-firm dispersion in the quality of production technology. The imperfection in proxy variables and ambiguity in relative valuation measures such as market-to-book (M/B) inhibit efforts to contrast alternative theories on the drivers of merger activity, particularly in multi-industry studies. The telecommunications industry is one where both deregulation and technological changes have been clearly linked to increases in merger activity. In the second essay, I study how merger activity in the telecommunications industry fits within the framework of the economic shocks theory in contrast to the misvaluation theory. I show that the increase in merger activity following the 1996 deregulation was an efficiency-driven restructuring response to increased entry, cash flow volatility and inter-firm dispersion in the quality of production technology. I find insignificant changes to stock valuations after deregulation. The positive association between competition and merger activity following telecommunications deregulation, however, is consistent with several possible motives for the mergers. This third essay is an event study analysis of alternative theories on the motives behind the cluster of merger following the 1996 deregulation. The evidence that mergers after telecommunications deregulation generate positive announcement abnormal returns to the stockholders of the merging firms is consistent with both collusion and efficiency theories. The negative announcement abnormal returns to bidders suggest hubris as a possible motive. I examine these alternative theories by studying the announcement abnormal returns to rivals of merging firms, including the Nynex/Bell Atlantic merger challenged by the FCC on collusion concerns. I find strong support for anticipation and the signaling of potential synergies between rivals and subsequent bidders through telecom bidding activity. The markets’ response to the announcement of the Nynex/Bell Atlantic merger shows little evidence that the merger would have had collusive or anticompetitive effects.