Mueller, Dennis C. --- "The Finance Literature on Mergers: A Critical Survey" [2003] ELECD 88; in Waterson, Michael (ed), "Competition, Monopoly and Corporate Governance" (Edward Elgar Publishing, 2003)

Book Title: Competition, Monopoly and Corporate Governance

Editor(s): Waterson, Michael

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843760894

Section: Chapter 9

Section Title: The Finance Literature on Mergers: A Critical Survey

Author(s): Mueller, Dennis C.

Number of pages: 45

Extract:

9. The finance literature on mergers: a
critical survey1
Dennis C. Mueller

Among the many important pieces of research by Keith Cowling is a co-
authored book of case studies of UK mergers (Cowling et al., 1979). In that
book Cowling and associates established that mergers and acquisitions
(hereafter M&As)2 can not only result in increases in efficiency and market
power, they can also lead to less efficient enterprises. M&As that fall into the
first two categories are consistent with the premise that managers maximise
profits or shareholder wealth. M&As falling into the third category must be
explained by theories that posit other managerial goals than profits, for
example firm growth, or quasi-irrational behaviour as might occur because
managers are overcome by hubris. From the point of view of the theory of
the firm, the important question about M&As is whether they are best
explained by a hypothesis from the third category, or by one that presumes
profits maximisation. If most M&As are consistent with profits maximisa-
tion, then corporate governance structures can be assumed to align share-
holder and managerial interests. If, on the other hand, a large fraction do
not increase shareholder wealth, corporate governance structures must fail
to bring about such an alignment.
To measure the social value of M&As, one must also distinguish between
the first two sets of hypotheses. Only M&As that increase efficiency,
broadly defined, have a positive impact on social welfare. To determine
whether ...