Hostname: page-component-5b777bbd6c-vfh8q Total loading time: 0 Render date: 2025-06-21T20:14:49.167Z Has data issue: false hasContentIssue false
  • English
  • Français

Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry

Published online by Cambridge University Press:  05 January 2012

David A. Becher ,
J. Harold Mulherin  and
Ralph A. Walkling
David A. Becher
Affiliation:
LeBow College of Business, Drexel University, 3141 Chestnut St., Philadelphia, PA 19104. becher@drexel.edu, rw@drexel.edu
J. Harold Mulherin
Affiliation:
Terry College of Business, University of Georgia, 310 Herty Dr., Athens, GA 30602. mulherin@uga.edu
Ralph A. Walkling
Affiliation:
LeBow College of Business, Drexel University, 3141 Chestnut St., Philadelphia, PA 19104. becher@drexel.edu, rw@drexel.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Our work provides refined tests of the source of merger gains in a neglected industry: utilities. Utilities offer fertile ground for analysis of traditional theories: synergy, collusion, hubris, and anticipation. Utility mergers create wealth for the combined firm, consistent with both the synergy and collusion hypotheses. To distinguish between these hypotheses, we study rival stock returns across dimensions related to collusion: deregulation, geography, and horizontal and withdrawn deals. We also find that the impact of mergers on consumer prices is consistent with synergy rather than collusion. Analysis of industry rivals that become targets also rejects collusion and is consistent with anticipation.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 1 , February 2012 , pp. 57 - 89
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103–120.Google Scholar
Andrade, G., and Stafford, E.. “Investigating the Economic Role of Mergers.” Journal of Corporate Finance, 10 (2004), 1–36.CrossRefGoogle Scholar
Baker, J. B. “Market Definition: An Analytical Overview.” Antitrust Law Journal, 74 (2007), 129–173.Google Scholar
Bartunek, K.; Jessell, K.; and Madura, J.. “Are Acquisitions by Utility Firms Beneficial?” Applied Economics, 25 (1993), 1401–1408.Google Scholar
Becker-Blease, J. R.; Goldberg, L. G., and Kaen, F. R.. “Mergers and Acquisitions as a Response to the Deregulation of the Electric Power Industry: Value Creation or Value Destruction?” Journal of Regulatory Economics, 33 (2008), 21–53.Google Scholar
Berry, S. K. “Excess Returns in Electric Utility Mergers During Transition to Competition.” Journal of Regulatory Economics, 18 (2000), 175–188.Google Scholar
Besanko, D.; D’Souza, J.; and Thiagarajan, S. R.. “The Effect of Wholesale Market Deregulation on Shareholder Wealth in the Electric Power Industry.” Journal of Law and Economics, 44 (2001), 65–88.Google Scholar
Blacconiere, W. G.; Johnson, M. F.; and Johnson, M. S.. “Market Valuation and the Deregulation of Electric Utilities.” Journal of Accounting and Economics, 29 (2000), 231–260.Google Scholar
Block, D. “Price Too High for Constellation.” Daily Deal (Oct. 26, 2006).Google Scholar
Blumsack, S.; Lave, L. B.; and Apt, J.. “Electricity Prices and Costs under Regulation and Restructuring.” Working Paper, Carnegie Mellon University (2008).Google Scholar
Borenstein, S. “Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets.” Electricity Journal, 13 (2000), 49–57.Google Scholar
Borenstein, S., and Bushnell, J.. “An Empirical Analysis of the Potential for Market Power in California’s Electricity Industry.” Journal of Industrial Economics, 47 (1999), 285–323.Google Scholar
Cai, J.; Song, M. H.; and Walkling, R. A.. “Anticipation, Acquisitions, and Bidder Returns: Industry Shocks and the Transfer of Information across Rivals.” Review of Financial Studies, 24 (2011), 2242–2285.Google Scholar
Demsetz, H. “Industry Structure, Market Rivalry, and Public Policy.” Journal of Law and Economics, 16 (1973), 1–9.Google Scholar
Eckbo, B. E. “Horizontal Mergers, Collusion, and Stockholder Wealth.” Journal of Financial Economics, 11 (1983), 241–273.Google Scholar
Eckbo, B. E. “Mergers and the Market Concentration Doctrine.” Journal of Business, 58 (1985), 325–349.Google Scholar
Eckbo, B. E., and Wier, P.. “Antimerger Policy under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis.” Journal of Law and Economics, 28 (1985), 119–149.Google Scholar
Energy Information Administration. Status of State Electric Industry Restructuring Activity. Washington, DC: U.S. Energy Information Administration (2003).Google Scholar
Fagan, M. L. “Measuring and Explaining Electricity Price Changes in Restructured States.” Electricity Journal, 19 (2006), 35–42.Google Scholar
Fan, J. P. H., and Goyal, V. K.. “On the Patterns and Wealth Effects of Vertical Mergers.” Journal of Business, 79 (2006), 877–902.Google Scholar
Farrell, J., and Shapiro, C.. “Horizontal Mergers: An Equilibrium Analysis.” American Economic Review, 80 (1990), 107–126.Google Scholar
Federal Trade Commission and U.S. Department of Justice. Commentary on the Horizontal Merger Guidelines. Washington, DC: Government Printing Office (2006).Google Scholar
Fee, C. E., and Thomas, S.. “Sources of Gains in Horizontal Mergers: Evidence from Customer, Supplier and Rival Firms.” Journal of Financial Economics, 74 (2004), 423–460.Google Scholar
FirstEnergy Corp. S-4 Filing with the U.S. Securities and Exchange Commission (March 23, 2010).Google Scholar
Funk, J. “FirstEnergy in Deal to Become Largest Electric Utility in Nation: Announces $8.5 Billion Plan to Buy Allegheny Energy.” Cleveland Plain Dealer (Feb. 12, 2010).Google Scholar
Harford, J. “What Drives Merger Waves?” Journal of Financial Economics, 77 (2005), 529–560.Google Scholar
Houston, J. F.; James, C. M.; and Ryngaert, M. D.. “Where Do Merger Gains Come From? Bank Mergers from the Perspective of Insiders and Outsiders.” Journal of Financial Economics, 60 (2001), 285–331.Google Scholar
Johnson, M. S.; Niles, M. S.; and Suydam, S. L.. “Regulatory Changes in the Electric Utility Industry: Investigation of Effects on Shareholder Wealth.” Journal of Accounting and Public Policy, 17 (1998), 285–309.CrossRefGoogle Scholar
Joskow, P. L. “Inflation and Environmental Concern: Structural Change in the Process of Public Utility Price Regulation.” Journal of Law and Economics, 17 (1974), 291–327.Google Scholar
Joskow, P. L. “Deregulation and Regulatory Reform in the U.S. Electric Power Sector.” Working Paper, Massachusetts Institute of Technology (2000).Google Scholar
Kelderman, E.“Power Prices Put Utilities in the Hot Seat” (March 21, 2007), Stateline.org.Google Scholar
Kennedy, S.“Is Energy ‘Fox’ Minding Henhouse? Federal Regulators Don’t Check All Electricity Rates to Ensure They Are ‘Just and Reasonable’” (Oct. 14, 2007), Newsday.com.Google Scholar
Kim, E. H., and Singal, V.. “Mergers and Market Power: Evidence from the Airline Industry.” American Economic Review, 83 (1993), 549–569.Google Scholar
Leggio, K. B., and Lien, D.. “Mergers in the Electric Utility Industry in a Deregulatory Environment.” Journal of Regulatory Economics, 17 (2000), 69–85.CrossRefGoogle Scholar
Leonard, K. “FTC Moves to Chill Local Dominion: Equitable Deal.” Pittsburgh Tribune Review (Apr. 14, 2007).Google Scholar
Mansnerus, L. “New Jersey Opposition Leads to Utility Merger’s Collapse.” New York Times (Sept. 15, 2006).Google Scholar
McAfee, R. P., and Williams, M. A.. “Can Event Studies Detect Anticompetitive Mergers?” Economics Letters, 28 (1988), 199–203.Google Scholar
McLaughlin, R. M., and Mehran, H.. “Regulation and the Market for Corporate Control: Hostile Tender Offers for Electric and Gas Utilities.” Journal of Regulatory Economics, 8 (1995), 181–204.Google Scholar
Mitchell, M. L., and Mulherin, J. H.. “The Impact of Industry Shocks on Takeover and Restructuring Activity.” Journal of Financial Economics, 41 (1996), 193–229.Google Scholar
Mulherin, J. H., and Boone, A. L.. “Comparing Acquisitions and Divestitures.” Journal of Corporate Finance, 6 (2000), 117–139.Google Scholar
Peterson, S. E., and Meersman, T.. “Regulators Short-Circuit NSP Merger.” Minneapolis Star Tribune (May 15, 1997).Google Scholar
Pierce, R. J. Jr. “Antitrust Policy in the New Electricity Industry.” Energy Law Journal, 17 (1996), 29–58.Google Scholar
Prager, R. A., and Hannan, T. H.. “Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry.” Journal of Industrial Economics, 46 (1998), 433–452.Google Scholar
Rennie, C. G. “Governance Structure Changes and Product Market Competition: Evidence from U.S. Electric Utility Deregulation.” Journal of Business, 79 (2006), 1989–2017.Google Scholar
Roll, R. “The Hubris Hypothesis of Corporate Takeovers.” Journal of Business, 59 (1986), 197–216.Google Scholar
Salpukas, A. “2 Big Utilities Plan to Merger in Deal Valued at $6 Billion.” New York Times (May 2, 1995).Google Scholar
Sapienza, P. “The Effects of Banking Mergers on Loan Contracts.” Journal of Finance, 57 (2002), 329–367.Google Scholar
Schwert, G. W. “Hostility in Takeovers: In the Eyes of the Beholder?” Journal of Finance, 55 (2000), 2599–2640.Google Scholar
Shleifer, A., and Vishny, R. W.. “The Takeover Wave of the 1980s.” Science, 249 (1990), 745–749.Google Scholar
Singal, V. “Airline Mergers and Competition: An Integration of Stock and Product Price Effects.” Journal of Business, 69 (1996), 233–268.Google Scholar
Slocum, T. “Electric Utility Deregulation and the Myths of the Energy Crisis.” Bulletin of Science, Technology and Society, 21 (2001), 473–481.Google Scholar
Slovin, M. B.; Sushka, M. E.; and Hudson, C. D.. “Deregulation, Contestability, and Airline Acquisitions.” Journal of Financial Economics, 30 (1991), 231–251.Google Scholar
Song, M. H., and Walkling, R. A.. “Abnormal Returns to Rivals of Acquisition Targets: A Test of the ‘Acquisition Probability Hypothesis.’ ” Journal of Financial Economics, 55 (2000), 143–171.Google Scholar
Stigler, G. J. “A Theory of Oligopoly.” Journal of Political Economy, 72 (1964), 44–61.Google Scholar
Stigler, G. J., and Friedland, C.. “What Can Regulators Regulate? The Case of Electricity.” Journal of Law and Economics, 5 (1962), 1–16.Google Scholar
Stillman, R. “Examining Antitrust Policy towards Horizontal Mergers.” Journal of Financial Economics, 11 (1983), 225–240.Google Scholar
Stouffer, R. “FirstEnergy to Pay $4.7 Billion for Allegheny Energy If States OK.” Pittsburgh Tribune Review (Feb. 12, 2010).Google Scholar
Switzer, S., and Straub, M. M.. “The Benefits of Restructuring: It’s Not Your Grandfather’s Electric Utility Anymore.” Electricity Journal, 19 (2006), 30–41.Google Scholar
Thompson, M. W. “Deregulation and Competition in the Electric Power Industry.” Prepared statement of the Federal Trade Commission before the Committee on the Judiciary, United States House of Representatives (July 28, 1999).Google Scholar
Warwick, W.“A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets.” PNNL–13906, Pacific Northwest National Laboratory, chap. 6 (2002).Google Scholar
Weinberg, M. “The Price Effects of Horizontal Mergers.” Journal of Competition Law and Economics, 4 (2008), 433–447.Google Scholar
Willig, R. D. “Merger Analysis, Industrial Organization Theory, and Merger Guidelines. Brookings Papers on Economic Activity, Microeconomics, 1991 (1991), 281–332.Google Scholar