SEPTEMBER 1977 ON THE THEORY OF CONGLOMERATE MERGERS JAMES SCOTT,JR.* H. I. INTRODUCTION MERGERS BE EXCITING, however their effects on stockholders remain unclear. CAN Mandelker [I81 found that the average firm that acquired another firm in the 1940's and 1950's did not benefit its stockholders. Given bleak findings such as this, it is not surprising to find theoretical controversy over what constitutes a good merger. From a theoretical standpoint, a number of benefits are obvious, though they may be difficult to estimate in practice. For example, the profitability of a merger is enhanced by positive synergistic effects, i.e. real gains due to the effective integration of productive facilities, distribution networks, etc. Tax loss canyforwards can also be a source of merger benefits. Another benefit is possible if, in an inefficient market, one large firm has better access to external sources of funds than do two smaller firms. However, if these and other real factors are swept aside, and if the securities markets are efficient, are there any purely financial benefits to merging? The answers to this question constitute the theory of conglomerate mergers and are the subject of this paper. The first major result of this theory concerns
The Journal of Finance – Wiley
Published: Sep 1, 1977
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