Merger Failures


  • We are grateful to an anonymous coeditor of this journal and two anonymous referees, Marcus Asplund, Heski Bar-Isaac, Miguel Garcia-Cestona, Rafael Hortala, Inés Macho-Stadler, Marco Ottaviani, David Pérez-Castrillo, Carmelo Rodríguez-Álvarez, Jennifer Rontganger, Joel Sandonís, Armin Schmutzler, Oz Shy, and Xavier Vives for valuable comments and discussions. We have also benefited from comments of seminar participants at Cambridge, UB, UAB, UMA, KUL, UPV, WZB, Guelph, Michigan State, Brock, Southampton, CREST, Canadian Economic Theory 2004, EEA 2004, JEI 2004, ASSET 2004, SAE 2004, IIOC 2005, CEPR Applied IO Workshop 2005 and ESSET 2005. Financial support from the ICM/CIM, Spanish Ministry of Science and Technology (BEC2003-01132) and EC 5th Framework Programme RTN (HPRN-CT-2002-00224) is gratefully acknowledged. All remaining errors are our own responsibility.


This paper proposes an explanation as to why some mergers fail, based on the interaction between the pre- and post-merger processes. We argue that failure may stem from informational asymmetries arising from the pre-merger period, and problems of cooperation and coordination within recently merged firms. We show that a partner may optimally agree to merge and abstain from putting forth any post-merger effort, counting on the other partner to make the necessary efforts. If both follow the same course of action, the merger goes ahead but fails. Our unique equilibrium allows us to make predictions on which mergers are more likely to fail.