The merger mania that transformed much of corporate America through the 1990s largely disappeared in the wake of the terrorist attack of September 11, 2001, the corporate scandals at Enron, Tyco, HealthSouth, and WorldCom, and the bursting of the dot.com bubble. There was a resurgence in merger activity from 2004—2008 but that also disappeared with the financial crisis that continues to affect economic activity in the United States. Despite the recent downturn in merger activity, however, there were over 9,500 new merger deals with a total value of $840 billion struck in the year ended 05/31/2011 and over 9,000 merger deals with a total value of $759 billion struck in the year ended 05/31/2012. The urge to merge may not be as strong as it was in the 1990s, but it is by no means absent.
The organization and reorganization of firms brought about by mergers and acquisitions raises several issues. Perhaps the most important of these is: why merge? What is the motivation behind the marriage of two (or more) firms? One possible answer is that a merger creates cost savings by eliminating wasteful duplication or by improving information flows within the merged organization. Similarly, a merger may lead to more efficient pricing and/or improved services to customers. This is the case when two firms producing complementary goods such as nuts and bolts merge.1
If the primary motivation for mergers is to reduce costs or rationalize complementary production, mergers are ...