Mergers and market foreclosure: using data on mergers and stock market prices to detect foreclosure

Abstract

It is a real dilemma to figure out why firms merge or engage in acquisitions if all they end up is low stock values and losses. In this particular piece we make the claim that this indeed is the case for high-mergers and less so for low-tech ones and those that happen in special sectors such as the energy sector. This happens in high-tech industries, we argue, because of what we call the winner's curse. Hence, losses are made due to the inability in calculating the value of company assets and companies end up by overpaying for those assets. In this preliminary study we display the above assertions and we further make the claim that for those high-tech mergers and acquisitions if there exist contracts previous to the merger or an acquisition not only the winner's curse would be prevented but at the same time the merged company would have the ability to foreclose others to its inputs with the pure ability to own sensitive information. To this end we analyze the monthly stock prices for twenty eight merged companies in the above mentioned industry categories five years prior to the merger and five years following it. We also repeat this analysis for twenty two acquisitions. We end up observing that indeed winner's curse is very prevalent for the high-tech sector as opposed to the other two industry groups. If this is the case, we argue, engaging in pre-merger contracts are likely to not help prevent winner's curse but also it gives the opportunity to the transacting firms to increase input prices to the others in the market.