Eat or Be Eaten: A Theory of Mergers and Firm Size

Abstract

We propose a theory of mergers that combines managerial merger motives and a regime shift that may lead to some value-increasing merger opportunities. Anticipation of the regime shift can lead to mergers, either for defensive or positioning reasons. Defensive mergers occur when managers acquire other firms to avoid being acquired themselves. Mergers may also allow a firm to position itself as a more attractive takeover target and earn a takeover premium. The identity of acquirers and targets and the profitability of acquisitions depend, among other factors, on the distribution of firm sizes within an industry.

Empire building? Analysing the drivers towards mega-mergers in the English housing association sector

“…A change in the macroeconomic environment may also be driven by government policy or regulatory changes (Resti 1998) or political developments (Thelen 2009). In fact, Gorton et al (2009) demonstrate that shifts in regimes can explain why mergers tend to occur in waves. For Gorton et al (2009), mergers can be seen as 'positioning acquisitions' in response to a regime shift so that individual businesses ensure long-term legitimacy and survival.…”

“…In fact, Gorton et al (2009) demonstrate that shifts in regimes can explain why mergers tend to occur in waves. For Gorton et al (2009), mergers can be seen as 'positioning acquisitions' in response to a regime shift so that individual businesses ensure long-term legitimacy and survival. Regime changes can have different levels of influence show that clustering of merger activity is also likely to occur in individual industries.…”

“…For Garud et al (2007), certain organisations are in a stronger position to leverage resources and act as institutional entrepreneurs, taking the lead in repositioning themselves in their organisational field and, in doing so, transform it. There is a trade off, however, of waiting to see the best 'cultural fit' versus a pre-emptive move to not be left behind, effectively bringing about a 'race for firm size' (Gorton et al 2009). Making a business case for mergers is therefore critical and each firm needs to focus on the positive synergy gains to be made.…”

“…Yet overall, in terms of size of the merging entities these two mergers are similar and can be considered a 'merger of equals' (Gorton et al 2009). In comparison, L&Q is seven times as large as East Thames so in this respect it is a different merger than the other two and is effectively an acquisition or 'take over' (Gorton et al 2009), as East Thames Group becomes a newly formed subsidiary of L&Q. After all mergers, the three new legal entities will be relatively similar in size.…”

“…Although having only a nominal £1 voting right in each case, these shareholders hold little power in the decision-making. Moreover, unlike the private sector that is invariably driven by short-term pressures to maximise shareholder value (Gorton et al 2009), the very nature of the not-for-profit housing sector business model is that they are focused on long-term investments and the stewardship of their social housing assets and local communities. The strategic decision to form megamergers as a way to stay relevant, meet government expectations, and be part of the solution to addressing UK's housing crisis, thus clearly underpinned managerial motivations.…”