Mergers, Spinoffs, and Employee Incentives

Abstract

This paper studies mergers between competing firms and shows that while such mergers reduce the level of product market competition, they may have an adverse effect on employee incentives. In industries where value creation depends on innovation and development of new products, mergers are likely to be inefficient even though they increase the market power of the post-merger firm. In such industries, a stand-alone structure where independent firms compete both in the product market and in the market for employee human capital leads to a greater profitability. Furthermore, our analysis shows that multidivisional firms can improve employee incentives and increase firm value by reducing firm size through a spin-off transaction although doing so reduces the benefits of operating an internal capital market within the firm.To be presented at the AFA 2010 meetings. We thank seminar participants at ESMT, Oxford University and University of Virginia for useful comments. All errors are our own.

R&D and the Incentives from Merger and Acquisition Activity

“…Vives (2008) provides a detailed overview of theoretical and empirical work. Recently, Fulghieri and Sevilir (2011) theoretically model the ex ante effects of mergers and competition on innovation. They model how a reduction in competition through mergers reduces employee incentives to innovate.…”

Acquisitions and Technology Value Revision

“…It is safe to assume a firm's portfolio of technology bears substantially on its current and future cash flows. Further, firms with similar technology are economically-linked through their shared knowledge base and extensive networks of citations, licensing, the pool of talents, or collaboration (e.g., Katz and Shapiro, 1986;Hall et al, 2001;Fulghieri and Sevilir, 2011;Baghai et al, 2019). Therefore, peers are exposed to similar macro and technology shocks.…”

“…Such a signal is credible because the acquiring firm has an informational advantage about the target firm and the acquisition synergy, and commits significant financial resources to the acquisition proposal. Further, technology peers are linked fundamentally through their extensive network of citations, licensing, talent pool, and collaborations, and are likely to incur similar technology and economic shocks (e.g., Katz and Shapiro, 1986;Hall et al, 2001;Fulghieri and Sevilir, 2011;Baghai et al, 2019). Therefore, an initial signal from one firm may disseminate information about its peer firms' prospects along the technology links.…”

Taxes, Ownership and Capital Structure

“…They enjoy internal support transfers and coordinate their capital structure choices to optimize the tax shield. Intercorporate ownership can generate other synergies, relating for instance to investment choices (Stein, 1997 andMatvos andSeru, 2014) or to product market competition and workers' incentives (Fulghieri and Sevilir, 2011). Real synergies can make both the ownership and leverage decisions of the firm less responsive to changes in tax rates.…”