The purpose of this report is to contribute to the analysis of two questions. Should a merger control system take into account efficiency gains from horizontal mergers, and balance these gains against the anti-competitive effects of mergers? If so, how should a system be designed to account for efficiency gains? The report is based on a report to the European Commission. To help answer the two questions we start with an extensive review of the relevant economic research, including both theoretical and empirical studies of mergers and merger control. Next, we review the current legal practice in seven OECD jurisdictions. Finally, we propose a merger control system, emphasising the central role of informational limitations. Based on our conclusions from the empirical literature that efficiencies may need to be assessed on a case-by-case basis, we construct an information-economising twostage decision framework for evaluating mergers. In a first stage, notified mergers are assessed using routine tools with modest information requirements. Mergers that do not pass the first stage test are subject to further investigation, including an efficiency

Firms exit through the mutually precluding events of bankruptcy and acquisition. We use a competing risks hazard regression model to identify the characteristics leading to each of these two outcomes using over thirty years of data on US and UK quoted firms. We find evidence about the way in which macroeconomic factors affect firm survival in these two economies, in addition to firm and industry-specific factors. Further, there are significant differences in the way in which firms in the US and the UK react to changes in the macroeconomic environment and, particularly to macroeconomic instability. We argue that these differences in response may be attributable to differences in bankruptcy codes in the US and the UK.

We review five decades of takeover actively in the UK. We assess the relative characteristics of acquiring and acquired companies and the performance impacts of merger using both accounting and share price based measures. We conclude that the fundamental conclusions reached by Ajit Singh about takeovers and the market for corporate control in his seminal contributions of the 1970s remain true in the light of subsequent work.

This paper develops and empirically tests a new methodology for evaluating the financial performance of takeovers. The existing accounting and event study methodologies do not adequately address the key issue of whether takeovers are a positive net present value investment for the acquiring company. Our methodology attempts this by employing the residual income approach to valuation, and comparing the present value of the acquirer’s future earnings before the acquisition, with those that actually result following takeover. In contrast to existing methodologies, we explicitly take account of the cost of the acquisition, the acquirers cost of capital, and the earnings which are created beyond the sample period. The methodology is used for evaluating a comprehensive sample of U.K. acquisitions completed during 1985-96. Using the traditional accounting method, we find that acquisitions result in a significant improvement in profitability. However, the residual income approach reveals that on average, acquisitions destroy roughly 30 percent of the acquirer’s pre-acquisition value.

The paper introduces the three articles in this Policy Feature, concerned respectively with competition, corporate governance and selection in emerging markets. Apart from being important in their own right, it is shown how these topics have recently acquired urgent domestic and international policy significance. This overview also provides the intellectual background to the issues raised in the papers and examines their interrelationships in analytical, empirical and methodological terms. It outlines a research programme which would not only have direct policy relevance for both emerging and mature countries, but would also have broader analytical significance for many areas of economic theory.

helpful comments. The convergence of the Chinese and Western takeover markets The evolution of the Chinese takeover market and its integration with the international takeover market are analysed in three ways. First, the paper charts the legal and institutional changes in China in the last two decades to develop a decentralised “Anglo-Saxon ” takeover market. Second, the paper provides statistical and case material on the extent to which the Chinese takeover market has in practice become aligned with that of the US and UK. And, third, it presents case evidence on early failure and success in attempts to integrate the domestic with the world takeover market. 3 The convergence of the Chinese and Western takeover markets In developing over the last two decades the largest transition economy, the fastest growing major economy, and the second largest economy in the world 1, the Chinese authorities have introduced many of the characteristics of the world’s two largest takeover markets, the US and the UK. Private ownership, trading of shares on a regulated stock market, promotion of joint stock companies,

We demonstrate a “preemptive merger mechanism ” which may explain the empirical puzzle why mergers reduce pro…ts, and raise share prices. A merger may confer strong negative externalities on the …rms outside the merger. If being an “insider ” is better than being an “outsider, ” …rms may merge to preempt their partner merging with someone else. Furthermore, the pre-merger value of a merging …rm is low, since it re‡ects the risk of becoming an outsider. These results are derived in a model of endogenous mergers which predicts the conditions under which a merger occurs, when it occurs, and how the surplus is divided. Key Words: mergers & acquisitions; defensive merger; coalition formation; antitrust policy

The results from this paper provide mixed conclusions as to the existence of operating gains for a sample of 191 UK takeovers between 1985 and 1993. The existence of gains is found to be sensitive to the benchmark adopted for evaluating post-takeover performance. If this benchmark is some pro-forma combined measure of acquiree and acquirer pre-takeover performance, the results fail to show any significant improvement in post-takeover operating performance, although no decline either. If, on the other hand, we adopt the Healy, Palepu and Ruback (1992) regression-based methodology, allowing the benchmark to resemble some multiple of pre-takeover performance, the results show significant and positive improvements in operating performance. The results from this paper serve to cast some light on the non-trivial methodological issues involved in constructing pre-takeover benchmarks of acquiree and acquirer operating performance. JEL Classification: G34

This study, using the Cox proportional hazards model, finds that the risk of takeover rises with cost inefficiency. It also finds that a firm faces a significantly higher risk of takeover if its cost performance lags behind its industry benchmark. Moreover, these findings appear to be remarkably stable over the nearly two decades spanned by the sample. The effect of the variables used to measure the risk-size relationship, however, indicates temporal changes. Lastly, the study presents evidence from fixed-effects models of ex post cost efficiency improvements that support the hypothesis that takeover targets are selected based on the potential for improvement. Corporate takeovers have been a permanent feature of the American business landscape since the mid-1800s (Pound (1992)). Mergers and acquisitions continue to play an important role in allocating resources in the U.S. economy. The same number of mergers and acquisitions were completed in the first five years of the 1990s – about 23,000 – as in the entire previous decade (Mergers and Acquisitions, September-October, 1995). Furthermore, in the peak years of each decade, the value of takeovers equaled about one-fourth of GNP (Fortune, March 2, 1998.) The prominent role of takeovers in reallocating control over capital in the U.S. economy

The views expressed in this paper are those of the authors and do not necessarily reflect the views of the National Bank of Belgium.