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A Search Theory of Diversifying Merger *

Published online by Cambridge University Press:  17 August 2016

John Cable
John Cable*
Affiliation:
International Institute of Management, Berlin and University of Warwick, England
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Abstract

The paper argues that gaining information on potential investment opportunities can be a sufficient motive for the acquisition of a firm, at least in conglomerate merger cases. It suggests that search via merger can be efficient and hence rational behaviour under more-or-less stan¬dard assumptions. Some support for a merger-as-search hypothesis exists in the presently available evidence on merger activity, though the relative incidence of search motivated merger is not clear. A potential welfare gain is identified concerning the flexibility of capital transfer in the economy, but this may be offset by an impairment to the long-run corporate competitive process. At the practical policy level the arguments support the use of non-discretionary rules rather than case-by-case review.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 43 , Issue 3 , September 1977 , pp. 225 - 243
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1977 

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Footnotes

*

An earlier version of this paper was given to the Third European Conference on Industrial Structure, Brussels, September 1976. The author wishes to thank in particular Bob Frank, John Hiller, Anne-Marie Kumps, Dennis Mueller, Marshall Sarnat, Roger Sherman and Oliver Williamson for their comments and suggestions, and Douglas Kuehn and Peter Steer for making available invaluable data.

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