The Aggregate Implications of Mergers and Acquisitions

This paper develops a search and matching model of mergers and acquisitions (M&A) and uses it to evaluate the implications of merger activity for aggregate economic outcomes. The theory is consistent with a rich set of micro-level facts on US M&A, including, e.g., sorting among merging firms, a substantial merger premium and serial acquisition. It provides a sharp link between these facts and the nature of merger gains. Estimating the model shows that both synergies, i.e., complementarities between merging firms, and productivity improvements of target firms are important in generating firm-level gains. Gains are split almost equally between the parties, despite large differences in abnormal stock returns. The estimated model suggests that M&A has a significant beneficial impact on aggregate outcomes - the results show a contribution to steady state output of 13% and 4% for consumption. Endogenous sorting plays an important role in generating these gains, which occur through the reallocation of resources across firms and changes in firm selection and new entrepreneurship. The economy is not efficient, suggesting a scope for policy improvements