The Role of Divestitures in Horizontal Mergers

We show that divestitures accompanying horizontal mergers affect both the market power potential and the competitive efficiency of merging firms. Stock price reactions of customer firms are more positive (hence divestitures are more effective in mitigating the market power impact of the merger) if merging firms divest assets to buyers outside the industry rather than existing rivals. This result is stronger when the merging industry is more concentrated and when powerful customers are absent. Stock price reactions of the acquirer and rivals suggest that firms are more concerned with maintaining a competitive edge relative to each other than gaining market power relative to customers