Skip to main content Accessibility help

Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry

  • David A. Becher (a1), J. Harold Mulherin (a2) and Ralph A. Walkling (a1)


Our work provides refined tests of the source of merger gains in a neglected industry: utilities. Utilities offer fertile ground for analysis of traditional theories: synergy, collusion, hubris, and anticipation. Utility mergers create wealth for the combined firm, consistent with both the synergy and collusion hypotheses. To distinguish between these hypotheses, we study rival stock returns across dimensions related to collusion: deregulation, geography, and horizontal and withdrawn deals. We also find that the impact of mergers on consumer prices is consistent with synergy rather than collusion. Analysis of industry rivals that become targets also rejects collusion and is consistent with anticipation.



Hide All
Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103120.
Andrade, G., and Stafford, E.. “Investigating the Economic Role of Mergers.” Journal of Corporate Finance, 10 (2004), 136.
Baker, J. B. “Market Definition: An Analytical Overview.” Antitrust Law Journal, 74 (2007), 129173.
Bartunek, K.; Jessell, K.; and Madura, J.. “Are Acquisitions by Utility Firms Beneficial?Applied Economics, 25 (1993), 14011408.
Becker-Blease, J. R.; Goldberg, L. G., and Kaen, F. R.. “Mergers and Acquisitions as a Response to the Deregulation of the Electric Power Industry: Value Creation or Value Destruction?Journal of Regulatory Economics, 33 (2008), 2153.
Berry, S. K. “Excess Returns in Electric Utility Mergers During Transition to Competition.” Journal of Regulatory Economics, 18 (2000), 175188.
Besanko, D.; D’Souza, J.; and Thiagarajan, S. R.. “The Effect of Wholesale Market Deregulation on Shareholder Wealth in the Electric Power Industry.” Journal of Law and Economics, 44 (2001), 6588.
Blacconiere, W. G.; Johnson, M. F.; and Johnson, M. S.. “Market Valuation and the Deregulation of Electric Utilities.” Journal of Accounting and Economics, 29 (2000), 231260.
Block, D.Price Too High for Constellation.” Daily Deal (Oct. 26, 2006).
Blumsack, S.; Lave, L. B.; and Apt, J.. “Electricity Prices and Costs under Regulation and Restructuring.” Working Paper, Carnegie Mellon University (2008).
Borenstein, S.Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets.” Electricity Journal, 13 (2000), 4957.
Borenstein, S., and Bushnell, J.. “An Empirical Analysis of the Potential for Market Power in California’s Electricity Industry.” Journal of Industrial Economics, 47 (1999), 285323.
Cai, J.; Song, M. H.; and Walkling, R. A.. “Anticipation, Acquisitions, and Bidder Returns: Industry Shocks and the Transfer of Information across Rivals.” Review of Financial Studies, 24 (2011), 22422285.
Demsetz, H.Industry Structure, Market Rivalry, and Public Policy.” Journal of Law and Economics, 16 (1973), 19.
Eckbo, B. E. “Horizontal Mergers, Collusion, and Stockholder Wealth.” Journal of Financial Economics, 11 (1983), 241273.
Eckbo, B. E. “Mergers and the Market Concentration Doctrine.” Journal of Business, 58 (1985), 325349.
Eckbo, B. E., and Wier, P.. “Antimerger Policy under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis.” Journal of Law and Economics, 28 (1985), 119149.
Energy Information Administration. Status of State Electric Industry Restructuring Activity. Washington, DC: U.S. Energy Information Administration (2003).
Fagan, M. L. “Measuring and Explaining Electricity Price Changes in Restructured States.” Electricity Journal, 19 (2006), 3542.
Fan, J. P. H., and Goyal, V. K.. “On the Patterns and Wealth Effects of Vertical Mergers.” Journal of Business, 79 (2006), 877902.
Farrell, J., and Shapiro, C.. “Horizontal Mergers: An Equilibrium Analysis.” American Economic Review, 80 (1990), 107126.
Federal Trade Commission and U.S. Department of Justice. Commentary on the Horizontal Merger Guidelines. Washington, DC: Government Printing Office (2006).
Fee, C. E., and Thomas, S.. “Sources of Gains in Horizontal Mergers: Evidence from Customer, Supplier and Rival Firms.” Journal of Financial Economics, 74 (2004), 423460.
FirstEnergy Corp. S-4 Filing with the U.S. Securities and Exchange Commission (March 23, 2010).
Funk, J.FirstEnergy in Deal to Become Largest Electric Utility in Nation: Announces $8.5 Billion Plan to Buy Allegheny Energy.” Cleveland Plain Dealer (Feb. 12, 2010).
Harford, J.What Drives Merger Waves?Journal of Financial Economics, 77 (2005), 529560.
Houston, J. F.; James, C. M.; and Ryngaert, M. D.. “Where Do Merger Gains Come From? Bank Mergers from the Perspective of Insiders and Outsiders.” Journal of Financial Economics, 60 (2001), 285331.
Johnson, M. S.; Niles, M. S.; and Suydam, S. L.. “Regulatory Changes in the Electric Utility Industry: Investigation of Effects on Shareholder Wealth.” Journal of Accounting and Public Policy, 17 (1998), 285309.
Joskow, P. L. “Inflation and Environmental Concern: Structural Change in the Process of Public Utility Price Regulation.” Journal of Law and Economics, 17 (1974), 291327.
Joskow, P. L. “Deregulation and Regulatory Reform in the U.S. Electric Power Sector.” Working Paper, Massachusetts Institute of Technology (2000).
Kelderman, E.“Power Prices Put Utilities in the Hot Seat” (March 21, 2007),
Kennedy, S.“Is Energy ‘Fox’ Minding Henhouse? Federal Regulators Don’t Check All Electricity Rates to Ensure They Are ‘Just and Reasonable’” (Oct. 14, 2007),
Kim, E. H., and Singal, V.. “Mergers and Market Power: Evidence from the Airline Industry.” American Economic Review, 83 (1993), 549569.
Leggio, K. B., and Lien, D.. “Mergers in the Electric Utility Industry in a Deregulatory Environment.” Journal of Regulatory Economics, 17 (2000), 6985.
Leonard, K.FTC Moves to Chill Local Dominion: Equitable Deal.” Pittsburgh Tribune Review (Apr. 14, 2007).
Mansnerus, L.New Jersey Opposition Leads to Utility Merger’s Collapse.” New York Times (Sept. 15, 2006).
McAfee, R. P., and Williams, M. A.. “Can Event Studies Detect Anticompetitive Mergers?Economics Letters, 28 (1988), 199203.
McLaughlin, R. M., and Mehran, H.. “Regulation and the Market for Corporate Control: Hostile Tender Offers for Electric and Gas Utilities.” Journal of Regulatory Economics, 8 (1995), 181204.
Mitchell, M. L., and Mulherin, J. H.. “The Impact of Industry Shocks on Takeover and Restructuring Activity.” Journal of Financial Economics, 41 (1996), 193229.
Mulherin, J. H., and Boone, A. L.. “Comparing Acquisitions and Divestitures.” Journal of Corporate Finance, 6 (2000), 117139.
Peterson, S. E., and Meersman, T.. “Regulators Short-Circuit NSP Merger.” Minneapolis Star Tribune (May 15, 1997).
Pierce, R. J. Jr. “Antitrust Policy in the New Electricity Industry.” Energy Law Journal, 17 (1996), 2958.
Prager, R. A., and Hannan, T. H.. “Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry.” Journal of Industrial Economics, 46 (1998), 433452.
Rennie, C. G. “Governance Structure Changes and Product Market Competition: Evidence from U.S. Electric Utility Deregulation.” Journal of Business, 79 (2006), 19892017.
Roll, R.The Hubris Hypothesis of Corporate Takeovers.” Journal of Business, 59 (1986), 197216.
Salpukas, A.2 Big Utilities Plan to Merger in Deal Valued at $6 Billion.” New York Times (May 2, 1995).
Sapienza, P.The Effects of Banking Mergers on Loan Contracts.” Journal of Finance, 57 (2002), 329367.
Schwert, G. W. “Hostility in Takeovers: In the Eyes of the Beholder?Journal of Finance, 55 (2000), 25992640.
Shleifer, A., and Vishny, R. W.. “The Takeover Wave of the 1980s.” Science, 249 (1990), 745749.
Singal, V.Airline Mergers and Competition: An Integration of Stock and Product Price Effects.” Journal of Business, 69 (1996), 233268.
Slocum, T.Electric Utility Deregulation and the Myths of the Energy Crisis.” Bulletin of Science, Technology and Society, 21 (2001), 473481.
Slovin, M. B.; Sushka, M. E.; and Hudson, C. D.. “Deregulation, Contestability, and Airline Acquisitions.” Journal of Financial Economics, 30 (1991), 231251.
Song, M. H., and Walkling, R. A.. “Abnormal Returns to Rivals of Acquisition Targets: A Test of the ‘Acquisition Probability Hypothesis.’ ” Journal of Financial Economics, 55 (2000), 143171.
Stigler, G. J. “A Theory of Oligopoly.” Journal of Political Economy, 72 (1964), 4461.
Stigler, G. J., and Friedland, C.. “What Can Regulators Regulate? The Case of Electricity.” Journal of Law and Economics, 5 (1962), 116.
Stillman, R.Examining Antitrust Policy towards Horizontal Mergers.” Journal of Financial Economics, 11 (1983), 225240.
Stouffer, R.FirstEnergy to Pay $4.7 Billion for Allegheny Energy If States OK.” Pittsburgh Tribune Review (Feb. 12, 2010).
Switzer, S., and Straub, M. M.. “The Benefits of Restructuring: It’s Not Your Grandfather’s Electric Utility Anymore.” Electricity Journal, 19 (2006), 3041.
Thompson, M. W. “Deregulation and Competition in the Electric Power Industry.” Prepared statement of the Federal Trade Commission before the Committee on the Judiciary, United States House of Representatives (July 28, 1999).
Warwick, W.“A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets.” PNNL–13906, Pacific Northwest National Laboratory, chap. 6 (2002).
Weinberg, M.The Price Effects of Horizontal Mergers.” Journal of Competition Law and Economics, 4 (2008), 433447.
Willig, R. D. “Merger Analysis, Industrial Organization Theory, and Merger Guidelines. Brookings Papers on Economic Activity, Microeconomics, 1991 (1991), 281332.


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed