Utility Mergers, Synergy or Collusion?

Mergers of utilities face increased scrutiny by governmental regulators seeking to avoid collusion and monopolistic pricing.  Traditional research on mergers often neglect this industry due to it's unique characteristics.  In an article published in the Journal of Financial and Quantitative Analysis  we test for the existence and source of gains in utility mergers and distinguish between collusion and synergy as motives for mergers in this industry.  The abstract is below.  The complete article can be downloaded here.

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

David A. Becher
Drexel University - Department of Finance 

J. Harold Mulherin

University of Georgia - Department of Banking and Finance 

Ralph A. Walkling

Drexel University - Lebow College of Business

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Abstract:      

Our work provides refined tests of the existence and source of merger gains in a neglected industry: utilities. While excluded from traditional analyses, utilities offer fertile ground for a detailed analysis of the traditional theories of synergy, collusion, hubris and anticipation. The analysis of utilities provides methodological advantages and is important for public policy reasons. We find that utility mergers create wealth for the combined bidder and target. These positive wealth effects are consistent with both the synergy hypothesis and the collusion hypothesis. To distinguish between the hypotheses, we study the stock price returns to industry rivals across several dimensions specifically related to collusion: deregulation, horizontal mergers, geography, and withdrawn deals. We also examine the impact of mergers on consumer prices. The results are consistent with synergy and inconsistent with collusion. Analysis of industry rivals that subsequently become targets also rejects the collusion hypothesis and is consistent with the anticipation hypothesis.