Evaluating Mergers in the Presence of Dynamic Competition Using Impacts on Rivals

We present evidence that event studies can help antitrust agencies forecast impacts of mergers on innovation. In large pharmaceutical mergers, cumulative abnormal returns on portfolios of rivals predict post-merger changes in the combined firm's R&D intensity. More favorable impacts on rivals are associated with lower intensities, which is consistent with softening competition. Matching merging firms to similar non-merging firms suggests we can attribute the changes in R&D intensity to the mergers. We highlight the importance of deducting “expenses” associated with in-process R&D and provide guidance on how to define rivals, construct portfolios and use event studies in merger evaluations