Merger failure and merger profitability: an alternative to the Hviid and Prendergast model

In this paper the effect of failed mergers on the profitability of the bidder and the target is investigated. It is demonstrated that when firms produce differentiated products in Bertrand competition, the post-rejection expected profitability of both firms is adversely affected by the information revealed through the rejection. This is a reversal of the Hviid and Prendergast finding that the post-offer increase in the profitability of the target firms is further boosted by the information made available through the rejection. This reversal is the direct result of using upward sloping reaction curves, which are usually found in price-setting games. The prediction for the bidder firm remains unchanged; this will experience a fall in its profits in the case of merger failure, the degree of which will be even more extensive if the failed bid was hostile because of the information transmission involved.