On the profitability of cross-border mergers

Abstract

A horizontal merger is unlikely to be profitable unless it involves the large majority of firms in an industry. This well established result was developed by Salant et al (1983) in a closed economy setting. The present paper studies the profitability of mergers in an open economy. A cross-border merger provides the acquiring firm with market access. If alternative modes of market entry are sufficiently costly, a merger may indeed be profitable. The relationship between entry costs and the profitability of merger is, however, not a monotonic one. An increase in entry costs may cause a change in the optimal entry mode of rival firms such that a merger may be unprofitable even for higher entry costs. The paper also derives results regarding the nationality of the acquiring firm.