The Hidden Cost of M&A

This Article addresses one context where the pursuit of share price gains both fails to maximize the wealth of all shareholders and fails to benefit society: corporate mergers and acquisitions activity. Since Henry Manne’s seminal paper, The Market for Corporate Control, it has been generally accepted that mer- ger gains accrue either through efficiency or market power. Efficiency gains involve creating synergies and eliminating redundancies, thus enabling merged entities to do more with less. To the extent that merger gains accrue via this route, mergers benefit everyone involved: shareholders benefit from a boost in share prices, society benefits from a more efficient marketplace, and consumers benefit from lower prices for goods and services. In contrast, market power gains enable the merged entity to increase the price of the goods it sells or the services it provides, thereby reducing consumer welfare. Because of the increased cost to consumers, this second option pits the interests of some groups against others. Wealthy shareholders likely benefit more from share price increases than they are harmed by the increased cost of goods and services, since these shareholders tend to own substantial amounts of stock and to make substantial sums from that stock. However, the reverse may be true for less wealthy shareholders and society at large. Corporate legal scholarship has largely failed to address this hidden cost.