CONGLOMERATE MERGERS AND THE PURSUIT OF ECONOMIES OF SCOPE (MULTIPRODUCT, Q RATIO, CAPM, RISK)

Conglomerate mergers have been a puzzle to economists and financial analysts. Unlike horizontal and vertical mergers, it is difficult to explain conglomerate mergers as a simple pursuit of market power and/or economies of specialization. Further complicating the problem, empirical evidence indicates that while the acquired firm shareholders gain substantially, the acquiring firm shareholders just break even. This dissertation integrates the multiproduct theory of Baumol, Panzar, and Willig with the CAPM to build a theory of conglomerate mergers consistent with the neo-classical profit-maximizing axioms. The relationships among product market, capital market, and the market for corporate control are examined.;The impact of economies of scope on Tobin's q ratio, the nexus between capital market and product market, is also analyzed in the context of the CAPM. A measure of the expected value of economies of scope of conglomerate mergers is derived accordingly. This measure involves the market value and replacement costs of the acquired firm and the acquisition premium paid by the acquiring firm.;The pursuit of economies of scope within the product market is hypothesized to be a major motivation of conglomerate mergers. Because of the competition within the market for corporate control, the synergy expected to be generated by economies of scope is obtained by the shareholders of the acquired firm. The acquiring firm shareholders just break even in terms of both value and systematic risk.