Nonmarket Strategy for Corporate Mergers and Acquisitions

Abstract: We examine how firms use nonmarket strategies to protect economic rents created by corporate mergers and acquisitions. Mergers are typically rationalized on the basis of creating rents by achieving scale or scope economies implying, all else equal, improved returns for investors in the acquiring and/or target firms. In many industries, however, regulatory agencies have the discretion to reduce investor returns by imposing costly ex ante structural or ex post behavioral conditions before approving a merger. Firms thus have an incentive to use nonmarket strategy to limit the extent of regulatory conditions imposed on a proposed merger. In this paper we contribute to the nonmarket strategy literature by conducting one of the first empirical investigations of how firms design integrated market and nonmarket strategies. We investigate the conditions under which electric utilities use campaign contributions to state politicians to achieve more favorable merger approval conditions. In this sector, state regulators commonly request rate reductions as a condition of approval. In our empirical analysis of all electric utility merger proposals from 1999-2006, we find that utilities significantly increased their political contributions in the 12 month period before the announcement of a proposed merger.