A Search Theory of Diversifying Merger

The paper argues that gaining information on potential investment opportunities can be a sufficient motive for the acquisition of a firm, at least in conglomerate merger cases. It suggests that search via merger can be efficient and hence rational behaviour under more-or-less stan¬dard assumptions. Some support for a merger-as-search hypothesis exists in the presently available evidence on merger activity, though the relative incidence of search motivated merger is not clear. A potential welfare gain is identified concerning the flexibility of capital transfer in the economy, but this may be offset by an impairment to the long-run corporate competitive process. At the practical policy level the arguments support the use of non-discretionary rules rather than case-by-case review.