Merger and optimal number of firms: an integrated simulation approach

Abstract

In a market where imperfect competition occurs as a result of mergers, this study proposes a framework consisting of both efficiency and risk analyses that allow the simulation of pro forma mergers and hence the determination of the optimal number of firms in the industry. This is valuable policy information for regulators concerned with possible intervention in the case of competition and anti-trust violations, and also for business managers seeking acquisition targets. The framework is applied to the banking industry in Taiwan. Results reveal the potential for industrial restructuring in a sector where the optimal number of Bank Holding Companies (BHCs) is between four and six, subject to whether partial control is assumed.

Acknowledgements

First and foremost, praise and thanks go to Professor Mark Taylor (editor) and two anonymous referees for helpful comments and suggestions on the earlier versions of this article. This article has also been benefited from the comments of the seminar participants at the 17th Asian Finance Association Conference, for which we acknowledge the funding from the National Science Council in Taiwan (NSC94-2416-H-260-018). Any remaining errors are the authors’.