In 1997, Bell Atlantic submitted a petition to the New York Public Service Commission seeking approval of (technically, nonintervention in) the proposed Bell Atlantic-Nynex Merger.[1] Among the arguments in favor of the merger was that it would achieve a minimum of $600 million in annual cost savings through operating efficiency and economies of scale and scope. The basis for this estimate was not specifically explained, but it is consistent with the predictions of savings from other mergers in the telecommunications industry. Accordingly, the Bell Atlantic-Nynex merger was approved in August 1997, just after the consummation of the merger between two other regional Bell operating companies (RBOC); SBC Communications and Pacific Telesis.
The literature reviewed was based on a study done by Nakil Sung and Michael Gort in which they wanted to answer the following questions: Did merged companies perform better after than before the merger and better than nonmerged companies? Were the cost savings realized as promised? In particular, the study analyzes the effects of one of the first two horizontal mergers between RBOC holding companies, the Bell Atlantic-Nynex merger, on the performance of the respective local operating companies. The effects of the mergers are examined by comparing the performance of the merged companies with control groups of nonmerged companies and also the performance of the merged companies before and after merger. In this sense, the study is a dynamic analysis of mergers. The comparisons are made on total factor productivity (TFP) change, on shifts in the total cost function, and also on shareholder returns. In addition, the estimation of total cost functions provides estimates for economies of scale and scope, which are often cited as the main drivers for mergers.
This study was chosen because it differs from other studies on mergers in that it attempts not only to measure the underlying value creation (or...