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Despite the fact that the European Community (EC) is committed to reducing the economic inequalities between and within its member states, EC mergers policy has no clear mechanism by which the regional economic consequences of takeovers can be assessed or taken into account during merger investigations. This is important, because there is clear evidence that external takeovers are one method by which regional economic imbalance may be exacerbated. In this paper, proposals are put forward for the explicit inclusion of an economic cohesion clause into EC mergers regulation. Also, the advantages such a clause would have are discussed, and the possible objections to the consideration of regional issues during merger investigations are assessed.

A model is developed for estimating the regional output and employment effects of linkage and final demand changes experienced by externally acquired companies. The model is illustrated using examples from the Scotch whisky industry. Systematically negative linkage effects of takeover are found, but the overall size of these effects on regional economic activity is invariably lower than the effect of takeover on final demand.

A framework is suggested for the evaluation of the effects of external takeover on regional economic performance, and an approach is offered to identify the impact of takeover on the performance of the acquired firm. The approach is then applied to estimate the effects of external takeover on the performance of Scottish manufacturing companies between 1965 and 1980. The results show that external takeover improved sales performance but lowered rates of return in acquired firms. Employment was, in general, unaffected. Overall, the effects on acquired firms are judged to have been beneficial, but evidence of harmful effects on the wider regional economy suggests that it cannot be assumed that such takeovers will not be against the public interest.