Industries with declining demand tend to be riddled with chronic excess capital due to the presence of a business‐stealing effect and fixed costs. This article highlights the potential of mergers to internalize this business‐stealing effect and thereby promote divestment. Using the case of mergers in the Japanese cement industry, it examines whether such merger‐induced divestment improves total welfare based on a dynamic model of divestment. The findings suggest that merged firms indeed tended to reduce capital more actively and that, as a result of these mergers, total welfare improved despite a reduction in the consumer surplus.