Value Creation in Diversifying Acquisitions
Georgia State University
Tulane University - Department of Finance
March 30, 2016
We use stock market and accounting-based measures to examine the sources of value creation in diversifying acquisitions. Our proxies for the merging firms’ change in purchasing concentration are positively related to the combined wealth effect of merging firms, negatively related to the change in cogs-to-sales of merging firms, and negatively related to the wealth effects of common supplier industry firms and rival firms. Furthermore, we document post-acquisition decreases in output prices for the main common supplier industry. The above results cannot be explained by pre-acquisition declining trends in output prices of the main common supplier industry or negative demand shocks in acquiring firm industries. These results highlight the benefits of pooled purchasing in diversifying acquisitions. Additionally, we find that greater asset complementarities and increased debt capacity also generate larger gains for the merging firms. Overall, this paper provides evidence that merging firms in diversifying acquisitions exploit operational and financial synergies.
Number of Pages in PDF File: 58
Keywords: corporate finance, diversifying acquisitions, conglomerate acquisitions, buyer power, product market effects, asset complementarities, financial synergies
JEL Classification: G34, L11, L22, L25, D57
Date posted: April 7, 2013 ; Last revised: March 31, 2016
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