Buyer Power in Conglomerate Acquisitions
Georgia State University - Department of Finance
Georgia State University
Tulane University - Department of Finance
April 1, 2013
In this paper, we empirically examine whether buyer power is a source of value creation in conglomerate acquisitions. The possibility that conglomerate acquisitions can lead to increased buyer power has received no attention in academic circles or from regulators. The bidder and target firms in a conglomerate acquisition can source their inputs from common supplier industries and, therefore, the combination can result in a larger entity with increased bargaining power vis-à-vis supplier industries. We construct a novel proxy for the increase in buyer power achieved by merging firms in conglomerate acquisitions using the benchmark input-output tables for the U.S. economy. We find that an increase in buyer power is significantly positively related to the combined wealth effect of the merging firms and significantly negatively related to both the wealth effect of supplier firms and acquirer rival firms around conglomerate acquisition announcements. These effects are concentrated in a sub-sample of deals where the acquirer and target are unlikely to have asset complementarities. We document a significant decrease in output prices for supplier industries that are most likely to be affected by the increased buyer power of the merging firms. Finally, consistent with lower input prices in deals in which there is a larger increase in buyer power, we find that the post-acquisition decrease in cogs-to-sales is higher for merging firms with greater increase in buyer power. Overall, our battery of tests provides consistent evidence in support of the buyer power hypothesis in the context of conglomerate acquisitions.
Number of Pages in PDF File: 64
Keywords: corporate finance, conglomerate acquisitions, buyer power, product market effects
JEL Classification: G34, L11, L22, L25, D57working papers series
Date posted: April 7, 2013 ; Last revised: March 25, 2014
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