An Investigation of Pooled Purchasing as a Source of Value Creation in Diversifying Acquisitions
63 Pages Posted: 7 Apr 2013 Last revised: 17 Nov 2017
Date Written: August 1, 2016
We take a broad product markets approach to examine whether pooled purchasing is a source of value creation in diversifying acquisitions. We find that our proxies for the merging firms’ change in purchasing concentration are positively related to the combined wealth effect of merging firms, positively related to the change in gross profit margin of merging firms, negatively related to the wealth effects of main common supplier industry firms and acquirer industry rival firms, and unrelated to the wealth effects of main common customer industry firms. We document a post-acquisition decrease in output prices with no concomitant decrease in revenues for the main common supplier industry. We also document a decrease in output prices and an increase in revenues for the acquirer’s industry. Our firm- and industry-level evidence suggests that the benefits of pooled purchasing in diversifying acquisitions come from an efficiency increasing volume discount channel rather than anti-competitive channels.
Keywords: corporate finance, diversifying acquisitions, conglomerate acquisitions, pooled purchasing, product market effects, asset complementarities, financial synergies
JEL Classification: G34, L11, L22, L25, D57
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