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

See all articles by Daniel Greene

Daniel Greene

Clemson University

Omesh Kini

Georgia State University

Jaideep Shenoy

University of Connecticut

Date Written: August 1, 2016

Abstract

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

Suggested Citation

Greene, Daniel and Kini, Omesh and Shenoy, Jaideep, An Investigation of Pooled Purchasing as a Source of Value Creation in Diversifying Acquisitions (August 1, 2016). Journal of Law and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2245728 or http://dx.doi.org/10.2139/ssrn.2245728

Daniel Greene

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

Omesh Kini

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Jaideep Shenoy (Contact Author)

University of Connecticut ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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