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An Investigation of Pooled Purchasing, Asset Complementarities, and Increased Debt Capacity as Sources of Value Creation in Diversifying Acquisitions

62 Pages Posted: 7 Apr 2013 Last revised: 16 Oct 2016

Daniel Greene

Clemson University

Omesh Kini

Georgia State University

Jaideep Shenoy

University of Connecticut

Date Written: August 1, 2016

Abstract

In this paper, we take a broad product markets approach to examine the sources 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, 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 negative demand shocks in acquiring firm industries. These results highlight the benefits of pooled purchasing in diversifying acquisitions. Additionally, greater asset complementarities and increased debt capacity also generate larger gains for the merging firms.

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, Asset Complementarities, and Increased Debt Capacity as Sources of Value Creation in Diversifying Acquisitions (August 1, 2016). 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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