62 Pages Posted: 7 Apr 2013 Last revised: 16 Oct 2016
Date Written: August 1, 2016
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: 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