Customer Concentration of Targets in Mergers and Acquisitions

64 Pages Posted: 6 Apr 2020

See all articles by Mei Cheng

Mei Cheng

University of Arizona - Department of Accounting

Jacob Jaggi

Washington State University - Department of Accounting

Spencer Young

Arizona State University

Date Written: December 12, 2019

Abstract

We study how customer concentration of targets impacts the occurrence, structure and performance of M&A deals. We hypothesize that acquirers respond to customer concentration-related risk by (1) placing fewer bids for targets with greater customer concentration and (2) by using more stock payment in their offer. Using data on customer concentration and M&A deals from 1985 to 2016, we find consistent evidence supporting these predictions. We also find that these relations vary predictably with the uncertainty arising from major customer relationships. Finally, we examine whether acquirers are effective in screening targets and structuring deals based on customer concentration. We find that despite measures taken by acquirers, target customer concentration is negatively associated with acquirer post-acquisition abnormal returns. Our findings extend the literature by systematically documenting an important risk factor in M&A decisions and by quantifying the economic consequences of customer concentration.

Keywords: customer concentration, business risk, mergers and acquisitions

JEL Classification: M41, G34

Suggested Citation

Cheng, Mei and Jaggi, Jacob and Young, Spencer, Customer Concentration of Targets in Mergers and Acquisitions (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=3503133 or http://dx.doi.org/10.2139/ssrn.3503133

Mei Cheng (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Jacob Jaggi

Washington State University - Department of Accounting ( email )

Pullman, WA 99164
United States

Spencer Young

Arizona State University ( email )

Tempe, AZ 85287
United States
85287 (Fax)

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