The Effects of Horizontal Merger Operating Efficiencies on Rivals, Customers, and Suppliers
Gennaro Bernile; Evgeny Lyandres
Review of Finance, Volume 23, Issue 1, 1 February 2019, Pages 117–160, https://doi.org/10.1093/rof/rfy017
Mergers and acquisitions can impact not only the merging firms, but also firms that are economically linked to them: those competing with the merging firms in product markets (rivals) as well as those operating along the merging firms’ supply chains (corporate customers and suppliers). Industrial organization theory predicts two main channels through which a horizontal merger can impact merging firms’ rivals, customers, and suppliers. The first channel is through the change in the structure of the industry in which merging firms operate, which increases their market power and affects competition in input and output markets. The second channel is through operating efficiencies that merging firms may be able to realize, which affect their demand for inputs and supply of output. Operating efficiencies can take the form of cost savings, such as elimination of duplicate functions and facilities, and/or productivity gains, such as economies of scale.
We examine the effects of merger-related operating efficiencies on related firms, while using a novel, direct estimate of merger-related operating efficiency gains. We measure these gains using a unique, hand-collected dataset of forecasts disclosed by merging firms’ managers at the time of merger announcements. To assemble this dataset, for each M&A deal in our sample, we search news stories and press releases from all English-language sources for insiders’ projections of operating efficiency gains. To quantify these projections, we develop an algorithm that takes into account the estimated post-merger evolution of projected efficiency gains.
Our empirical results are as follows. First, operating efficiency gain projections are positively and significantly related to rivals’ reactions to merger announcement. A one-standard-deviation increase in projected efficiency gains is associated with 1.3%–2.6% decrease in rivals’ announcement returns. Second, a one-standard-deviation increase in projected gains is associated with 0.3%–1.1% increase in customers’ values. Third, a one-standard-deviation increase in efficiency gains is associated with 0.6%–2.7% increase in suppliers’ announcement returns. The last result suggests that operating efficiencies tend to take the form of cost savings, increasing the demand for suppliers’ inputs, rather than productivity gains that could reduce the demand for inputs.
These relations are more pronounced in subsamples of mergers in which insiders’ projections are expected to be more credible ex-ante (i.e. in mergers between more capital-intensive bidders and targets) and/or turn out to be more credible ex-post (i.e. in mergers in which the market capitalizes a larger portion of projected efficiency gains).
Collectively, our results are largely consistent with empirical predictions derived from industrial organization theory, and highlight the importance of efficiency gains in mergers and acquisitions not only for the merging firms but also for firms associated with them either horizontally or vertically.