When Do Merges Create Value?
When do vertical mergers create value?
This paper studies the market reaction to vertical mergers and explores the many rationales for vertical integration proposed in the industrial organization literature. Abnormal returns for vertical merger announcements are positive until the late 1990s, and turn negative afterward. Acquirers suffer most of the losses. We find support for the most fundamental insight in the industrial organization literature, namely, that vertical mergers generate the greatest value when undertaken in imperfectly competitive markets. We find some evidence to support ideas of asset and site specificity, that is, creating value when market exchange is difficult. We do not find support for information-based or price uncertainty theories.
If markets were competitive, with no frictions, then transactions between firms could be efficiently executed with arm 's length contracts. However, market frictions can lead to a rationale for integration and mergers. This insight can be traced back to Stigler (1950) and its implications are explored in numerous subsequent studies. In this paper, we classify mergers into vertical, horizontal, and conglomerate deals. We study the market reaction to these deals and, in particular, vertical mergers ' announcements and examine how they are related to the underlying rationales for vertical integration modeled in the large industrial organization literature. Although conglomerate mergers and horizontal mergers have been the focus of many studies, ours is one of the few papers that examine vertical mergers.
A significant obstacle to the study of vertical mergers had been the identification of vertically related transactions. Horizontal mergers are more easily classified and were studied by Eckbo (1983, 1985) in the 1980s and, more recently, by Fee and Thomas (2004), Shahrur (2005), and Gugler and Siebert (2007). Early researchers (e.g., Spiller, 1985) hand collected data on vertical deals and consequently had
This paper studies the market reaction to vertical mergers and explores the many rationales for vertical integration proposed in the industrial organization literature. Abnormal returns for vertical merger announcements are positive until the late 1990s, and turn negative afterward. Acquirers suffer most of the losses. We find support for the most fundamental insight in the industrial organization literature, namely, that vertical mergers generate the greatest value when undertaken in imperfectly competitive markets. We find some evidence to support ideas of asset and site specificity, that is, creating value when market exchange is difficult. We do not find support for information-based or price uncertainty theories.
If markets were competitive, with no frictions, then transactions between firms could be efficiently executed with arm 's length contracts. However, market frictions can lead to a rationale for integration and mergers. This insight can be traced back to Stigler (1950) and its implications are explored in numerous subsequent studies. In this paper, we classify mergers into vertical, horizontal, and conglomerate deals. We study the market reaction to these deals and, in particular, vertical mergers ' announcements and examine how they are related to the underlying rationales for vertical integration modeled in the large industrial organization literature. Although conglomerate mergers and horizontal mergers have been the focus of many studies, ours is one of the few papers that examine vertical mergers.
A significant obstacle to the study of vertical mergers had been the identification of vertically related transactions. Horizontal mergers are more easily classified and were studied by Eckbo (1983, 1985) in the 1980s and, more recently, by Fee and Thomas (2004), Shahrur (2005), and Gugler and Siebert (2007). Early researchers (e.g., Spiller, 1985) hand collected data on vertical deals and consequently had
References: Acemoglu, D., S. Johnson, and T. Mitton, 2009, "Determinants of Vertical Integration: Financial Development and Contracting Costs," Journal of Finance 63, 1251-1290. Akhigbe, A., S.E Borde, and A.M Alexandridis, D., D. Petmezas, and N.G. Travlos, 2010, "Gains from Mergers and Acquisitions around the World: New Evidence," Financial Management 39, 1671-1695. Anderson, E Andrade, G., M. Mitchell, and E. Stafford, 2001, "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives 15, 102-120. Baker, G., R Bens, D., P. Berger, and S. Monahan, 2011, "Discretionary Disclosure in Financial Reporting: An Examination Comparing Internal Firm Data to Externally Reported Segment Data," Accounting Review 86, 417-450. Berger, P Bradley, M., A. Desai, and E. Kim, 1988, "Synergistic Gains from Corporate Acquisitions and Their Division between the Stockholders of Target and Acquiring Firms," Journal of Financial Economics 21, 3-40. Campa, J.M Carlton, D., 1977, "Uncertainty, Production Lags, and Pricing," American Economic Review 67, 244-249. Caves, R.E Chen, Y. and M.H. Riordan, 2007, "Vertical Integration, Exclusive Dealing and Ex-Post Cartelization," Rand Journal of Economics 38, 1-21. Davis, N., 2008, "Chemical Industry Mergers and Acquisitions: A Sign of Things to Come," ICIS.com, May 9 DeFontenay, C. and J. Gans, 2005, "Vertical Integration in the Presence of Upstream Competition," Rand Journal of Economics 36, 544-572. Eckbo, E., 1983, "Horizontal Mergers, Collusion and Stockholder Wealth," Journal of Financial Economics 11, 241-273 Eckbo, E., 1985, "Mergers and the Market Power Doctrine: Evidence from the Capital Markets," Journal of Business 58, 325-349. Fama, E Fan, J. and V. Goyal, 2006, "On the Patterns and Wealth Effects of Vertical Mergers," Journal of Business 79, 877-902. Fee, E Fishman, M., 1988, "A Theory of Preemptive Takeover Bidding," Rand Journal of Economics 19, 88-101. Grossman, S.J Gugler, K. and R. Siebert, 2007, "Market Power vs. Efficiency Effects of Mergers and Joint Research Ventures: Evidence from the Semiconductor Industry," Review of Economics and Statistics 89, 645-659. Hart, O., J Hoberg, G. and G. Phillips, 2010, "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," Review of Financial Studies 23, 3773-381l. Hughes, J.S Kedia, S., V. Panchapagesan, and V. Uysal, 2008, "Geography and Acquirer Returns," Journal of Financial Intermediation 17, 256-275. Kehoe, M.R., 1996, "Franchising Agency Problems and the Cost of Capital," Applied Economics 28, 1485-1493 Klein, B., R.G. Crawford, and A.A. Alchian, 1978, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics 21, 297-336. Klein, B Kohers, N. and T. Kohers, 2001, "Takeovers of Technology Firms: Expectations vs. Reality," Financial Management 30, 35-54. LaFontaine, E and M Lieberman, M.A., 1991, "Determinants of Vertical Integration: An Empirical Test," Journal of Industrial Economics 39, 451-466. Maksimovic, V Masten, S.E., J.W. Meehan, Jr., and E.A. Snyder, 1989, "Vertical Integration in the US Auto Industry: A Note on the Influence of Transaction Specific Assets," Journal of Economic Behavior and Organization 12, 265-273. Moeller, S.B., F.P Ohanian, N.K., 1994, "Vertical Integration in the US Pulp and Paper Industry, 1900-1940," Review of Economics and Statistics 76, 202-207. Ordover, J.A., G Perry, M.K., 1978, "Vertical Integration: The Monopsony Case," American Economic Review 68, 561-570. Perry, M.K., 1989, "Vertical Integration: Determinants and Effects," in R Qiu, L. and W. Zhou, 2007, "Merger Waves: A Model of Endogenous Mergers," Rand Journal of Economics 38, 214-226. Rajah, R., H Ravid, S.A. and M. Spiegel, 1999, "On Toeholds and Bidding Contests," Journal of Banking and Finance 23, 1219-1242. Rhodes Kropf, M Riordan, M, 1998, "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review 88, 1232-1248.