Customer Concentration of Targets in Mergers and Acquisitions

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.