Abstract
This study seeks to understand “how” economic shocks drive industry merger activity. We test whether economic shocks from deregulation and technological change drive industry merger activity by increasing industry competition, controlling for the effect of valuations. We find that these shocks drive merger activity through three channels related to industry competition; deregulation drives merger activity by increasing entry and cash flow volatility; technological change drives merger activity by increasing entry and inter-firm dispersion in the quality of production technology. These findings underscore the role of the competitive mechanism in how managers reallocate assets via mergers and support the view that the industry-level clustering of merger activity is an efficiency-driven restructuring response to increased competition.
Highlights
In 2000 the aggregate value of mergers between public U.S targets and public acquirers was over $940 billion based on data from Security Data Company’s (SDC) M&A database
H3: Industry merger activity is positively associated with inter-firm dispersion in the quality of production technology. These three hypotheses relate industry merger activity to changes to the competitive structure of an industry brought about by deregulation and technological change, and will enable important inferences to be made about how economic shocks from deregulation and technological change drive merger activity and whether merger activity is motivated by efficiency
Jovanovich and Rousseau (2002) use a Q-theory model of mergers to show that the merger waves of the 1980s and 1990s were a response to profitable reallocation opportunities attributable to economic shocks from technological changes
Summary
In 2000 the aggregate value of mergers between public U.S targets and public acquirers was over $940 billion based on data from Security Data Company’s (SDC) M&A database. Using a sample of 6,943 M&A transactions involving public U.S targets and public acquirers in 48 industries and for the period from 1980 to 2009, we show empirically that economic shocks from deregulation and technological change drive merger activity by increasing industry competition. Change drive merger activity through three channels related to industry competition: entry, cash flow volatility and inter-firm dispersion in the quality of production technology. ENTRY Number of Firms HH INDEX DISP CFLOW SHOCK DISP ROS DISP ROA AVG R&D/ASSETS DISP R&D/ASSETS M/B (log) We present correlation coefficients for the proxy variables employed in the study based on industry-year observations. ENTRY HH INDEX DISP CFLOW SHOCK DISP ROS DISP ROA AVG R&D/ASSETS DISP R&D/ASSETS M/B (log) We present the averages (means) of industry-year M&A activity, by count and by value ($ billion in 2009 dollars), and descriptive variables. M/B is the average market-to-book equity ratio computed from the mean market-to-book equity ratio (in natural logs) for each industry-year
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