Abstract
This paper examines whether horizontal acquisitions create buying power by studying the effect of a broad, inter-industry sample of horizontal acquisitions on the selling price of supplier industries. We find that supplier industries that are more dependent on the merging industry for buying its output suffer bigger declines in selling prices after the downstream acquisition. Moreover, dependent suppliers and suppliers that suffer more adverse price changes after downstream consolidation undertake significantly more horizontal acquisitions of their own in the following two (three) years. This suggests that consolidation in supplier industries is partly motivated by the need to countervail buying power created by the downstream merger. Additional tests indicate that more dependent supplier industries have lower profit margins in the two (three) following downstream consolidation but this poor performance is mitigated if supplier industries subsequently undertake horizontal acquisitions of their own. To our knowledge, this is the first paper to provide formal evidence that horizontal acquisitions hurt selling prices and profit-margins in supplier industries causing supplier industries to engage in countervailing acquisitions.
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