Buyer Power in Conglomerate Acquisitions

Posted by D. Daniel Sokol

Daniel Greene, Georgia State University – Department of Finance, Omesh Kini, Georgia State University and Jaideep Shenoy, Tulane University – Department of Finance discuss Buyer Power in Conglomerate Acquisitions

ABSTRACT: There is a burgeoning literature in financial economics that finds evidence consistent with buyer power in horizontal acquisitions. The possibility that conglomerate acquisitions can also result in increased buyer power has, however, received no attention in academic circles or from regulators. The bidder and target firms in a conglomerate acquisition can source their inputs from common supplier industries and, therefore, the combination can result in a larger entity with increased bargaining power vis-à-vis these supplier industries. We construct a proxy for the increase in buyer power achieved by merging firms in conglomerate acquisitions using the benchmark input-output tables for the U.S. economy. We find that an increase in buyer power is significantly positively related to the combined wealth effect of the merging firms and significantly negatively related to the wealth effect of supplier firms around conglomerate acquisition announcements. We document a significant decrease in output prices for supplier industries that are most likely to be affected by the increased buyer power of the merging firms. Finally, consistent with lower input prices in deals in which there is a larger increase in buyer power, we find that the post-acquisition decrease in cogs-to-sales is higher for merging firms with greater increase in buyer power. Overall, our battery of tests provides consistent evidence in support of the buyer power hypothesis in the context of conglomerate acquisitions.