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Takeover Motives during the Conglomerate Merger Wave

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  • John G. Matsusaka

Abstract

This article examines the stock market response to acquisition announcements during and immediately after the conglomerate merger wave of the late 1960s. The main finding is that acquirer shareholders benefited from diversification acquisitions, which implies that diversification was not driven by managerial objectives. It is also shown that the market responded positively to bidders who retained the management of target companies and negatively to bidders who replaced target management. This is consistent with the hypothesis that the market favored acquisitions intended to exploit managerial synergies. It suggests that the market disliked takeovers that were motivated to discipline target management. Evidence on buyer and target price-earnings ratios is presented that is inconsistent with the conjecture that conglomerates were able to mislead investors by earnings-per-share manipulation.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 24 (1993)
Issue (Month): 3 (Autumn)
Pages: 357-379

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Handle: RePEc:rje:randje:v:24:y:1993:i:autumn:p:357-379

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Cited by:
  1. Mitchell Berlin, 1999. "Jack of all trades? Product diversification in nonfinancial firms," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 15-29.
  2. David N. Margolis, 2006. "Should employment authorities worry about mergers and acquisitions ?," Cahiers de la Maison des Sciences Economiques bla06015a, Université Panthéon-Sorbonne (Paris 1).
  3. Zhang, Yahua & Round, David K., 2008. "China's airline deregulation since 1997 and the driving forces behind the 2002 airline consolidations," Journal of Air Transport Management, Elsevier, vol. 14(3), pages 130-142.
  4. M. Àngels Oliva & Luis Rivera-Bátiz, 1997. "A model of conglomeration and synergy traps," Economics Working Papers 232, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Patrick Bolton & David S. Scharfstein, 1998. "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 95-114, Fall.
  6. Claessens, Stijn & Djankov, Simeon & Joseph P. H. Fan & Lang, Larry H. P., 1999. "Corporate diversification in East Asia : the role of ultimate ownership and group affiliation," Policy Research Working Paper Series 2089, The World Bank.
  7. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, Rene M. & Zutter, Chad J., 2009. "Do Target CEOs Sell Out Their Shareholders to Keep Their Job in a Merger?," Working Paper Series 2009-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  8. R. Glenn Hubbard & Darius Palia, 1998. "A Re-Examination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View," NBER Working Papers 6539, National Bureau of Economic Research, Inc.
  9. Shams, Syed M.M. & Gunasekarage, Abeyratna & Colombage, Sisira R.N., 2013. "Does the organisational form of the target influence market reaction to acquisition announcements? Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 89-108.
  10. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
  11. Belen Villalonga, 2001. "Diversification Discount or Premium? New Evidence from BITS Establishment-Level Data," Working Papers 01-13, Center for Economic Studies, U.S. Census Bureau.
  12. Villalonga, Belen, 2000. "Does Diversification Cause the “Diversification Discount�," University of California at Los Angeles, Anderson Graduate School of Management qt40v212gm, Anderson Graduate School of Management, UCLA.
  13. Mantell, Edmund H., 1998. "The effect on firm output after its acquisition by a pure conglomerate," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 487-501, September.
  14. David Margolis, 2006. "Should Employment Authorities Worry About Mergers and Acquisitions ?," Post-Print halshs-00111969, HAL.
  15. Kotaro Tsuru, 2000. "Finance and Growth: Some Theoretical Considerations and a Review of the Empirical Literature," OECD Economics Department Working Papers 228, OECD Publishing.
  16. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.

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