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Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis

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  • Gerard Hoberg
  • Gordon M. Phillips

Abstract

We examine how product differentiation influences mergers and acquisitions and the ability of firms to exploit product market synergies. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter restructuring transactions when the language describing their assets is similar to all other firms, consistent with their assets being more redeployable. (2) Targets earn lower announcement returns when similar alternative target firms exist. (3) Acquiring firms in competitive product markets experience increased profitability, higher sales growth, and increased changes in their product descriptions when they buy target firms that are similar to them and different from rival firms. Our findings are consistent with similar merging firms exploiting synergies to create new products and increase their product differentiation relative to ex-ante rivals.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14289.

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Date of creation: Aug 2008
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Publication status: published as Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
Handle: RePEc:nbr:nberwo:14289

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  1. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, Elsevier, vol. 77(3), pages 529-560, September.
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  8. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  9. Oliver Hart & John Moore, 1994. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," NBER Working Papers 4886, National Bureau of Economic Research, Inc.
  10. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2019-2065, December.
  11. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 293-315, January.
  12. Baker, Jonathan B & Baresnahan, Timothy F, 1985. "The Gains from Merger or Collusion in Product-differentiated Industries," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 33(4), pages 427-44, June.
  13. Healy, Paul M. & Palepu, Krishna G. & Ruback, Richard S., 1992. "Does corporate performance improve after mergers?," Journal of Financial Economics, Elsevier, Elsevier, vol. 31(2), pages 135-175, April.
  14. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(2), pages 193-229, June.
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  16. Gerard Hoberg & Gordon M. Phillips, 2008. "Real and Financial Industry Booms and Busts," NBER Working Papers 14290, National Bureau of Economic Research, Inc.
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