Mergers and Market Share

The impact of mergers on the market shares of acquired companies is estimated using market share data for the 1000 largest companies of 1950 and 1972. Market shares are computed for conglomerate and horizontal acquisitions between 1950 and 1972. To control for other factors that might affect market shares, market shares of acquired firms are compared with those of a control sample of unacquired firms drawn from the same industries. Companies acquired in a conglomerate merger and companies joining in horizontal mergers are both found to experience substantial losses in market shares relative to control group companies following the mergers. M s ERGERS have over the course of the last century transformed the corporate landscape. A careful examination of the 1,000 largest manufacturing companies of 1950 revealed that 384 had disappeared through mergers by 1973 (Mueller, 1983, p. 4). Others from this list have disappeared since. A look at the 100 largest corporations in the United States reveals a mere handful for which mergers did not figure substantially in their growth at one time or another. Exxon, United States Steel, and General Motors were spawned in the early merger waves. Textron, ITT and Occidental Petroleum are products of recent merger history. The process of transformation through merger continues unabated through today. Despite the venerability of this process and its profound influence on corporate structure, our knowledge of the economic effects of mergers is spotty, and disagreement exists regarding what the existing evidence shows. Most studies of early merger activity focussed on the effects of mergers on the profitability of the merging companies. Here a fair consensus exists that the mergers of the first two greater merger waves are more likely to have lowered than to have increased profitability. ' A similarly mixed picture of the effects of mergers on the profitability of the merging companies is presented in studies of post World War II merger activity in this country and Europe.2 Most recent studies of the effects of mergers have looked at their impact on the returns on common shares. Here it appears that the shareholders of acquired companies are unquestionably better off, but shareholders of acquiring companies may or may not be better off, and some disagreement exists over whether the net effects of mergers on stockholder wealth are positive or negative.3 This paper takes a fresh look at the effects of mergers question, by examining their impact on a heretofore almost unexplored variable, market share. Several recent studies have found that market shares are positively related to profitability (e.g., Ravenscraft, 1983), and market share is a frequently cited objective of corporate management. Thus, one might legitimately evaluate the successfulness of mergers by their impact on market shares. On the other hand, in certain situations, as for example, in a horizontal merger in an industry with less than perfect collusion, the combined market share of the merging firms could fall although their profits rose (see Salant, Switzer and Reynolds, 1983; Perry and Porter, 1983). Thus, we shall not attempt to relate our results to the literature on mergers effects on either profitability or stockholder wealth. We ask instead the more modest question of whether mergers have succeeded in increasing the market shares of the acquired firms. The next section describes the data and empirical tests. Results follow in section II, discussion of the results and conclusions in sections III and IV. I. Data and Methodology Our sample is drawn from Federal Trade Commission surveys for 1950 and 1972 of sales at the 5-digit level for the 1,000 largest companies in Received for publication October 26, 1983. Revision accepted for publication August 21, 1984. *University of Maryland, College Park and Federal Trade Commission. Helpful comments on earlier drafts were obtained from Ronald Brauetigam, Paul Geroski, David Ravenscraft, and two referees. My thanks go to Carl Schwinn for his programs aggregating the CPR data into our economic markets, and to Paul Bagnoli, John Hamilton and Talat Mahmood for additional computer assistance. The views expressed in this paper are my own, and should not be assumed to be shared by the above mentioned gentlemen, any of the FTC staff, or its commissioners. 1 For surveys of this literature and references to earlier studies see Markham (1955) and Hogarty (1970). 2 For the United States see Weston and Mansinghka (1971); Melicher and Rush (1974); and Mueller (1980), ch. 9. For Europe see Meeks (1977); Cowling et al. (1979); and 6 country studies in Mueller (1980), ch. 3-8. 3For surveys see Steiner (1975), ch. 8; Mueller (1977,1981); Scherer (1980), pp. 138-141; and Halpern (1982).