This confirms the basis of the resource dependence hypothesis but not the familiarity hypothesis. Horizontal mergers primarily reduce competitive interdependence. Competitive uncertainty is highest in moderately concentrated industries, where firms are too big to be price takers, but there are too many firms for them all to coordinate their activities informally. Diversification is a way of reducing dependence on a single, critical exchange by involving the firm in new and unrelated types of exchange relationships. Mergers are really just a special case of growth.
Growth always helps deal with dependence.
This theory ignores the fact that organizational growth is based on a decision. Individual motives of leaders Profitability Economies of scale Empirical data show no consistent relationship between merger activity and profitability. However, diversified mergers tend to result in higher profits. Furthermore, there is no consistent relationship between growth per se and either profitability or economies of scale. The argument that executives conduct mergers in order to increase their personal wealth is inconsistent with the facts that executive compensation today is heavily based on stock, and that merged companies are not, on average, more profitable or valuable than others.