Jing Zhu

ABSTRACT

There has been considerable research in the finance and economics literature examining the effects of horizontal mergers. Most of these papers focus on the impact of such mergers on market/pricing power (e.g., Fee and Thomas 2004, Shahrur 2005). However, how such activities affect the supply chain performance has been ignored in the literature until now, although anecdotal evidences and surveys indicate that the impact can be significant (Accenture 2007). In this paper, we empirically study the effects of horizontal mergers on the merging firms’ financial and operating performance, paying particular attention to inventory related measures. We also report how such mergers affect the performance of the non-merging competitors. Another novel aspect of our study is that we distinguish mergers at different levels of the supply chain as upstream and downstream mergers, and investigate categorical differences in performance between these two groups.

Focusing on industries with more inventory-related activities, we first use SDC Platinum database to draw our sample of mergers and acquisitions announced in the U.S. manufacturing, wholesale trade and retail trade industry segments between 1997 and 2006. Subsequently, using financial data obtained from COMPUSTAT database, we analyze 359 pairs of merging firms, and examine merger-induced changes in inventory performance (e.g., inventory level, inventory period, gross margin return on inventory (GMROI)). We also report the changes in sample firms’ financial data items and operational measurements to provide a comprehensive understanding of the impact of mergers. To peel off the effect of economy and industry wide factors, we use the average industry level performance as the benchmark for evaluating the post-merger performance.

For the inventory performance, we find that indeed mergers can significantly improve performance, especially at the downstream level. In the year following mergers, the median performance of merging firms’ inventory period decrease by 11.9%, with more than 63% of them experiencing a decrease in inventory period. However, looking at the mergers at different levels, the upstream merging firms do not exhibit a significant change in inventory period, while for downstream firms the decrease in inventory period is quite pronounced. The median change in merging firms’ GMROI is -19.9% (significantly different from zero) and merged firms at both levels undergo significant reductions in return on inventory. The effects of mergers are much smaller on outside non-merging competitors at both levels, although they can also be significant if we compare the median performance of the outsiders to the industry average. Regarding financial measures of performance, if we take into account both upstream and downstream firms, then merging firms’ assets, cost of goods sold, total inventory and net sales are all positively associated with mergers, while the operating income is negatively correlated. On the other hand, from the operating performance perspective, we find that merging firms’ profitability (measured by return-to-assets and return-to-sales ratios) is positively associated with horizontal mergers, while the sale efficiency (measured by sales-to-asset ratio) is negatively associated with mergers, and gross profit margin does not change significantly.