A market model analysis of diversification strategies and administrative experience on the performance of merging firms

The purpose of this study has been to re-investigate empirically the market for acquisitions to determine if mergers can be justified from the viewpoint of the stockholders of the acquiring firms. This question was investigated from a new perspective--one obtained by inte-grating the literature on merger from the fields of finance, strategic management, and industrial organizations. The act of merging was viewed The in-as a heterogeneous phenomena. Two taxonomies were developed. tent of one taxonomy was to form portfolios of mergers homogeneous to the strategic fit of the acquiring and acquired firm; the intent of the other taxonomy was to form portfolios of mergers homogeneous to the amount of experience the acquiring firms have in the administrative task of consolidating organizations. Two basic hypotheses were tested using performance measures developed from the capital asset pricing model. Samples of acquiring firms were selected from the Federal Trade Commission's listing of major mergers over the years 1948 through 1979. The first hypothesis tested predicted a relationship between the strategic fit of the acquiring and acquired firms and the performance of the acquiring firm as a result of merging. The second hypothesis predicted a relationship between the experience level of the acquiring firm in consolidating firms and the performance of the acquiring firm as a result of merging.

The findings suggest that mergers can be justified from the viewpoint of the stockholders of the acquiring firms. The acquiring firms, on average, exhibited abnormal returns of greater than 8 percent during the twenty-two months preceding the merger. When the overall samples of mergers were broken down into four subsamples, homogeneous to strategic fit, differences across merger types were noticed, indicating that a relationship does exist between the strategic fit of the acquiring and acquired firms and the performance of the acquiring firm as a result of merger. The actual ranking of merger strategies by performance, however, defies current strategic management theory on diversification strategies in general and on mergers in specific. In particular, vertical mergers and conglomerate mergers appear to out-perform horizontal and concentric mergers. No strong relationship was found between administrative experience and performance.