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Mergers and Acquisitions

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 12 & 13
Hosted By: American Finance Association
  • Gustavo Grullon, Rice University

Agglomeration and Post-Merger Restructuring

Jarrad Harford
,
University of Washington
Samuel Piotrowski
,
Norwegian School of Economics
Yiming Qian
,
University of Connecticut

Abstract

We show that while horizontal and vertical acquirers treat overlapping target establishments differently, agglomeration forces influence post-merger restructuring in both types of mergers. Using proxies to capture three dimensions of (co)agglomeration: input sharing, knowledge spillover, and labor pooling, we find that acquirers are more likely to keep geographically proximate target establishments when (co)agglomeration benefits are high. Retained establishments benefiting the most from agglomeration externalities in horizontal mergers show a significant increase in productivity. In addition to explaining how acquirers restructure the firm post-acquisition, our findings show how agglomeration externalities are reinforced and expanded by establishment-level decisions made following mergers.

When Private Equity comes to Town: The Local Economic Consequences of Rising Healthcare Costs

Cyrus Aghamolla
,
Rice University
Jash Jain
,
Indian School of Business
Richard Thakor
,
University of Minnesota

Abstract

We examine the effect of increased healthcare costs on local economic conditions. We use private equity buyouts of hospital systems as a shock to the healthcare costs faced by firms in affected areas. We provide evidence that private equity buyouts of hospital systems result in higher healthcare insurance premiums paid by firms, and such rises in premiums lead to higher business bankruptcies, an increase in business loan volume, slower employment and establishment growth, and reduced innovative output. The effects are more pronounced in areas with less competitive hospital markets, higher labor intensity, and fewer insurers providing coverage.

See the Gap: Firm Returns and Shareholder Incentives

Eitan Goldman
,
Indiana University
Jinkyu Kim
,
Indiana University
Wenyu Wang
,
Indiana University

Abstract

Smart money often trades actively during times of large corporate events. We document in the context of mergers and acquisitions that, during the public bid negotiation period, institutional investors increase (decrease) their holdings of acquirers in deals that generate positive (negative) value. The resulting trading profits create a significant gap between the return to the acquiring firm and the return to these investors, and this gap renders firm return a misleading measure of investors' incentives in pursuing mergers. On average, institutional investors of acquiring firms earn 2.4% from M&A while the return to the acquirer is only -0.9%. The gap widens to 6.3% in deals that deliver volatile returns. We further show how institutional investors' strategic trading and the resulting gap are impacted by deal characteristics such as merger size and stock liquidity as well as institution characteristics such as initial holdings, portfolio weight, and trading skills. Importantly, institutions that earn a high return gap are associated with weak governance in preempting and correcting value-destroying mergers. Our study highlights that the group of investors who have influence over corporate actions do not necessarily bear the full consequences of such events, and therefore accounting for the dynamics of shareholder composition is critical in measuring investors' governance incentives correctly.

Competition Enforcement and Accounting for Intangible Capital

John Kepler
,
Stanford University
Charles McClure
,
University of Chicago
Christopher Stewart
,
University of Chicago

Abstract

Antitrust laws mandate regulatory review of mergers and acquisitions (M&A) when the measured book value of the acquired assets exceeds a specified threshold. However, these policies overlook the fact that accounting standards preclude firms from recognizing nearly all types of internally generated intangible capital as assets. We show that this omission of intangible capital leads to hundreds of acquisitions of intangible capital-intensive firms—mostly in the pharmaceutical and technology sectors—to go unreported to antitrust authorities each year. Consistent with these acquisitions potentially having anticompetitive implications in developed product markets, we document that, relative to reported deals, the equity values and product markups of acquiring firms increase following unreported acquisitions of intangible-intensive firms from the same product market. We also show that unreported deals in undeveloped pharmaceutical markets are nearly three times as likely to involve the consolidation of overlapping drug projects, and acquirers are more than three times as likely to terminate these overlapping projects. Our results suggest that continued growth of intangible assets in the economy may exacerbate market consolidation via unreported mergers in the sectors that are of most concern for consumers.

Discussant(s)
Gerard Hoberg
,
University of Southern California
Constantine Yannelis
,
University of Chicago
David Robinson
,
Duke University
David De Angelis
,
University of Houston
JEL Classifications
  • G3 - Corporate Finance and Governance