Working Paper: NBER ID: w14289
Authors: Gerard Hoberg; Gordon M. Phillips
Abstract: We examine how product differentiation influences mergers and acquisitions and the ability of firms to exploit product market synergies. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter restructuring transactions when the language describing their assets is similar to all other firms, consistent with their assets being more redeployable. (2) Targets earn lower announcement returns when similar alternative target firms exist. (3) Acquiring firms in competitive product markets experience increased profitability, higher sales growth, and increased changes in their product descriptions when they buy target firms that are similar to them and different from rival firms. Our findings are consistent with similar merging firms exploiting synergies to create new products and increase their product differentiation relative to ex-ante rivals.
Keywords: mergers; acquisitions; product market synergies; competition; text analysis
JEL Codes: G3; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Product similarity (L15) | likelihood of restructuring (G33) |
| Number of similar targets (C52) | announcement returns (E60) |
| Acquiring firms in competitive markets + similar targets (G34) | profitability and sales growth (L21) |
| Similarity of targets to acquirers (G34) | profitability and sales growth (L21) |
| Similarity of targets to closest rivals (C52) | profitability and sales growth (L21) |