ON MEASURING THE EFFECTS OF INDUSTRIAL MERGERS
| DOI | http://doi.org/10.1111/j.1467-9485.1974.tb00173.x |
| Date | 01 February 1974 |
| Published date | 01 February 1974 |
| Author | M. A. Utton |
Scvttish
Journal
of
Political
Economy
Vol.
XXI,
No.
1,
February
1974
ON MEASURING THE EFFECTS
OF INDUSTRIAL MERGERS
M.
A.
UTTON
I
INTRODUCTION
There is still considerable controversy about the effects of industrial mergers
on market power and efficiency. Basically the issue is whether the efficiency
of
firms is
improved
by mergers through a more eoonomic use
of
managerial,
marketing and research resources or whether efficiency is
impaired
by the
growth
of
co-ordination problems and those characterized as
‘
control loss
’
(Williamson, 1967, pp. 123-138) which are likely to increase with the size of
firm and be more acute where the
size
change per time period is large, as it
can be with external expansion.
A
priori the efficiency effect
of
mergers
can
thus go either way (although the weight
of
policy orientated discussion, especi-
ally in the
U.K.,
has generally favoured positive benefits). The
same
applies
to the
‘
market power
’
effect since any merger may increase, decrease, or
leave unchanged the Concentration of an industry (Utton, 1971, p. 49).
How-
ever, evidence
for
the
period
1954-65 has suggested that mergers
did
play
an
important part in the observed concentration increase
:
accounting
for
about
half the increase in manufacturing as a whole and much
higher
proportions
in some individual sectors such
as
food,
drink and metal manufacture (ibid
pp. 46 and
52).
Furthermore, in
a
random sample of
30
products from the
Census
of
Production it has recently been estimated that
in
roughly
a
third
of
the cases concentration increased between 1958 and 1963
as
a
result
of
mergers (Hart, Utton and Walshe, 1973, ohapter 3). Thus
it
is likely that in
many instances mergers increased the firms’ market power even
if
they were
neutral as far as efficiency was concerned.
The measurement of
a
firm’s efficiency is difficult enough even when no
question of merger arises. The problems are,
if
anything, compounded when
the question is one
of
incremental efficiency increases (decreases) following
a
merger. Ideally an answer
to
the question requires detailed information over
several years prior to the merger for the firms involved and for the amalga-
mated firm for several years after union on a large number
of
variables. For
example,
on
production: the product composition and output level per
plant
for
each firm over the period with indications
of
which changes resulted
from the merger and which were due simply to short-run fluctuations in
demand or scheduled plant changes; the number
of
the production manage-
ment and employees working the plant over the time period with related
13
14
M.
A.
UTTON
data
on
turnover
of
such
In
short, information of this kind is likely
to
be available within the firms concerned and in fact may
be
used by them to
assess the effects
of
mergers
on
their internal efficiency but it is not generally
published. Chairman’s reports sometimes mention the closing
of
a plant or
the alteration
of
product output as between plants following a merger but it is
never certain whether
all
such changes are mentioned and how this affects
production costs.
Similar information
on
changes in marketing and distribution, research
and development effort
and
central organization would ideally
be
required to
measure the
full
effeot of
a
merger. But information
of
this kind
con-
cerning the economies of scale
for
multi-plant
firms
(as
opposed to plants)
of different sizes is extremely sparse even
in
the absence of mergers.*
Two
ncent empirical studies have, however, attempted to shed some light
on
these issues (Kitching (1967) and Newbould (1970)). Both investigations
involved questiormaires and follow-up interviews with executives of firms
recently
making acquisitions in order to assess the effects
on
their perfor-
mance.
In
the
American
study 22 out
of
69 acquisitions made by a sample of
21 companies were rated as failures by the executives concerned. Amongst
those which were successful the groatest
scope
for
improved performance
came in the
area
of
6nance
(both
amount and cost of capital) followed, in
order
of
importance,
by
marketing, research and development and finally
production.
As
the
author
notes,
this
ordering
is
an
almost exact reversal
of
that given in most discussions of economies that are likely to arise in mergers.
In
the
British study information was obtained from
38
acquiring com-
panies
on
a
number
of
issues reflecting their post-merger performance. The
record for merger was generally unimpressive
:
for
exampk. zero
or
negligibk
effects were
reported
by 27 acquiring
firms
on
post merger asset disposal, by
25
lirms
on
plant
closure.
by 26 firms on sales and by
30
firms
on
exports
(Newbould, pp. 161-175).
The detailed qualitative analysis of questionnaires
casts
doubt
on
the
proposition
that
mergers generally
lead
to
improved efficiency and better firm
performance.
If
management believed in advance, for example, that certain
investment projects stood an almost 1 in
3
chance of complete
fuiZure
(the
odds
suggested by Kitching’s studys) it is unlikely that they
would
be
under-
taken. Other studies
using
an alternative approach have employed published
data
to measure the effect of mergers
on
performance. Results obtained from
these studies
arc
discussed
in
section
111,
followed in
section
lV
by an exami-
nation of the recent performance
of
a sample of
‘
merger intensive
’
firms
1
It
is
possible that the psychological jolt occasioned by merger may increase the
rate of management and labour turnover, not through deliberate redundancy, although
this
will
naturally
occur
in
some
cases,
but through individual failure to adjust quickly
enough
to
the new environment.
To
the extent that
such
turnover raises costs it must
be cou~ltcd against
any
increased tfiiciency resulting from the merger in other direc-
tions.
On
the
special
labour problems that mergers raise
see
Acton Society
Trust,
1966.
Kitching
is
not more specific in defining
how
‘
failure
’
is
to
be interpreted.
Whether
it
means lower returns than expected
or
actual
losses
is not stated in
his
results.
a
For a
recent
dew
of
the evidence
see
Sutherland,
1971.
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