Post-Merger Restructuring and the Boundaries of the Firm

1. Post-Merger Restructuring and the Boundaries of the Firm Vojislav Maksimovic Gordon Phillips N.R. Prabhala

2. Main PointsA. Substantial Post-Merger Restructuring A merger is not an end-node in defining firm boundaries. Rather, it starts a vigorous short-term restructuring of target’s assets. At t+3, acquirers in our sample operate only 54% of the acquired plants. The rest are sold or closed. 

3. Main PointsB. Cross-Sectional Variation in Restructuring Acquirers retain a plant if they have a comparative advantage in operating it. If not, they sell it. The peripheral productivity of an acquirer at the margin of its boundaries matters. Not the average productivity. Skilled acquirers are more likely to retain. The probability of sale depends on industry shocks. Skilled acquirers are especially less likely to sell if there is a positive industry shock.

4. Main PointsC. Productivity Changes Retained plants Increase in productivity. Have higher productivity than predicted under unobserved counterfactual. Sold plants Productivity changes are not significant.

5. Main PointsD. Acquirer’s Own Plants No preference for retention after controlling for plant characteristics. Prior ownership status does not matter. No evidence that acquirer’s own retained plants Decrease in productivity Have higher productivity than under (unobserved) counterfactual.

6. Main PointsD. Other Results Repeat acquirers: Sell off more acquired plants Little evidence that kept plants are less efficient. Diagonal Increase in productivity not greater when bidder’s and target’s BV/MV are similar

7. Implications Quasi-experiment in resetting firm boundaries ? boundaries reset pretty much in line with neoclassical theories of comparative advantage (Lucas 1978) Even if mergers are motivated by other things like empire building, economic rationality reasserts itself – quickly… in 3 years. No evidence of gains in sold off units --- so mergers don’t liberate trapped assets. Successful acquirers successful at restructuring Suggests directions for research: Mergers and asset sales markets are related. Buy whole firm and sell divisions versus buy divisions.

8. Literature (Very) brief perspective What happens after a merger? Long-term evidence from Porter (1987), Kaplan and Weisbach (1992). Diverstitures of whole businesses over 7-20 years. Little short-term evidence on disposal decisions. Little evidence on performance of sold versus kept plants Acquisitions as adjustments to firm boundaries Free cash flow – empire building Neoclassical view: comparative advantage exploiting fixed resource. Lucas (1978), Maksimovic and Phillips (2001, 2008)

9. Literature (Very) brief perspective TFP after plants change owners: Maksimovic and Phillips (2001), Schoar (2002). Neither paper looks at Sell/keep/close decision after merger. Thus, we look at the second ownership change in the immediate aftermath of a merger. Cross-sectional variation of this sell/keep/close decision. The extreme asymmetry in productivity changes depending on whether the (just acquired) plant is sold or kept.

10. Summary Statistics on Disposition of Target Plants