Industry structure and horizontal takeovers: Analysis of wealth effects on rivals, suppliers, and corporate customers

We examine the wealth effects of horizontal takeovers on rivals of the merging firms, and on firms in the takeover industry's supplier and customer industries as identified in the benchmark input-output accounts for the U.S. economy. We find that the announcement of a horizontal takeover is associated with wealth gains to rivals and corporate customers, while suppliers experience an adverse wealth effect. Inconsistent with the collusion and buyer power motives for horizontal takeovers, we find significant positive (negative) abnormal returns to rivals, suppliers, and corporate customers for the subsample of takeovers with positive (negative) combined wealth effect to target and bidder shareholders. Overall, our results suggest that the average takeover in our sample is driven by efficiency considerations. We find evidence, however, suggesting that horizontal takeovers increase the buyer power of the merging firms if suppliers are concentrated. More generally, we find that the concentrations of the takeover, supplier, and customer industries play a role in determining abnormal returns to the merging firms, rivals, suppliers, and corporate customers.