New owners better able to manage supply, demand, research finds
The typical acquisition narrative is that a more productive company buys up a less productive firm.
There is more to the storyline, though, according to new research from the University of Chicago Booth School of Business.
Professor Chad Syverson of Chicago Booth, with co-authors Serguey Braguinsky of Carnegie Mellon University, Atsushi Ohyama of Hokkaido University and Tetsuji Okazaki of the University of Tokyo, found that less profitable, rather than less efficient companies were more likely to be acquired. When more profitable companies acquire less profitable companies, the successful sales and management practices of the buying company are spread around, making better use of existing productivity and boosting the profitability of the purchased firm.
In fact, they were not on average less physically productive, the researchers write in their working paper, "Acquisitions, Productivity and Profitability: Evidence from the Japanese Cotton Spinning Industry." Typically, the acquired company had better equipment, but was not managed as well as the acquiring company — which would then realign production to better handle demand uncertainties.
"One clear lesson of our findings is that acquisitions on average move productive resources to managers and organizations that are better able to use those resources — 'better able' in multiple dimensions — than their original owners," Syverson says.
Though the data were from the Japanese cotton spinning industry in the late 1800s to early 1900s, the researchers say that the ties between ownership, productivity and profitability are applicable today, and the processes used by Japanese cotton spinners could be applied in developing countries.
"The case study is a bit unusual — we chose it in part because its incredibly detailed data lets us see things one usually cannot — but I think holds a lot of general lessons," Syverson says. "Essentially, it tells us about what corporate acquisitions look like and what they accomplish — what determines who is the buyer and who is bought, and what happens financially and operationally to each."
Contact: Professor Syverson is available for contact at Chad.Syverson@chicagobooth.edu.
From: Ethan Grove, Chicago Booth Office of Media Relations, 773.834.5161 (office), 773.420.8670 (cell), Ethan.Grove@chicagobooth.edu.