Why mergers are good for your clients

University of Waterloo study confirms benefits of tie-ups

Why mergers are good for your clients
Steve Randall

When companies merge it’s good news for investors according to a new study by the University of Waterloo.

Researchers analyzed data from multiple sources for more than 5,000 publicly-traded US manufacturing companies between 1980 and 2003 including financial data and patents.

The dataset allowed comparison on market values before, during, and after mergers; and also for those that did not merge to allow industry-wide factors to be filtered out.

They found that merged firms saw an increase in both shareholder value and market share; market share of the combined firms was greater than the sum of the individual firms pre-merger.

"The increase in firm value post-merger may be chiefly attributable to improved efficiencies as opposed to market power," said Anindya Sen, co-author and professor of economics at the University of Waterloo. "Firms are realizing synergies from mergers which benefit all stakeholders. Consumers are not necessarily paying higher prices, and investors are gaining through holding the stocks of such firms in their financial portfolios."

Why this study differs from previous ones
While there have been previous studies of the effects of mergers on shareholder value, they have typically been focused on a single firm or a shorter timeframe, with often mixed results.

"We often see firms such as Loblaws and Shoppers Drug Mart merge under the assumption that mergers create value. However, empirical evidence on merger effects across industries was limited because it's so hard to assemble and construct the required dataset," said Sen. "Our research offers some robust evidence and clarity on how firms benefit from mergers in terms of market value and market share."

The study, "Market value, market share, and mergers: Evidence from a panel of U.S. firms", appeared in Managerial and Decision Economics.