Financial and managerial implications of mergers and acquisitions in food industries in the 1980s

Food firms can improve their profits by focusing on one or a few specialized activities because of efficiency gains and/or market power benefits. This study documents that profits increase with increasing concentration for firms in food industries whose top-4-concentration ratio is greater than 38%.Specialization through intra-industry mergers and acquisitions was prevented from 1950 to 1982 by the enforcement of the Celler-Kefauver Act. But, from 1982, the fall off in the enforcement of anti-trust regulations triggered a wave of takeovers that lasted eight years. Transactions reached values never seen before.In addition to data given in publications about takeover statistics, a sample of 55 acquired firms and 36 acquiring firms involved in mainly cash takeovers announced between January 1981 and December 1989 is studied through an event-study approach. The findings show that operational forces have motivated takeovers at a fairly uniform level throughout the 1980s. Companies have concentrated their activities on acquiring targets in similar and related businesses and by divesting unrelated business units. Managerial and operating synergies, which create value, and market power seem to be the major motives.Misused free cash flows because of acquirer's agency problems cannot be ruled out as a motive for takeovers in low growth activities like food businesses. Financial motives have increased strongly over time in facilitating highly levered and overpaid investments. The mispricing of low-grade bonds prior to the autumn of 1989 facilitated the financing of leveraged buyouts leading to large wealth transfers from creditors to shareholders. The stock market, especially for food firms, soared and the multiples of purchase price to book value were higher in the period 1985-1989 than during the years 1981-1984. The sharp decline of the U.S. dollar against the currencies of ten major industrial countries attracted more foreign food corporations to buy food firms in the years 1987-1989. Takeovers made in the late 1980s had much higher probability of being negative net present value investments than those made in the early 1980s.The study documents that shareholders of targets in highly concentrated food industries obtained a higher cumulative abnormal return (the advantage is worth between 7 and 9% on average), and a higher percentage of offer to market price of 15% on average. This premium is due to efficiency gains and/or market power benefits that can be obtained by food firms in highly concentrated industries.The results show no specific change in systematic risk for acquirers of targets in highly and less concentrated industries. But, the sample does not include private acquirers who may have taken over a firm through a leveraged buyout.U of I OnlyETDs are only available to UIUC Users without author permissio