How stock‐swap mergers affect shareholder (and bondholder) wealth: More evidence of the value of corporate “Focus”

Alfred Chandler once described the U.S. conglomerate movement of the 1960s and '70s as an historical aberration and a disaster. And the recent trend in corporate mergers and acquisitions away from diversifying acquisitions would seem to confirm Chandler's argument. In what constitutes yet another piece of evidence in support of Chandler's argument, the authors of this article conducted a study of changes in debt and equity values in 260 stock-for-stock mergers completed between 1963 and 1996. With a sample almost evenly divided between conglomerate and mergers, the authors report significant net wealth gains for all securityholders as a group in mergers, but generally insignificant net gains for securityholders in conglomerate mergers. Not surprisingly, target firm shareholders experienced net wealth gains in both kinds of acquisitions; but for acquiring company shareholders, there was a striking difference: economically and statistically significant gains for acquirers in related transactions, and significant losses for acquirers in conglomerate deals. Perhaps the biggest surprise of the study, however, was that even the bondholders of acquirers in related mergers benefited more than bondholders in conglomerate deals. The result is surprising because, to the extent bondholders benefit from corporate diversification, one would expect the opposite result. That bondholders in related mergers experience larger wealth increases than those of conglomerate acquirers is just one more sign of the dramatic differences in total value created by the two kinds of mergers.