An Investigation of Pooled Purchasing as a Source of Value Creation in Diversifying Acquisitions

Daniel Greene, Omesh Kini and Jaideep Shenoy

Journal of Law and Economics, 2017, vol. 60, issue 4, 597 - 636

Abstract: We take a broad product-market approach to examine whether pooled purchasing is a source of value creation in diversifying acquisitions. We find that our proxies for the merging firms' change in purchasing concentration are positively related to the combined wealth effect of merging firms, positively related to the change in the gross profit margin of merging firms, negatively related to the wealth effects of main common supplier-industry firms and acquirer-industry rival firms, and unrelated to the wealth effects of main common customer-industry firms. We document a postacquisition decrease in output prices with no concomitant decrease in revenues for the main common supplier industry. We also document a decrease in output prices and an increase in revenues for the acquirer's industry. Our firm- and industry-level evidence suggests that the benefits of pooled purchasing in diversifying acquisitions come from an efficiency-increasing volume-discount channel rather than anticompetitive channels.

Date: 2017
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