Target Selection and Shareholder Value Implications in Operating Synergy-Driven Mergers

Abstract

This study examines whether resource similarity in product and geographic market positions, as well as resource quality similarity, affects the likelihood of related mergers aimed at operating synergies. I classify five value-creation sources of operating synergies: cost efficiency, market position, product portfolio, geographic expansion, and innovation resources. Product and geographic market resources are critical to achieving these value-creation goals, while variation in resource quality among potential targets possessing the necessary resources indicates different gains acquirers can retain from synergy distribution.

I estimate conditional logit models for target selection analyses and ordinary least squares regressions for shareholder wealth effect analyses. The results show that all three dimensions of similarity increase merger likelihood, although their effects vary across value-creation contexts. I find evidence consistent with acquirers’ expectations of net gains from synergy distribution when selecting targets exhibiting product similarity and resource quality similarity, as reflected by closer Tobin’s Qs.

Product similarity consistently increases merger likelihood, yet its effect on acquirer shareholder wealth depends on the specific value-creation motive, reflecting its varying relevance across goals. Resource quality similarity primarily matters in product-enrichment-driven mergers. Its varying effect across value-creation contexts likely depends on the substitutability of the resources sought by acquirers. Geographic proximity increases the likelihood of operating synergy-driven mergers other than innovation-driven ones, but does not affect shareholder wealth outcomes. Its effect on merger likelihood appears driven by reduced information asymmetry between nearby firms, which may not enhance shareholder wealth creation.

This study adds new evidence on the determinants of target selection and merger performance across distinct value-creation contexts of operating synergies. This study also advances the literature on resource quality similarity by enriching evidence on its positive effect on merger likelihood and providing the first empirical evidence that the substitutability of the resources sought by acquirers moderates the strength of the positive relationship. The findings also indicate that requiring disclosure of primary reasons for mergers upon announcements may enhance acquirers’ decision-making and external monitoring in operating synergy-driven mergers.