View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

August I, 1989

eCONOMIC
COMMeNTORY
Federal Reserve Bank of Cleveland

Mergers, Acquisitions and Evolution
of the Region's Corporations
by Erica L. Groshen
and Barbara Grothe

How
do regional 'economies adapt to
changing national and international

• Concerns About Mergers
and Acquisitions

markets? Some researchers suggest that
much of the ability of a region to
develop rests with the openings and
closings of small businesses, 1

In the recent past, Ohio and Pennsylvania have been among the most active

If this is true, then the dominance of
large firms in the Cleveland-CincinnatiPittsburgh region might suggest an inability to respond to economic challenges. This reasoning, however, ignores
the fact that (particularly in the recent
past) large firms engage in an alternative, highly visible form of transforma-

states for location of corporate headquarters involved in M&As. Ohio
ranked fifth in 1985 and 1986, with
307 M&As over the two years; while
Pennsylvania ranked seventh, with 266
M&As. Overall, the Midwest led the
other six Census regions in the U.S. in
M&As in both years: accounting for
one quarter of the nation's total M&As
in those two years?

tion: corporate mergers and acquisitions
(M&As). This Economic Commentary

The regional effects of M&As can be
both positive and negative, as listed in

looks at how the M&As of a number of
large firms have shaped the regional
economy in the last three decades.

table I, and as described below. Although observers have raised a variety
of concerns about the effect of M&As
on a region's industrial structure, few

We briefly trace the evolution from

of the issues have been explored systematically.

1960 to
operated
areas of
District:

1987 of 37 companies that
in three key metropolitan
the Federal Reserve's Fourth
Cleveland, Cincinnati, and

First, if M&As increase the size of companies, the new firms may become less

Pittsburgh. In order to understand their
propensity to grow, to expand into new
markets, and to adopt new technologies, we discuss their size, geographi-

flexible and less likely to operate on the
cutting edge of technology and product
development. If so, an area beset by
M&As may suffer a decline in innova-

cal dispersion, products, and headquarters location, and link these

tive and entrepreneurial activity. On the
other hand, larger companies have more
access to capital. Thus, the funds available for research and development may

features to concerns about the regional
effects of M&As.

actually rise after a merger. Indeed, one
recent study finds no evidence that re-

ISSN 0428-1276

-

Mergers and acquisitions have both
positive and negative effects on a
region's industrial structure. The
authors use a sample of 37 companies
to discuss the effects of mergers and
acquisitions on three key metropolitan areas in the Fourth Federal
Reserve District.

search and development expenditures
fall after an acquisition.'
A second source of concern about
M&As stems from the consolidation of
corporate headquarters and facilities.
Not only are such consolidations inherently disruptive in the short run, but
they can entail losses of jobs important
to the region. When the ownership of a
business transfers to a nonlocal firm,
many of the functions of the acquired
firm's headquarters shift to the headquarters of the buyer. This consolidation reduces local jobs for educated
mid- and high-level white collar
employees as, for example, research
and development facilities are combined out of town. These lost headquarters jobs also tend to be less cyclically sensitive than production jobs.
Thus, a region with a large share of
M&A activity could suffer a dispropor-

and/or acquiring firms. The productivity-

TABLE 1

POTENTIAL REGIONAL BENEFITS AND COSTS FROM
MERGERS AND ACQUISITIONS

Potential Benefits
Improved productivity from better management
New synergies with other subsidiaries (that is, links to other technologies,
products, and markets)

TABLE 2

COMPARISON OF HISTORICALLY INTACT COMPANIES
AND ACQUIRED COMPANIES: 1960 MEASURES
OF AGE AND SIZE
Historically
Intact Companies

by implication, a rash of M&As can be
the vehicle through which a region's
productivity is raised.

Preservation of production jobs and facilities
Addition of cyclically stable, high-wage/high-skill
town)

jobs (if headquarters stays in

Addition of community leaders (if headquarters stays in town)
Increased profits from greater market power
Potential Costs
Disruption associated with adjustment to new ownership
Loss of the flexibility and innovativeness found in small companies

20

jobs to new headquarters city

Average age

70 years

80,655

12,575

tempts to increase or acquire market
power.6 If so, they may raise wealth in
the region where the new, more profitable company is located, although they

Average number of
common stockholders

112,388

23,415

49

8

may reduce competition and lower welfare in the country as a whole. On the
other hand, since these M&As do not
raise firms' productivity, their disrup-

SOURCE: Authors'tabulationsromMoody'sIndustrial anuals, 960and 1987.
f
M
1

holders, and six times as many subsidiaries as acquired companies. 10

TABLE 3

A study of the "motive" of takeovers
finds that disciplinary takeovers are

Average number of subsidiaries

_

tive effects may be the strongest effect
experienced by the region.

EMPLOYEE GROWTH: 1960-1987
BY SIZE OF COMPANY AND MERGER STATUSa

larly hostile ones) is the incentive to
abrogate long-term contracts, whether

Abrogation of explicit or implicit contracts with local labor or suppliers

pear to result in lower wages and
lower employment; in fact, one usually
goes up while the other goes down,
with the directions dependent on the
type of merger."

external costs (for example, of pollution or plant relocation) that their
decisions impose on the region.
While losses of headquarters probably
have a net negative impact on the
region, we also need to consider what
would happen to the companies (particularly those that are acquired) without
M&As. Some would cease or reduce
operations for lack of access to capital,
technology, or markets. If so, the alternative to M&As may be losses of production jobs and facilities in addition to
losses of headquarters jobs and offices.
In considering the points above, it is important to realize that some M&As re-

Also associated with corporate consolidation are the possible losses of
local autonomy and corporate commit-

duce the size of companies involved. In
these "bust-up" M&As (which include
many leveraged buy-outs), the buyers

ment to the region. Some high-level
corporate officers are active community leaders; their departure may
deprive the community of valuable
input. Furthermore, local management

sell off the components of conglomerates in order to finance their purchase.
In that case, many of the arguments
above work in the opposite direction.

or ownership may be more committed
to long-run rather than short-run profitmaximization with regard to the local
facilities, and be more sensitive to the

The possible causes of M&As also have
important regional implications. One explanation emphasizes the role of M&As
in raising the productivity of acquired

17,887
33,157
27,340

95.5%
425.5%
269.9%

Medium Companies (30,000-100,000
Intact
6
Acquired
3
Total Group
9

• Mergers and Acquisitions in a
Sample of Firms in the District

58,083
90,931
69,032

37.5%
133.2%
67.7%

employees)
42,247
38,992
41,162

Large Companies (over 100,000 employees)
Intact
5

Thus, M&As are part of the process by
which a region undergoes needed restructuring, modernization, and stream-

to get a picture of the impact of M&As
in the Fourth District, this Economic
Commentary follows changes in 37
major employers in the Cleveland, Cin-

255,289'

359,691

a. Groupsarebasedon 1960
employment sampled
of
companies.
SOURCE: Authors'tabulationsromMoody'sIndustrial anuals, 960and 1987.
f
M
1

_

FIGURE 1 ANNUAL DISTRIBUTION OF THE ACQUISITIONS OF
SAMPLE COMPANIES BY OTHERS
Number of Acquisitions
5

cinnati, and Pittsburgh metropolitan
statistical areas (MSAs).

40.9%

Several characteristics distinguish acquired and unacquired companies.
Companies that remained intact tended
in 1960 to be younger, and to have
over six times the employment, nearly
five times as many common stock-

likely to be hostile, while synergistic
takeovers are likely to be friendly.
Furthermore, the characteristics of the
targets can be distinguished on several counts. For example, targets of hostile takeovers were likely to be older,
smaller, and growing more slowly than
were other Fortune 500 firms. liOn
the basis of sample differences in characteristics between acquired and intact
companies, the acquired companies in
this region were more likely to have
been the targets of disciplinary
takeovers than of synergistic mergers.
The 17 companies from the sample that
were taken over by other companies
generally (with four exceptions) became
a permanent part of the new larger entity.12 Thus, most of these companies do
not appear to have been involved in
"bust-up" acquisitions. Ownership also
stayed within the country; with only one
exception, all of the acquiring companies were American-owned.
The sales of these companies (as
shown in figure 1) follow the widel y
noted waves of M&As in the late
1960s and the 1980s. Also, the sales do

The sample was chosen from a group of
privately-held large employers in the
three MSAs.8 While these fmns may not

not appear to have been the result of
economic downturns; except for 1980,
when we experienced a short recession,

be strictly representative of fmns in the
region, their experiences are instructive
about the effects of M&As. Data were
collected from Moody's Industrial
Manuals for 1960 and 1987. As can be
seen in table 2, the fmns covered were
very large, broadly-held, and well-

Percent
Change in
Employment

Smaller Companies (less than 16,000 employees)
Intact
8
9,147
Acquired
13
6,310
Total Group
21
7,390

explicit or implicit? To the extent that
these contracts were made with local
employees or suppliers, the regional
labor market will suffer a loss of jobs or
a lowering of compensation, and
regional suppliers will lose customers.

lining. But, they can also cause operational disruptions, sap local businesses
of autonomy, and remove valuable
members from the community. In order

Average Number
of Employees
1960
1987

Number
of
Companies

A final explanation for M&As (particu-

Of course, if the region's M&As reflect
local companies' acquisitions of nonlocal firms, then a wave of M&As could
raise the local share of cyclically
stable, high-skill employment. A study
of the effect of M&As on small Michigan firms finds that mergers do not ap-

other half were bought and merged into
a larger entity'

58 years

Less awareness of, or responsiveness to, local operational externalities

skill jobs. Regions may fear becoming
merely the production arm of businesses, with no "brain."

17

Number

in the sample. By 1987, only about half
of the companies remained an identifiable buyer throughout the period; the

Average number of employees

Loss of community leaders to new headquarters city

tionate loss of cyclically stable, high-

Acquired
Companies

established in 1960. The level of M&A
activity in the region is readily apparent

Alternatively, M&As may represent at-

Greater access to capital

Loss of cyclically stable, high-wage/high-skill

_

enhancing theory has two variants; the
target company may be either poorly
managed or have potential synergies
with the operations of the buyer. 5 Then,

all of these companies were sold
Year of Sale

during years of economic expansion.
Thus, there is no indication that the acquisitions of these companies was
spurred by their distress in hard times.

and/or acquiring firms. The productivity-

TABLE 1

POTENTIAL REGIONAL BENEFITS AND COSTS FROM
MERGERS AND ACQUISITIONS

Potential Benefits
Improved productivity from better management
New synergies with other subsidiaries (that is, links to other technologies,
products, and markets)

TABLE 2

COMPARISON OF HISTORICALLY INTACT COMPANIES
AND ACQUIRED COMPANIES: 1960 MEASURES
OF AGE AND SIZE
Historically
Intact Companies

by implication, a rash of M&As can be
the vehicle through which a region's
productivity is raised.

Preservation of production jobs and facilities
Addition of cyclically stable, high-wage/high-skill
town)

jobs (if headquarters stays in

Addition of community leaders (if headquarters stays in town)
Increased profits from greater market power
Potential Costs
Disruption associated with adjustment to new ownership
Loss of the flexibility and innovativeness found in small companies

20

jobs to new headquarters city

Average age

70 years

80,655

12,575

tempts to increase or acquire market
power.6 If so, they may raise wealth in
the region where the new, more profitable company is located, although they

Average number of
common stockholders

112,388

23,415

49

8

may reduce competition and lower welfare in the country as a whole. On the
other hand, since these M&As do not
raise firms' productivity, their disrup-

SOURCE: Authors'tabulationsromMoody'sIndustrial anuals, 960and 1987.
f
M
1

holders, and six times as many subsidiaries as acquired companies. 10

TABLE 3

A study of the "motive" of takeovers
finds that disciplinary takeovers are

Average number of subsidiaries

_

tive effects may be the strongest effect
experienced by the region.

EMPLOYEE GROWTH: 1960-1987
BY SIZE OF COMPANY AND MERGER STATUSa

larly hostile ones) is the incentive to
abrogate long-term contracts, whether

Abrogation of explicit or implicit contracts with local labor or suppliers

pear to result in lower wages and
lower employment; in fact, one usually
goes up while the other goes down,
with the directions dependent on the
type of merger."

external costs (for example, of pollution or plant relocation) that their
decisions impose on the region.
While losses of headquarters probably
have a net negative impact on the
region, we also need to consider what
would happen to the companies (particularly those that are acquired) without
M&As. Some would cease or reduce
operations for lack of access to capital,
technology, or markets. If so, the alternative to M&As may be losses of production jobs and facilities in addition to
losses of headquarters jobs and offices.
In considering the points above, it is important to realize that some M&As re-

Also associated with corporate consolidation are the possible losses of
local autonomy and corporate commit-

duce the size of companies involved. In
these "bust-up" M&As (which include
many leveraged buy-outs), the buyers

ment to the region. Some high-level
corporate officers are active community leaders; their departure may
deprive the community of valuable
input. Furthermore, local management

sell off the components of conglomerates in order to finance their purchase.
In that case, many of the arguments
above work in the opposite direction.

or ownership may be more committed
to long-run rather than short-run profitmaximization with regard to the local
facilities, and be more sensitive to the

The possible causes of M&As also have
important regional implications. One explanation emphasizes the role of M&As
in raising the productivity of acquired

17,887
33,157
27,340

95.5%
425.5%
269.9%

Medium Companies (30,000-100,000
Intact
6
Acquired
3
Total Group
9

• Mergers and Acquisitions in a
Sample of Firms in the District

58,083
90,931
69,032

37.5%
133.2%
67.7%

employees)
42,247
38,992
41,162

Large Companies (over 100,000 employees)
Intact
5

Thus, M&As are part of the process by
which a region undergoes needed restructuring, modernization, and stream-

to get a picture of the impact of M&As
in the Fourth District, this Economic
Commentary follows changes in 37
major employers in the Cleveland, Cin-

255,289'

359,691

a. Groupsarebasedon 1960
employment sampled
of
companies.
SOURCE: Authors'tabulationsromMoody'sIndustrial anuals, 960and 1987.
f
M
1

_

FIGURE 1 ANNUAL DISTRIBUTION OF THE ACQUISITIONS OF
SAMPLE COMPANIES BY OTHERS
Number of Acquisitions
5

cinnati, and Pittsburgh metropolitan
statistical areas (MSAs).

40.9%

Several characteristics distinguish acquired and unacquired companies.
Companies that remained intact tended
in 1960 to be younger, and to have
over six times the employment, nearly
five times as many common stock-

likely to be hostile, while synergistic
takeovers are likely to be friendly.
Furthermore, the characteristics of the
targets can be distinguished on several counts. For example, targets of hostile takeovers were likely to be older,
smaller, and growing more slowly than
were other Fortune 500 firms. liOn
the basis of sample differences in characteristics between acquired and intact
companies, the acquired companies in
this region were more likely to have
been the targets of disciplinary
takeovers than of synergistic mergers.
The 17 companies from the sample that
were taken over by other companies
generally (with four exceptions) became
a permanent part of the new larger entity.12 Thus, most of these companies do
not appear to have been involved in
"bust-up" acquisitions. Ownership also
stayed within the country; with only one
exception, all of the acquiring companies were American-owned.
The sales of these companies (as
shown in figure 1) follow the widel y
noted waves of M&As in the late
1960s and the 1980s. Also, the sales do

The sample was chosen from a group of
privately-held large employers in the
three MSAs.8 While these fmns may not

not appear to have been the result of
economic downturns; except for 1980,
when we experienced a short recession,

be strictly representative of fmns in the
region, their experiences are instructive
about the effects of M&As. Data were
collected from Moody's Industrial
Manuals for 1960 and 1987. As can be
seen in table 2, the fmns covered were
very large, broadly-held, and well-

Percent
Change in
Employment

Smaller Companies (less than 16,000 employees)
Intact
8
9,147
Acquired
13
6,310
Total Group
21
7,390

explicit or implicit? To the extent that
these contracts were made with local
employees or suppliers, the regional
labor market will suffer a loss of jobs or
a lowering of compensation, and
regional suppliers will lose customers.

lining. But, they can also cause operational disruptions, sap local businesses
of autonomy, and remove valuable
members from the community. In order

Average Number
of Employees
1960
1987

Number
of
Companies

A final explanation for M&As (particu-

Of course, if the region's M&As reflect
local companies' acquisitions of nonlocal firms, then a wave of M&As could
raise the local share of cyclically
stable, high-skill employment. A study
of the effect of M&As on small Michigan firms finds that mergers do not ap-

other half were bought and merged into
a larger entity'

58 years

Less awareness of, or responsiveness to, local operational externalities

skill jobs. Regions may fear becoming
merely the production arm of businesses, with no "brain."

17

Number

in the sample. By 1987, only about half
of the companies remained an identifiable buyer throughout the period; the

Average number of employees

Loss of community leaders to new headquarters city

tionate loss of cyclically stable, high-

Acquired
Companies

established in 1960. The level of M&A
activity in the region is readily apparent

Alternatively, M&As may represent at-

Greater access to capital

Loss of cyclically stable, high-wage/high-skill

_

enhancing theory has two variants; the
target company may be either poorly
managed or have potential synergies
with the operations of the buyer. 5 Then,

all of these companies were sold
Year of Sale

during years of economic expansion.
Thus, there is no indication that the acquisitions of these companies was
spurred by their distress in hard times.

_

TABLE 4

part of much larger entities than were
their intact counterparts.

GROWTH OF GEOGRAPHIC PRESENCE: 1960-1987
Average Number of Countries

Average Number of States
1960

SOURCE:

_

Percent
Change

1960

1987

Percent
Change

17

20

18%

6

13

117%

9

Intact
Companies
n=18
Acquired
Companies
n=15

1987

13

44%

3

11

267%

While the smallest companies in this
category enjoyed a 95 percent growth
in employees over the 27 -year period,
the medium and large intact companies
experienced much lower growth rates.

Authors' tabulations

TABLE 5

The intact companies also exhibit
strong employment growth, which
varies inversely with original size.

from Moody's

All of the companies vastly expanded
their geographical coverage during the
period. This is particularly true of the

Industrial Manuals, 1960 and 1987.

HEADQUARTERS LOCATION: 1960-1987
Number of Companies Headquartered
inMSA
1960

1987

Cleveland
Intact
Acquired
Total

6
5
11

3

Cincinnati
Intact
Acquired
Total
Pittsburgh
Intact
Acquired
Total
All Three MSAs
Intact
Acquired
Total

Percent
Change

Number of Companies
Headquartered in Sun belt
1987

I

o

4

- 50%
- 80%
- 55%

3
2
5

3
0
3

0%
-100%
- 40%

o
o
o

6
7
13

5
2
7

- 17%
- 71%
- 46%

o
2
2

acquired companies, which are now associated with entities that operate in almost four times as many countries as
did the original companies in 1960.
Table 4 presents a dramatic picture of
the growth of the presence of American
companies in foreign countries during
the past 27 years. This presence takes
the form of subsidiaries, production
facilities, or marketing activity. Over
this period, the average number of
countries in which intact companies
operated more than doubled to 13. Expansion of operations to other states in
the U.S. followed a similar pattern, but
the changes were less dramatic, probably because domestic coverage was already fairly extensive in 1960.
In 1960, the companies that were to
remain intact tended to have a broader

15
14
29

II

3
14

- 27%
- 79%
- 52%

2
3

• Size and Geographic Scope
of the Companies

Table 3 summarizes the trends in number of employees for our sample com-

Have M&As increased the size and
scope of companies in the region? One

panies, grouped according to number
of employees in 1959.13 Not one of
the largest companies was acquired.
Furthermore, in both the small and

of the most striking regularities observed among the companies followed
is that all of the companies expanded
their production capacities or their markets over the period; all 36 surviving
entities are now part of much larger
corporations than they were in 1960.
We track this through two measures of
company size: number of employees
and locational expansion.

medium- size groups, the companies
that were eventually acquired tended to
be the relatively smaller companies
within each group. The exaggerated
"growth" rate of the acquired firms is
an obvious result of the tendency of
these relatively small entities to be
bought by larger entities. Thus, by
1987, the acquired companies were

geographic presence both in the U.S.'
and in foreign markets than did the
companies that were to be acquired.
But in marked contrast to the results
for employment, by 1987 the intact
companies were still more geographically dispersed (domestically and internationally) than were the entities that
acquired their counterparts.

• Location of Headquarters
But did these companies' headquarters
stay in town? If not, where did they
move, and why? Table 5 shows the considerable movement of headquarters
location in our sample. In 1960, although all of the companies in our
sample employed a large number of
people in one of the three key cities in
the District, only 29 companies had
their headquarters in Cleveland, Cincin-

nati, or Pittsburgh. And, by 1987 only

•

fourteen of the companies remained
headquartered in one of these cities, a
decline of over one-half.

This Economic Commentary

Acquired companies showed a much
stronger tendency to change their headquarters city than did intact companies.
Almost 80 percent of acquired companies moved their headquarters, whereas
less than 30 percent of the intact companies moved their headquarters. Only
three companies in the sample moved
their headquarters to the Sunbelt and
two of these moves apparently resulted
from acquisitions by companies located in the South. 14 These tentative
findings invite further study of the impact of M&As on the movement of
headquarters out of ci ties.

• Product Changes
Another important dimension of structural change is the evolution of products. On the one hand, M&As are a
likely vehicle for capitalizing on synergies between the products or operations
of ongoing firms. If so, we'd expect
the intact companies to be less likely to
change their products over time than
would acquired companies. IS On the
other hand, control by a very large,
bureaucratic firm may limit the ability
of a plant to adapt to market changes.
With just two exceptions, all of the intact companies continued producing or
selling essentially the same products
over the 27 years. Both companies that
changed products produced office
equipment in 1960 and were dramatically affected by technological innovations in business equipment and communication processes. 16

Conclusions
has ex-

plored the effects of M&As on the
evolution of 37 large companies in the
region over the past 27 years. The dependence of our region's economy on
the M&A activities of ongoing
enterprises, combined with an understanding of the possible regional
benefits and costs of M&As (as summarized in table 1) heightens concern
about the directions in which these activities have taken our region. While
this analysis cannot measure the net
cost or benefit of these changes in corporate affiliation, we have noted some
important structural effects of the
M&As on our region.

and operate in more states and countries
than they did before. Half of the companies were absorbed by Americanowned entities, the others retained their
corporate identities while they expanded or acquired smaller companies.
In this sample, the smaller, older, less
geographically-dispersed companies
had a higher probability of being acquired. These acquired companies are
now permanent parts of larger, but less
geographically-dispersed firms than
are their intact counterparts. Finally, of
the firms headquartered in these three
MSAs in 1960, about half (including almost all of the acquired companies)
moved their headquarters out of town.

and nondurable goods was often preserved.17 The other eight acquired
companies continued to be identified
with companies that were engaged in
essentially the same product. Of these,
seven companies were highly capitalintensive. 18

the role of open ings and closings in the

pany (in the steel industry) changed hands

region (for example, Eberts [1984]).

four times.

2. These figures are based on unpublished

13, Two companies could not be included in

is a Ph.d. candidate in the School of Urban

tabulations provided by the staff of Mergers

this section because employee data were un-

Studies at The Cleveland State University.

and Acquisitions Magazine using the

available for 1987.

Mergers and Acquisitions Data Base.

14. The much-feared migration of businesses

The authors would like to thank Brian Cromwell, Randall Eberts, and William Osterberg

eds. The Merger Boom: Proceedings of

3. See Hall (1988).

to the Sunbelt from the Rustbelt has been at-

for helpful comments.

a

4. See Brown and Medoff (1988).

a Conference, Federal Reserve Bank of
Boston Conference Series Number 31,
October 1987. pp. 199-229.
Caves, Richard E. "Effects of Mergers and
Acquisitions on the Economy: An Industrial Organization Perspective,"

in

Lynn E. Browne and Eric S. Rosengren,
Conference. Federal Reserve Bank

of Boston Conference Series Number

5. The fact that studies of stock prices of ac-

31, October 1987. pp. 149-168.

quired firms find that they usually rise as a

Eberts, Randall W. "Dimensions
in Cleveland's

of Change

Economy," Federal

ly taken as strong evidence for this argument.
However, Caves (1987) points out that the ex

Golbe, Devra L., and Lawrence J. White. "A
Time Series Analysis of Mergers and Acquisitions in the U.S. Economy," in Alan

Neighborhood

and Regional Change,

1979.
Brown, Charles, and James L. Medoff. "The

post value of the new entity is often lower
than the combined value of the two firms
before the acquisition.

The views stated herein are those of the

climate encouraged by the governments of

Federal Reserve Bank of Cleveland or of the

the newly emerging Southern cities, and the

Board of Governors of the Federal Reserve

prevalence of nonunion labor.

System.

15. This effect would arise both because of
fewer opportunities for synergies in the
products and operations of the intact companies (therefore, no other company acquired
them for that purpose), and because acquired
glomerates whose major concentration is in
an industry different than that of its new ac-

8. These firms participated in a survey con-

quisition.

versity of Chicago Press, Chicago. 1988.

ducted by the Federal Reserve Bank of

16. One expanded into the worldwide

Cleveland for other purposes.

graphics market; the other moved into ad-

Activity on Corporate Research and

9. Companies were considered to be ac-

vanced information systems.

Development"

quired when they ceased to have an inde-

17. For example, a toiletry company was

Corporate Takeovers: Causes and Con-

pendent listing in Moody's Industrial Manual.

merged into a larger conglomerate that

sequences, National Bureau of
Economic Research, The University of

10. Of the 20 companies that were never ac-

produces nondurable consumer products.

quired, two filed bankruptcy proceedings in

Meanwhile, an elevator company merged

the 1980s. One sold off its viable operations

with a producer of transportation equipment

and has otherwise ceased to ex ist. The other

and building systems.

Hall, Bronwyn H., "The Effect of Takeover
in Alan J. Auerbach, ed.,

Chicago Press, Chicago, 1988, pp. 66lDO.
Mork, Randall, Andrei Shleifer, and Robert
W. Vishny. "Characteristics

of Targets of

continues to operate under the supervision of

18. Three firms are engaged in steel produc-

the Bankruptcy Court.

tion, two in petroleum refining, and two in

Hostile and Friendly Takeovers," in

11. See Mork, Shliefer, and Vishny (1988).

the production of heavy industry equipment.

Alan 1. Auerbach, ed., Corporate

Browne and Rosengren (1987) find few dif-

The final company, a chain of retail food

Takeovers:Causes

ferences in the financial characteristics of the

stores, merged with a larger retail food store

two types of targets.

chain.

and Consequences,

National Bureau of Economic Research,
The University of Chicago Press,
Chicago. 1988. pp. 101-129.
Ravenscraft, David J. "The I980s Merger
Wave: An Industrial Organization
Perspective,"

in Lynn E. Browne and

Eric S. Rosengren, eds. The Merger
Boom: Proceedings of a Conference,

BULK RATE

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

Shleifer, Andrei, and Lawrence H. Summers. "Breach of Trust in Hostile
Takeovers," in Alan 1. Auerbach, ed.,

Address Correction

Corporate Takeovers: Causes and Con-

Please send corrected mailing label to

sequences, National Bureau of Eco-

the above address.

in Alan 1. Auerbach, ed., Corporate

Requested:

Chicago Press, Chicago. 1988. pp. 33-56.

Takeovers: Causes and Consequences,
National Bureau of Economic Research,
The Uni versity of Chicago Press,
Chicago. 1988. pp. 9-23.

Lynn E. Browne and Eric S. Rosengren,

Grothe was a summer intern at the Bank and

companies are sometimes bought by con-

6. See Caves (1987).

nomic Research, The University of

"Are Hostile Takeovers Different?" in

Federal Reserve Bank of Cleveland. Barbara

authors and not necessarily those of the

7. See Schleifer and Summers (1988).

Impact of Firm Acquisitions on Labor,"

Browne, Lynn E. and Eric S. Rosengren.

tributed to lower utility costs in the South

Erica L. Groshen is an economist at the

(due to the weather), the favorable business

Causes and Consequences, National
Bureau of Economic Research, The Uni-

1987. pp. 17-37.

Cambridge, MA: MIT Program on

buyers are stable or may fall slightly, is usual-

Reserve Bank of Cleveland Economic

ference Series Number 31, October

• References

result of acquisition, while stock prices of the

Commentary, October 8, 1984.

Federal Reserve Bank of Boston Con-

Birch, David L. The Job Creation Process,

Half of the acquired companies were
bought by multiproduct entities, although the distinction between durable

12, Thirteen companies were bought only
once, three were sold twice, and one com-

J. Auerbach, ed., Corporate Takeovers:

Employees of all of these firms now
work for much larger and perhaps more
efficient (or profitable) companies than
they did in the past. These employers
now make a wider variety of products,

-

• Footnotes
1, See Birch (1979). Other studies examine

eds. The Merger Boom: Proceedings of

Material may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editor.

U.S. Postage Paid
Cleveland,OH
Permit No. 385

nati, or Pittsburgh. And, by 1987 only

•

fourteen of the companies remained
headquartered in one of these cities, a
decline of over one-half.

This Economic Commentary

Acquired companies showed a much
stronger tendency to change their headquarters city than did intact companies.
Almost 80 percent of acquired companies moved their headquarters, whereas
less than 30 percent of the intact companies moved their headquarters. Only
three companies in the sample moved
their headquarters to the Sunbelt and
two of these moves apparently resulted
from acquisitions by companies located in the South. 14 These tentative
findings invite further study of the impact of M&As on the movement of
headquarters out of ci ties.

• Product Changes
Another important dimension of structural change is the evolution of products. On the one hand, M&As are a
likely vehicle for capitalizing on synergies between the products or operations
of ongoing firms. If so, we'd expect
the intact companies to be less likely to
change their products over time than
would acquired companies. IS On the
other hand, control by a very large,
bureaucratic firm may limit the ability
of a plant to adapt to market changes.
With just two exceptions, all of the intact companies continued producing or
selling essentially the same products
over the 27 years. Both companies that
changed products produced office
equipment in 1960 and were dramatically affected by technological innovations in business equipment and communication processes. 16

Conclusions
has ex-

plored the effects of M&As on the
evolution of 37 large companies in the
region over the past 27 years. The dependence of our region's economy on
the M&A activities of ongoing
enterprises, combined with an understanding of the possible regional
benefits and costs of M&As (as summarized in table 1) heightens concern
about the directions in which these activities have taken our region. While
this analysis cannot measure the net
cost or benefit of these changes in corporate affiliation, we have noted some
important structural effects of the
M&As on our region.

and operate in more states and countries
than they did before. Half of the companies were absorbed by Americanowned entities, the others retained their
corporate identities while they expanded or acquired smaller companies.
In this sample, the smaller, older, less
geographically-dispersed companies
had a higher probability of being acquired. These acquired companies are
now permanent parts of larger, but less
geographically-dispersed firms than
are their intact counterparts. Finally, of
the firms headquartered in these three
MSAs in 1960, about half (including almost all of the acquired companies)
moved their headquarters out of town.

and nondurable goods was often preserved.17 The other eight acquired
companies continued to be identified
with companies that were engaged in
essentially the same product. Of these,
seven companies were highly capitalintensive. 18

the role of open ings and closings in the

pany (in the steel industry) changed hands

region (for example, Eberts [1984]).

four times.

2. These figures are based on unpublished

13, Two companies could not be included in

is a Ph.d. candidate in the School of Urban

tabulations provided by the staff of Mergers

this section because employee data were un-

Studies at The Cleveland State University.

and Acquisitions Magazine using the

available for 1987.

Mergers and Acquisitions Data Base.

14. The much-feared migration of businesses

The authors would like to thank Brian Cromwell, Randall Eberts, and William Osterberg

eds. The Merger Boom: Proceedings of

3. See Hall (1988).

to the Sunbelt from the Rustbelt has been at-

for helpful comments.

a

4. See Brown and Medoff (1988).

a Conference, Federal Reserve Bank of
Boston Conference Series Number 31,
October 1987. pp. 199-229.
Caves, Richard E. "Effects of Mergers and
Acquisitions on the Economy: An Industrial Organization Perspective,"

in

Lynn E. Browne and Eric S. Rosengren,
Conference. Federal Reserve Bank

of Boston Conference Series Number

5. The fact that studies of stock prices of ac-

31, October 1987. pp. 149-168.

quired firms find that they usually rise as a

Eberts, Randall W. "Dimensions
in Cleveland's

of Change

Economy," Federal

ly taken as strong evidence for this argument.
However, Caves (1987) points out that the ex

Golbe, Devra L., and Lawrence J. White. "A
Time Series Analysis of Mergers and Acquisitions in the U.S. Economy," in Alan

Neighborhood

and Regional Change,

1979.
Brown, Charles, and James L. Medoff. "The

post value of the new entity is often lower
than the combined value of the two firms
before the acquisition.

The views stated herein are those of the

climate encouraged by the governments of

Federal Reserve Bank of Cleveland or of the

the newly emerging Southern cities, and the

Board of Governors of the Federal Reserve

prevalence of nonunion labor.

System.

15. This effect would arise both because of
fewer opportunities for synergies in the
products and operations of the intact companies (therefore, no other company acquired
them for that purpose), and because acquired
glomerates whose major concentration is in
an industry different than that of its new ac-

8. These firms participated in a survey con-

quisition.

versity of Chicago Press, Chicago. 1988.

ducted by the Federal Reserve Bank of

16. One expanded into the worldwide

Cleveland for other purposes.

graphics market; the other moved into ad-

Activity on Corporate Research and

9. Companies were considered to be ac-

vanced information systems.

Development"

quired when they ceased to have an inde-

17. For example, a toiletry company was

Corporate Takeovers: Causes and Con-

pendent listing in Moody's Industrial Manual.

merged into a larger conglomerate that

sequences, National Bureau of
Economic Research, The University of

10. Of the 20 companies that were never ac-

produces nondurable consumer products.

quired, two filed bankruptcy proceedings in

Meanwhile, an elevator company merged

the 1980s. One sold off its viable operations

with a producer of transportation equipment

and has otherwise ceased to ex ist. The other

and building systems.

Hall, Bronwyn H., "The Effect of Takeover
in Alan J. Auerbach, ed.,

Chicago Press, Chicago, 1988, pp. 66lDO.
Mork, Randall, Andrei Shleifer, and Robert
W. Vishny. "Characteristics

of Targets of

continues to operate under the supervision of

18. Three firms are engaged in steel produc-

the Bankruptcy Court.

tion, two in petroleum refining, and two in

Hostile and Friendly Takeovers," in

11. See Mork, Shliefer, and Vishny (1988).

the production of heavy industry equipment.

Alan 1. Auerbach, ed., Corporate

Browne and Rosengren (1987) find few dif-

The final company, a chain of retail food

Takeovers:Causes

ferences in the financial characteristics of the

stores, merged with a larger retail food store

two types of targets.

chain.

and Consequences,

National Bureau of Economic Research,
The University of Chicago Press,
Chicago. 1988. pp. 101-129.
Ravenscraft, David J. "The I980s Merger
Wave: An Industrial Organization
Perspective,"

in Lynn E. Browne and

Eric S. Rosengren, eds. The Merger
Boom: Proceedings of a Conference,

BULK RATE

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

Shleifer, Andrei, and Lawrence H. Summers. "Breach of Trust in Hostile
Takeovers," in Alan 1. Auerbach, ed.,

Address Correction

Corporate Takeovers: Causes and Con-

Please send corrected mailing label to

sequences, National Bureau of Eco-

the above address.

in Alan 1. Auerbach, ed., Corporate

Requested:

Chicago Press, Chicago. 1988. pp. 33-56.

Takeovers: Causes and Consequences,
National Bureau of Economic Research,
The Uni versity of Chicago Press,
Chicago. 1988. pp. 9-23.

Lynn E. Browne and Eric S. Rosengren,

Grothe was a summer intern at the Bank and

companies are sometimes bought by con-

6. See Caves (1987).

nomic Research, The University of

"Are Hostile Takeovers Different?" in

Federal Reserve Bank of Cleveland. Barbara

authors and not necessarily those of the

7. See Schleifer and Summers (1988).

Impact of Firm Acquisitions on Labor,"

Browne, Lynn E. and Eric S. Rosengren.

tributed to lower utility costs in the South

Erica L. Groshen is an economist at the

(due to the weather), the favorable business

Causes and Consequences, National
Bureau of Economic Research, The Uni-

1987. pp. 17-37.

Cambridge, MA: MIT Program on

buyers are stable or may fall slightly, is usual-

Reserve Bank of Cleveland Economic

ference Series Number 31, October

• References

result of acquisition, while stock prices of the

Commentary, October 8, 1984.

Federal Reserve Bank of Boston Con-

Birch, David L. The Job Creation Process,

Half of the acquired companies were
bought by multiproduct entities, although the distinction between durable

12, Thirteen companies were bought only
once, three were sold twice, and one com-

J. Auerbach, ed., Corporate Takeovers:

Employees of all of these firms now
work for much larger and perhaps more
efficient (or profitable) companies than
they did in the past. These employers
now make a wider variety of products,

-

• Footnotes
1, See Birch (1979). Other studies examine

eds. The Merger Boom: Proceedings of

Material may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editor.

U.S. Postage Paid
Cleveland,OH
Permit No. 385