The effects of conglomerate mergers : A survey of the empirical evidence

The United States has experienced 3 large merger waves within the last century. Each has coincided with a period of strong economic and stock market advance. Each has come to an end along with the collapse of these bull markets and the recessions or depression that followed. The positive relationship between merger activity and stock market and economic advance is one of the well established if unexplained riddles of this literature [see, in particular, Nelson (1959, 1966); Reid (1968); and Beckenstein (1977)1. The first major merger wave has been described by Stigler as a wave to create monopolies; the second a wave to create oligopolies (1950). The third might be called a wave to create conglomerates. For the distinguishing feature of the mergers occurring in the 1960s was certainly the extent to which these mergers tended to diversify or extend the acquiring companies' product mixes. Reid, Markham, and Steiner have all noted that many of these mergers were not between firms as unrelated in their business activities as the word 'conglomerate' or some of the literature discussing them might imply. 1 Their point is well taken. Nevertheless, a substantial difference does exist between the acquisitions characteristic of this most recent period, and the ones which brought the Standard Oil Company and General Motors together, in terms of both their potential market power advantages, and their potential for plant and production economies, as all observers of the recent wave have admitted. This difference has made it difficult to explain conglomerate mergers in terms of the market power and economic efficiency advantages that have traditionally been put forward as the motives behind mergers. Not surprisingly therefore a new set of hypotheses about the causes (and effects) of mergers has appeared to explain this new form of merger.