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The Horizontal Merger: Its Motives and Spatial Employment ImpactsAuthor(s): Milford B. Green and Robert G. CromleySource: Economic Geography, Vol. 58, No. 4 (Oct., 1982), pp. 358-370Published by: Clark UniversityStable URL: http://www.jstor.org/stable/143460 .Accessed: 15/01/2011 07:53

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THE HORIZONTAL MERGER: ITS MOTIVES ANDSPATIAL EMPLOYMENT IMPACTS

MILFORD B. GREEN

University of Saskatchewan

ROBERT G. CROMLEY

University of Kentucky

This paper examines the importance of horizontal mergers as a form of invest-ment activity that has spatial ramifications. The complexity and motivations ofhorizontal mergers and the following rationalization process are illustrated by acase study of a firm in the pulp and paper industry. In addition, pre-merger andpost-merger employment levels of individual plants in a number of manufacturingsectors are compared for the period 1972-1978. Every industry and region of theUnited States experienced an increase in employment in the period immediatelyfollowing the horizontal merger. The rationalization process is seen as having apositive impact on employment levels in the short run.

The evolution of corporate capitalismhas generated significant changes inmodern industrial location theory. Re-searchers have shifted their interests fromthe locational decisions of the single plantfirm to the decisions of the multiplant,multiproduct conglomerate. In fact, Mas-sey [24] has questioned whether there canbe a locational decision for the firm that isseparate from other economic decisions.Recent criticisms of locational theoryhave emphasized the importance of rec-ognizing that locational choice andchange cannot be divorced from theoverall structure of the system in which

the individual firm resides [24; 40]. Atten-tion should be directed to aspatial activ-ities of the firm, such as investment deci-sions that have spatial ramifications.

For instance, for the single plant entrepreneur, the more frequent choice ini-tially is to decide what type of product isto be manufactured rather than whereproduction should be located [14]. Givenan uncertain environment ouside theentrepreneur's realm of experience, pro-duction is usually initiated in his hometown. Walker [39] has found that the loca-tional decision made by small, locally-controlled, single-plant firms are primar-ily non-economic in nature.

Additionally, as the firm evolves, itsgoals have grown from simple profit max-imization to multiple and sometimes con-flicting objectives such as growth of thefirm, larger control of the market, diver-sification of interests, and self-preser-vation [8; 13; 14]. Consequently, the tra-ditional issue of choice of location fornew manufacturing is submerged withinthe complex decision making organiza-tion of the company. The location deci-sion is often a non-issue, it is rather theconsequence of a firm's investment policy[37; 19]. Walker and Storper [40] arguethat investment decisions have predomi-

nance over location decisions because themode of capitalist reproduction requiresthe commitment of money capital to beinvested in fixed capital before there canbe a question of where to locate a newplant.

In fact, when a firm responds to exter-nal market pressure (i.e., changing de-mand, competition), its investment infixed capital can take several forms: (1)alter the output levels of existing plantsincluding closure; (2) relocate or opennewrplants; and (3) acquire control ofanother firm [13; 14].

Increasingly, the more common formof corporate behavior is acquisition or


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THE HORIZONTAL MERGER 359

merger. Dick [7] reports that large-scalebusiness corporations in the westernworld owe more to acquisition and mer-gers then to international expansionalone. Merger activity in the UnitedStates among large mining and manufac-turing companies (large being defined as$10 million or more in assets) accountedfor over 10.7 billion dollars worth ofinvestment in 1979 [9, p. 218]. Althoughthis activity has interested social scientistssince the 1890s, the motives and impactsof mergers are still not well understood[15; 21; 35].

The corporate merger is a significant

event in the life of a corporation, causingadjustments in management, employ-ment, and linkages. This paper examinesthe reorganization process for one formof acquisition-horizontal mergers. Fol-lowing the convention of Penrose [28]and Watts [41], mergers are defined asany combination of two or more firmswith the larger being considered the ac-quirer. No distinction is made betweenmergers and acquisitions because theeffects of the two are virtually indistin-guishable.

The research is undertaken from theperspective of the acquired firm and itshost area only. Difficulties in unravelingthe complex organizational structure ofmost acquiring firms, as well as lack ofdata, prevent a similar approach for ac-quiring firms.

GENERAL MERGER THEORIES

There are three major types of mer-gers: horizontal, vertical, and conglomer-ate [33, p. 33]. Each type is a response todiffering needs by the acquiring com-pany. Horizontal mergers expand controlof business activity in the same productline. The acquiring firm desires to in-crease its share of the market while simul-

taneously eliminating some of its compe-tition. Vertical mergers expand a firm'scontrol into allied product lines. In thiscase, the acquiring company desires toincrease its control over more sources ofsupply and distribution. Finally, conglom-

erate mergers, or diversification by ac-quisition, are an expansion by the ac-quiring company into new and differentproduct lines. The object is to reduce bus-iness risks by the acquiring company bydiversification of its interests. The bulk ofrecent merger research has concentratedon the conglomerate merger [3; 33].

However, the form of conglomeratemergers differs so much from case to casethat the Federal Trade Commission de-fines three distinct types that may beloosely classified as conglomerate mer-gers: product extension, market exten-sion, and other [9, p. 108]. A merger is

considered to be a product extensionwhen the acquiring and acquired com-panies are functionally related in produc-tion and/or distribution but sell productsthat do not directly compete with oneanother. A market extension merger oc-curs between companies that manufac-ture the same products but sell them indifferent geographic markets. Finally, theconsolidation of two essentially unrelatedfirms is grouped in the other category.

Although mergers differ in types, sev-eral major theories have been proposedto explain the general nature of mergerbehavior and activity. Beckenstein [3]suggests that the environmental condi-tions that motivate mergers can be broad-ly divided into those external to the firmand those internal to the firm. Externalforce theories suggest that merger activ-ity is largely a function of general busi-ness conditions. As the economy grows sodoes the number and size of firms. Alarger number of firms means greaternumbers of potential merger candidates.Concurrently, a strong economy impliesthat the average firm is experiencing astrong performance, making it easier toundertake a merger. However, such atheory is not without flaws. It is just asplausible to suggest that internal growth

would be undertaken. Secondly, whilethe number of firms available for mergermight increase, the improved economicconditions might also increase the possi-bility of a hostile reaction to a mergeroverture. A smaller firm that is doing well


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360 ECONOMIC GEOGRAPHY

may resist losing its identity, as recentarticles in the Wall Street Journal haveshown.

Institutional factors are also includedunder the external forces rubric. The twomost often cited are the possibility of taxsavings and the possibility of antitrustactivity. Tax considerations are of lesserimportance because of changes in taxa-tion laws regarding corporations. Anti-trust activity is particularly relevant forhorizontal mergers since they have been atraditional target of substantial enforce-ment activity [6].

A second group of merger theories

focus on internal forces in the life of afirm; these theories argue that mergers areundertaken to pursue continued corpo-rate expansion by managers. The returnto capital is greater for a young vigorousfirm relative to a mature firm. As capitalcosts increase, it becomes more profitableto internalize the growth opportunities ofyounger firms by merger. Substantial in-flation rates in recent years have also-made purchases of existing companiesless costly than investment in researchand development or the construction ofnew plants. Additionally, the acquirerbenefits from the elimination of produc-tion start-up time, sometimes as much astwo years, as well as from procuring theestablished clientele of the acquired firm[4].

Gort [12] argues that mergers also oc-cur because there are discrepancies be-tween the valuation placed on the firm byinsiders versus outsiders. Such discrepan-cies may be the result of inadequateinformation on the part of outsiders aswell as the random altering of expecta-tions. Other motivations included hereare the pursuit of monopoly power andscale economies, both long thought to bemajor reasons for horizontal mergers.

Finally, organizational interdepen-

dence theory [29, pp. 112-142] suggeststhat mergers are a response to an uncer-tain and unstable environment. Organiza-tions that are interdependent require ex-changes of resources for survival, al-though the availability of these resources

is uncertain. While this approach can beused to analyze all types of mergers, onlyits relationship to horizontal mergers ispresented here.

The horizontal merger is an attempt toincrease the firm's dominance in its inter-change relationship, thus reducing uncer-tainty. The acquisition of rivals also per-mits the firm greater control over itsexternal environment [29]. This approachis complementary to various geogra-phers' constructs regarding firm acquisi-tion behavior [20; 27]. Pfeffer and Sala-nick test this theory by examining thehypothesis that mergers could partially

be explained by the transaction relation-ships between firms. They found that arelationship does exist between a numberof mergers within an industry and thedegree of interconnectiveness of the in-dustry within itself.

This theory also implies that naturalresource based industries should exhibit ahigher degree of horizontal mergers thanother types of industries. The heavy de-pendence of these industries upon a rela-tively few number of suppliers makethem vulnerable to demands by the sup-pliers. Even small suppliers could be anannoyance if they were not properlydominated.

THE POST-MERGER SPATIALRATIONALIZATION PROCESS

The majority of past-merger research,however, suffers two major shortcom-ings. First, mergers are often analyzed asa homogenous whole, while, in fact, eachhas its own unique set of motivating fac-tors and consequences. A second majorshortcoming is that the spatial impact ofmerger activity is generally ignored.While it is clear that the relocation oropening of a new plant has spatial impli-cations, only recently has there been a

growing awareness of the spatial elementin industrial acquisition behavior [20; 24].A major consideration for the success ofany acquisition is the geographical com-patibility of the production and market-ing operations of the acquiring and ac-


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quired companies [22, p. 44]. The periodof post-acquisition integration usuallyinvolves not only the reorganization ofmanagerial control and changes in prod-uct lines but also a rearrangement in thelocation of factories and other corporatefunctions [16].

Watts [41] suggests that three basic spa-tial rationalization policies exist:

(1) Specialization-the concentrationof functions that permits realiza-tion of economies of scale.

(2) Concentration and Partial Disin-vestment-the concentration of pro-duction at fewer sites, allowing forsavings in services and linkagesbetween plants.

(3) Complete Disinvestment andGreenfield Site-the concentrationof production at a greenfield site.

Also, acquisitions do not always turnout well [22]. One survey reveals thatover 50 percent of firms that undertook an

acquisition replied they were dissatisfiedwith the outcome [35]. However, withinone's own industry the intelligence net-work reduces the probability of a poormerger choice [16]. Unsuccessful mer-gers result in a fourth policy:

(4) Complete Disinvestment andWithdrawal-the total or almosttotal removal of a newly acquiredfirm's facilities from the acquiringfirm's facilities. This may occurwhen a merger is undertaken thatlater becomes too burdensome forrationalization to occur. Anotherpossibility is the acquisition of afirm with the intent of stripping itof its assets and selling the assets tomake a profit.

The impact of mergers on regionaldevelopment is also inconclusive. North[27] concludes that firms do not explicitlyconsider locational parameters in makingmerger decisions for diversification strat-egies. When attempting horizontal andvertical integration, firms preferred to

acquire candidates near the corporateheadquarters location. Also, Leigh andNorth [20] contend that mergers are oftenbeneficial with respect to employmentand output expansion. Acquired plantsoften experienced increased levels of cap-ital investment although at low levels.The long-run consequences of manage-ment change and product change weredeemed uncertain. Erickson [8], on theother hand, suggests that the employmenteffects of acquisitions are less certain.

There are two major reasons for choos-ing horizontal mergers for investigation.First, horizontal mergers are the domi-

nant merger type in Western economieswith the exception of the United States.Historically the United States federal gov-ernment has taken the position thatmergers in general, and horizontal mer-gers in particular, have adverse effects onthe competitive structure of the econ-omy. It is not unreasonable to assume thatif a free market in mergers existed in theUnited States, horizontal mergers wouldassume greater importance. Secondly,horizontal mergers are typical of large,single-product enterprises. Thus, a suc-cessful merger requires greater spatialcompatibility among the production unitsof the joining companies than either ver-tical or conglomerate mergers. Theorganizational structure of single-productfirms display reciprocal interdependence,implying that the locations of all unitswithin the organization are interrelated.

Therefore, the acquiring firm will usuallychoose an acquisition with a complemen-tary locational pattern. The period ofpost-merger integration should primarilyinvolve reorganizing suppliers and mar-ket areas rather than relocation or closingold plants and opening new ones. Thus, itis easier to assess the success of horizontalmergers than either vertical or conglom-erate mergers by locational and employ-ment change in production.

A CASE STUDY OF THE HORIZONTALMERGER RATIONALIZATION PROCESS

The complexity of the rationalization


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362 ECONoMic GEOGRAPHY

process is best illustrated by examining anactual horizontal merger. The merger inquestion is the Riegel Paper Corpora-tion's acquisition by Federal PaperboardCorporation. Riegel Paper was a medium-sized manufacturer of folding cartonsand specialty paper products with salesof $191 million in 1971. The companyowned facilities in North Carolina, NewYork, and New Jersey, as well as 235,000acres of timberland with an additional115,000 acres on long-term lease.

In 1970 Riegel undertook an acquisitionprogram to diversify its holdings. Tech-nibuilt, a manufacturer of pre-engineered

housing, and Mohawk Paper Company, amanufacturer of book covers, were ac-quired. The company also acquired hold-ings in real estate with its CommunityConcepts, a builder of condominiums.

The paper industry in the late 1960s andearly 1970s suffered from sluggish salesand weak prices [2]. The industry as awhole was plagued by excess capacityand outdated plants. Consequently, anumber of firms undertook divestiture ofsome of their facilities. The chief execu-tive officer of Riegel decided that becauseof their medium size, they could notcompete in the capital intensive pulp andpaper segments of the industry. This por-tion of the company was to be sold tolarger corporations that could compete,while retaining the low capital packagingdivision [11]. The ensuing merger processis illustrated in Figure 1.

In June of 1971, Riegel Paper andSouthwest Forest Industries agreed to amerger plan of the two firms. SouthwestForest would acquire the paper and realestate portion of Riegel, while the pack-aging and industrial divisions of the com-pany would form a new corporationowned by the stockholders of Riegel. Thechairmen of Southwest Forest stated thatthe acquisition was being undertaken toremove the need to make a public offer-ing of shares to finance expansion of theirPhoenix, Arizona mill. Riegel was seen asa source of capital investment funds.

Federal Paperboard during the periodbetween June and December of 1971

decided to bid for Riegel's facilities. Fed-eral Paperboard won the ensuing biddingprocess. Federal Paperboard's decisionto acquire Riegel was motivated by Rie-gel's folding carton plant in Riegelwood,North CarQlina, as well as its timber hold-ings. Federal Paperboard manufacturedpaper products from wastepaper and theacquisition of Riegel would allow thecompany to undertake production fromvirgin timber.

Federal Paperboard acquired the papermills in New Jersey, the folding cartonplant in North Carolina, and two real es-tate subsidiaries, one of which was Com-

munity Concepts. The packaging andindustrial division of Riegel were spun offinto Rexham Corporation, headed by thepresident of Riegel.

The New Jersey paper mills were thensold to a former Riegel executive to formRiegel Products. An undisclosed amountof capital for the purchase was suppliedby Southwest Forest. Riegel Productswas shortlived, being acquired that sameyear by Southwest Forest. SouthwestForest subsequently closed its Phoenixmill, that it wanted to renovate using cap-ital supplied from a merger with RiegelPaper. Southwest Forest also acquiredGeneral Box, allowing it to expand itsoperations in paperboard, something thatit did not accomplish with the failure ofthe merger with Riegel Paper.

The rationalization process was not yetcomplete. Federal Paperboard sold Com-

munity Concepts to a minority stock-holder of Community Concepts. Federalalso purchased a paper mill from RexhamCorp., while also undertaking expansionof several mills and the construction of anew mill in North Carolina in a joint ven-ture with Canal Industries.

This case study reveals several factorsthat operate in most of the horizontalmergers reviewed. One is that the indus-try is often undergoing a period of stressand readjustment. This was especiallytrue for the meat cutting firms, the papercompanies, and the petroleum com-panies. The second major factor was theaccess to raw materials. Many of the


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Community Concepts REGEL PAPER Moawk Pap er

[Technibuilt

SOUTHWEST FOREST gX \ INDUSTRIES

FEDERAL Rexham RiegelPAPERBOARD Products

MohawkdMilford,N.J.Paper p Plants

Community Versailles,Conn.Concepts Plant

Canal New Jersey Warner GeneralIndustries Packaging Packaging Box

Plant Os

New Mill Fibreboard PhoenixRiegelwood, Plant Plant

N.C.

| Merger,...----0 Financial Backing

-1 Attempted Merger- Spin Off

Fig. 1. Riegel Paper Merger Process.

mergers were undertaken to gain controlof supplies of raw materials, thus reduc-ing risk. The petroleum industry is anobvious case in point. Finally, the acquisi-

tions were characterized by capital invest-ment in the acquired firm by the acquir-ing firms for plant expansion and moderni-zation. A classic example was the acquisi-tion of the color television division ofMotorola by Matsushita of Japan. The

acquiring company totally refurbishedthe plant trying to make an uncompeti-tive plant competitive. The process even-tually paid off.

THE HORIZONTAL MERGER INPERSPECTIVE

The relative importance of each type tooverall merger activity can be seen in


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180_

160-

140-

@ 120-

100-0

E 80-DE

Z 60-

40- IV'_ Z'9

20X/_

1950 52 54 56 58 60 62 64 66 68 70 72 74 76 78Year

Horizontal MergersAll Mergers except Horizontal

Fig. 2. Trends of Large Corporate Mergers.

Table 1, from a review of numerousmergers. Horizontal mergers accountedfor 16.9 percent of the number of all largemergers for the period 1948-1978, whilefor the time period of our study, 1972-1978, they accounted for 22.6 percent.Similar percentages are seen for assetsacquired. While horizontal mergers arenot the dominant type, they are certainlyan important component.

Because horizontal mergers are a sub-stantial portion of general merger activ-ity, the question that logically follows is:Do horizontal mergers follow the sametrends as other types? Figure 2 shows thenumber of horizontal mergers per yearversus all other types of mergers. Thelevel of horizontal merger activity doesnot follow the overall pattern.

In fact thelevel of horizontal merger activity hasbeen relatively constant, even during themerger boom period of 1966 to 1969. Itis evident, then, that horizontal mergermotivations are somewhat independent

of those that operate on other types ofmergers. Thus, it is impossible to rely tooheavily upon merger theories designed toexplain overall merger activity.

If horizontal merger trends are unre-lated to overall activity, one might sup-pose that firms that undertake a horizon-tal merger are somehow different. Table2 shows the series of tests performed onthe horizontal merger acquiring firm andacquired firm versus the four other types.The table clearly demonstrates almostwithout exception that no difference existsbetween the horizontal merger firm andthe other types.

A difference might lie in the resourcerelationships of horizontal merging firmsas Pfeffer and Salanick suggest. If this

suggestion is valid, then a greater thanaverage number of horizontal mergersshould occur in industrial classes that areheavily resource dependent. Table 3shows the numbers of horizontal mergersby SIC class versus all horizontal and all


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TABLE 1

LARGE ACQUISITIONS IN PUBLICLY HELD MANUFACTURING AND MINING FIRMS BY TYPE OF ACQUISITION

Number of Firms Assets AcquiredType of Billions of DollarsAcquisition 1948-1978 1972-1978 1948-1972 1972-1978 1948-1972 1972-1978 %

Horizontal 326 121 16.9 22.6 18,292 5,464 16.8

Vertical 196 43 10.2 8.0 10,094 2,468 9.3

Conglomerate 1404 371 72.9 69.3 80,605 22,322 74.0

Product Extension 829 174 43.0 32.5 36,729 7,740 33.7

Market Extension 76 18 3.9 3.4 6,380 1,472 5.9

Other 499 129 25.9 33.5 37,496 13,109 34.4

Source: Bureau of Ecoomics, Federal Trade Commission, Statistical Report on Mergers and Acquisitions, 1979, July,1981, Tables 19 and 20, p. 9.

TABLE 2

TESTS OF HORIZONTAL MERGERS VERSUS OTHER TYPES OF FIRMS OVER $10 MILLION IN ASSETS OF ACQUIRER

Product Market OtherVertical Extension Extension Conglomerate Horizontaln = 22 n = 175 n = 15 n = 179 n = 122

Mean Assets 110752.5 83569.8 12728.3 85041 59623.4of Acquiring t = -1.53 t = -1.30 t = -3.47 t = -1.38Firm (.133) (.193) (.001) (.170)

Mean Assets of 597.4 447.9 818.3 714.9 478.8Acquired Firm t = -.70 t = .28 t = -1.23 t = -1.63

(.483) (.781) (.233) (.104)

Mean Profit of 27.7 32.6 53.6 46.18 23.7Acquired Firm t = -.38 t = -1.81 t = -2.07 t = -3.21Year Prior to (.704) (.072) (.053) (.002)Acquisition

Mean Amount 318.8 373.2 536.7 503.9 349.9Paid for Firm t=.31 t =-.32 t = -.30 t= -1.51

(.755) (.748) (.166) (.133)

Mean Sales of 863.7 669.1 309.4 982.0 593.4Acquired Firm t= -.97 t= -.54 t= -1.42 t = -2.38Year Prior to (.338) (.543) (.172) (.018)Acquisition

other types of mergers. The three classesin which horizontal mergers are domi-nant-mining, petroleum refining, andpaper-are all heavily dependent uponnatural resources. Of the three, petro-leum refining is the class most completelydominated by horizontal mergers. Suchmergers are an attempt to acquire petro-leum reserves that are known instead ofpursuing the riskier exploration path.

EMPLOYMENT CHANGE, PRIOR ANDPOST-MERGER COMPARISONS

The merger of a firm can be expectedto affect a region in a number of ways:employment change, service and mate-

rial linkage changes, and changes in man-agement. Of these, employment prob-ably has the greatest short-run impact onthe local community and region. Thisarea of change has received the leastamount of attention in examination ofmergers, outside of interest in plant clo-sures and openings. To examine this em-ployment change, employment levels (tothe nearest hundred employees) wereobtained for 191 plants. These plants

represent 74 of the 122 firms that under-took horizontal mergers in the period1972-1978. The level one of two yearsbefore the merger and the level one ortwo years after the merger were com-pared. This of course assumes that the


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TABLE 3

DISTRIBUTION OF HORIZONTAL MERGERS BY SIC, 1972-1978, WITH GREATER THAN 1% OF ALL HORIZONTAL MERGERS

% f all % f allTotal Horizontal Mergers in % f all

Number Mergers Industry Class Mergers

*Mining 4 3.3 40 7*Petroleum

Exploration 17 13.9 70.8 3.2Food 15 12.3 23 2.6Apparel & Textiles 3 2.5 44.4 1.8

'Paper 7 5.7 53.8 1.3Printing & Publishing 5 4.1 35.7 .9Chemicals 5 4.1 11.1 .9Petroleum 2 1.6 40 .4Rubber & Plastics 2 1.6 25.0 1.6Stone, Clay, Glass

& Cement 2 1.6 11.8 .4Primary Metals 5 4.1 19.2 .9Fabricated Metal

Products 2 1.6 11.1 .8Non-electrical

Machinery 11 9.0 23.9 2.0Electrical

Machinery 8 6.6 17.8 1.5Transportation

Equipment 3 2.5 10.7 .6Instruments 2 1.6 28.6 .4Miscellaneous 2 1.6 28.6 .8Holding Company 9 7.4 14.6 1.7

? Horizontal merger is dominant type in this class.

Lambda (symmetric) = .1208 for cross-tabulation of all 5 mergertypes with SIC classes.

TABLE 4

TESTS OF EMPLOYMENT CHANGE FOR INDIVIDUAL PLANTS

(Difference)Mean t-Value Probability n

Single City Plants 1.73 2.39 .02 34

Multicity Plants -.75 -1.43 .16 88

Foreign AcquiredPlants -.54 -.53 .60 28

All Plants -.06 .13 .90 122

merger was the dominant factor thataffected employment change, if any, dur-ing that time period. In most cases, it wasimpossible to determine if a plant thatdisappeared from the data was due toclosure or transfer of ownership. If itcould be determined that the plantchanged owners, the employment levelwas traced and entered in the data set. Ifthe plant disappeared, it was treated asmissing and was not included in theanalysis.

A t-test analysis compared employ-ment levels before and after the merger.The entire collection of plants was testedas well as subsamples of plants that are a

part of a multicity network as opposed tothose plants that are single plants or plantsall located in a single city and thoseacquired by foreign corporations. Ofthese tests the only significant one was acomparison of employment levels of sin-gle city plants (Table 4). The single cityplants had significantly higher employ-ment levels after the merger. It should benoted that on average only single cityplants increased their level of employ-ment, while the others had a statisticallyinsignificant decrease. This result agreeswith the findings of Leigh and North [20]in Britain.

The mean employment change by the


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TABLE 5

SIC DISTRIBUTION F MEAN EMPLOYMENT HANGEFORINDIVIDUAL LANTS AND ACQUIRING IRMS COMPARING RIOR

AND POST-MERGER MPLOYMENT

Mean % Change

Mean % Change for Plants byfor Plant by Acquiring Firm'sSIC Class its Class Class

Food 9.9 (11) 6.3 (18)Textiles 5.0 (8) 1.5 (2)Apparel 3.7 (12) 6.4 (6)Lumber .95 (11) 13.1 (2)Furniture 2.6 (9)Paper & Allied

Products 2.8 (16) 1.1 (20)Printing 1.1 (4) 1.2 (8)Chemicals 1.0 (14) 4.7 (7)

Rubber & Plastics 3.9 (7) 6.2 (4)Stone, Clay, Glass

& Concrete 17.8 (16) 9.0 (14)Primary Metal .9 (5) .9 (5)Fabricated Metal

Products .9 (8) 1.5 (2)Non-electrical

Machinery 2.5 (18) 1.3 (11)Electrical Machinery 2.6 (34) 3.3 (32)1Transport Equipment 1.0 (27)Instruments 1.3 (6) .6 (3)

(1) Sample size in parentheses.

SIC class of plants in the sample wasexamined next. For sample plants, thelargest increases for the plant by its SICclass was found in food and the stone,clay, glass, and concrete sectors (Table5). As Table 6 reveals, the single city plantand multicity plants are not equally dis-tributed among the SIC classes. Food is

dominated by multiplant firms. Tables 5and 6 show that the food industry isundergoing a change to a multiplant in-dustry. Apparel, the only other industryto have a strong single plant character,was also moving in that direction, butmore slowly, due to need for response torapidly changing market conditions andmarket proximity. Schere [30] points outthat brewing, petroleum refining, glassbottle, and cement industries have geo-graphic dispersion as their dominantmotives in a multi-plant firm. Employ-ment increases in such plants are expectedif they are undertaking plant acquisitionto extend themselves graphically. Again

the heavily resource dependent industriesare predominant.

The pattern of mean employmentchange by the SIC class of the acquiringfirm is less obvious. Again stone,

clay,and

glass exhibits a large increase as doesfood, but additional industries, such aslumber, share substantial increases. Suchincreases must be viewed with cautionsince a firm which is acquired may haveplants that produce products outside ofits primary SIC classification. An acquir-ing firm thus acquires some plants thatmay not be of primary interest, but stillcan be profitably operated. Also, thesmall number of firms (in the case oflumber) should be noted.

Since different parts of the countryexperience their own set of business con-ditions as well as problems, regional dif-ferences might exist in terms of employ-ment change. However, an analysis ofvariance under a number of differentregionalizations revealed no significantdifferences by region for employment

change (Table 7). Again, the mean in-crease was positive in all cases. The tworegions of the largest mean increases,Mississippi and New England, are domi-nated by stone, clay, and glass and elec-trical machinery, respectively. Stone,clay, and glass is a high employmentincrease industry as seen previously, whilethe electrical machinery industry of NewEngland in this sample is of the highgrowth computer type. Overall though,the results suggest little regional variation.

The general conclusion that can bedrawn is that a horizontal merger main-tains or improves the employment figuresfor acquired plants, at least in the short-run. These results counter often citedfears of local and regional catastropheassociated with employment decline.Some industrial classes do better thanothers in employment increase, but re-

gional influences seem to be unimportantin comparison.

CONCLUSIONS

The complexity and motivations of the


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368 ECONOMIC EOGRAPHY

TABLE 6

DISTRIBUTIONS OF ACQUIRED PLANTS AND ACQUIRING FIRMS

Single City Multiple City -AcquiringSIC Class Plants Plants Firm

Food 8 3 12Textiles 3 5 1

Apparel 6 6 3

Lumber 3 8 1

Furniture - 9

Paper & Allied Products 4 12 6

Printing 2 2 5

Chemicals 2 12 4

Rubber & Plastics 1 6 2

Stone, Clay, Glass

& Concrete 1 15 4

Primary Metal 1 4 3

Fabricated Metal

Products - 8 2

Non-electrical

Machinery 5 13 8

Electrical Machinery 3 31 7

Transport Equipment 1 - 3

Instruments 1 7 1

Holding Company - - 5

TABLE 7REGIONAL DISTRIBUTION OF MEAN EMPLOYMENT CHANGE FOR INDIVIDUAL PLANTS

COMPARING PRIOR TO POST MERGER EMPLOYMENT

Mean & Standard Number ofChange Deviation Plants

Mississippi RegionLouisiana, Mississippi 6.2 13.9 28Arkansas, Texas

South Atlantic RegionGeorgia, Florida,South Carolina, 2.1 4.1 21Alabama

Western RegionCalifornia, Washington 1.1 .78 13

New England RegionMaine, Massachusetts,New Hampshire, 4.8 11.4 8Connecticut

Midwest RegionOhio, Indiana,Illinois, Wisconsin, 1.5 3.2 36Minnesota

Middle Atlantic RegionNew York, New Jersey,Delaware, Pennsylvania, 3.1 9.0 41Virginia, North Carolina


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rationalization process undertaken byRiegel Paper illustrate nicely the neces-sity of examining not only the locationalchanges but the economic environmentof the time. Divestitures and acquisitionsof individual plants as well as firms areoften motivated by a combination of spa-tial and aspatial factors.

In a more empirical sense this paper hasdemonstrated that the horizontal mergercan be very complex and involves a num-ber of ownership changes for a singleplant in a short period of time. Stress in anindustry also seems to be an importantcomponent in the occurrence of horizon-tal mergers.

Following a horizontal merger, indi-vidual acquired plants in the short runincrease employment. This was true forevery industry class and region, althoughthey differed in degree. Single city plants,which tended to be small, benefitted sig-nificantly from a merger with a largerfirm. This may be due to attempts toexploit economies of scale, as is the oftensuggested reason for horizontal mergers.These results are contrary to the oftencited fears about the effects of an acquisi-tion on the local community. Of course,such instances can be found, but theyseem to be the exception rather than therule.

Additional research should examine theother changes in an acquired firm and itsfacilities, such as service and material link-age changes, as well as the degree ofautonomy enjoyed by the managementof an acquired plant. Some of this re-search has been undertaken in Great Brit-ain [20; 27], but much is left to be done forthe United States.

LITERATURE CITED

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3. Bechenstein, Alan R. Merger Activity andMerger Theories: An Empirical Investigation,The Antitrust Bulletin, Spring (1979), pp. 105-28.

4. Bradley, James W. and Donald H. Korn. Acqui-sitions and Mergers: A Shifting Route to Corpo-rate Growth, Management Review, March(1979), pp. 46-51.

5. Corporate Merger Activity in Selected FourthDistrict Cities, 1950-1967, Economic Review,Federal Reserve Bank of Cleveland, Cleveland,Ohio, Oct. (1968), pp. 3-10.

6. Cotterill, Richard W. and Willard F. Mueller.The Impact of Firm Conglomeration on Mar-

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(1980), pp. 557-82.7. Dick, P. The Multiplant Business Enterprise

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9. Federal Trade Commission, Statistical Reporton Mergers and Acquisitions, August, 1980.

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Adjustment Patterns in the European SteelIndustry, Tijdschrift Voor Econ. En. Soc.Geografie, Vol. 57 (1962), pp. 177-99.

11. Forbes. Something for Everyone, March 15(1972), p. 68.

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13. Hakanson, Lars. Towards a Theory of Loca-tion and Corporate Growth, Spatial Analysis,Industry and the Industrial Environment.Edited by F. E. Ian Hamilton and G. J. Linge.Chichester: John Wiley, 1979.

15. Hamilton, V. B. The Business Protection Actand the Control of Conglomerate Mergers,Texas Law Review, Vol.38 (1980), pp. 588-621.

16. Hennessey, J. H. Acquiring and Merging Busi-nesses. Prentice-Hall Inc., Englewood Cliffs,N.J., 1966.

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Determinants and Effects of Mergers. Editedby Dennis C. Mueller. Cambridge, Mass., Oel-geschlager, Gunn and Hain, 1980.

18. Kierulff, Herbert E. Finding the Best Acquisi-tion Candidates, Harvard Business Review,January-February (1981), pp. 66-8.

19. Krumme, G. Toward a Geography of Enter-prise, Economic Geography, Vol. 45 (1969),pp. 30-41.

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