The Human Factor in Acquisitions

Why do firms diversify into unrelated product markets? Internal labor markets allow firms to reallocate workers in response to industry shocks. They also strengthen workers’ incentives to invest in transferable, productivity-enhancing skills. Thus, the transferability of human capital can be a source of merger synergies. To test this hypothesis, we construct an index of human capital transferability using more than 11 million job changes. We show that diversifying acquisitions occur more frequently among industry pairs with higher transferability. The effect is roughly 1.7 times the size of the effect of product market relatedness. Diversifying acquisitions between industries with higher human capital transferability result in larger labor productivity gains and are less often undone in subsequent divestitures. Moreover, firms retain more high skill workers after acquiring new industries with high human capital transferability to their existing industries and they exploit the real option to move workers from the target firm to jobs in other industries inside the merged firm. Overall, our results identify the utilization of human capital as a source of value from corporate diversification. JEL codes: G34, J24, J62, M51, M54.