Determinants of conglomerate and predatory acquisitions: evidence from the 1960s

We estimate continuous-time event-history models of the acquisition of conglomerate vs. non-conglomerate and predatory vs. friendly acquisitions among the 1962 Fortune 500 between January, 1963, and December, 1968. Our analysis of predatory acquisitions reveals that there were strong disciplinary motivations for these acquisitions in the 1960s. Q ratios were, by a large margin, the most important determinant of predatory acquisition likelihood. Surprisingly, however, corporate boards appear to have provided little alternative to predatory acquisition as a monitoring mechanism during this period. Friendly acquisitions, on the other hand, were concentrated among firms with low price-earnings ratios and high return on equity, suggestive of the earnings manipulation story often associated with conglomerate acquisitions. Our analysis of conglomerate acquisitions reveals that there were strong disciplinary motivations for conglomerate acquisitions during this period. Conglomerate targets had low Q ratios and were as likely as non-conglomerate targets to be acquired in a predatory fashion. We find no evidence that conglomerate acquisitions were motivated by a desire to improve earnings-per-share numbers, as some have maintained. This research has benefited from the invaluable comments of G. Bittlingmayer, K. Lehn (the editor), W. Mikkelson, A. Shivdasani, J. Walsh, L. Zingales and participants at the Empirical Issues in Corporate Finance session of the 1994 AFA Meetings in Boston. Paul Krueger provided careful research assistance. All errors are our own. * Corresponding author. 0929-1199/95/$09.50 © 1995 Elsevier Science B.V. All rights reserved SSDI 0929-1 1 99(94)00007-7 284 B.M. Barber et al. /Journal of Corporate Finance 1 (1995) 283-318 In addition, regardless of type or tenor, we find managerial ownership, firm size, and industrial organization motivations for acquisition are consistently important determinants of acquisition likelihood.