Merger Integration and Merger Success

We examine the importance of merger integration risk to the outcomes of mergers using new product-based ex ante measures of integration risk at the firm and firm-pair level. Our ex ante measures are significantly associated with ex post statements by managers in their 10-K indicating difficulties with merger integration and also employee retention issues. We find that firms performing acquisitions in high product integration risk markets experience lower ex post profitability, higher ex post expenses, and a higher propensity to divest assets. Upon announcement, acquirers experience lower announcement returns and targets experience significantly higher announcement returns when product integration risk is high. Examining long-term stock market returns, we find that the well-known anomaly that acquiring firms have lower longerterm stock returns primarily occurs in markets where product integration risk is high. ∗University of Southern California, and Tuck School at Dartmouth and National Bureau of Economic Research, respectively. Hoberg can be reached at [email protected] and Phillips can be reached at [email protected]. We thank Christopher Ball for providing us with access to the metaHeuristica database. We also thank seminar participants at the University of Amsterdam, Hong Kong Polytechnic University, Tilburg University, Tsinghua University and the University of Southern California for helpful comments. All errors are the authors alone. Copyright c ©2015 by Gerard Hoberg and Gordon Phillips. All rights reserved.