The Role of Technical Efficiency in Takeovers: Evidence From the French Cheese Industry, 1985-2000

The paper aims to identify whether production characteristics, such as technical efficiency and returns to scale, affect takeovers. Applying a two-stage procedure on original panel data on French cheese manufacturers, the paper first estimates firm-specific productive efficiency and scale economies using Data Envelopment Analysis. The paper then uses the findings of the first stage to evaluate a random effects logit model of the determinants of takeover in the French cheese industry for the period 1985-2000. The paper finds that technical efficiency is not a significant determinant of takeovers, whereas the nature of scale economies is. Firms with Decreasing Returns to Scale (i.e. an over-sized production capacity) face a higher risk of takeover. This suggests that cheese manufacturers have been seeking to expand their milk processing capacities by acquiring large firms. This proves to be an indirect consequence of the non-transferable milk quota regime affecting the scarce milk input commodity.