Less profitable, rather than less efficient companies are more likely to be acquired in mergers, according to new research from the University of Chicago Booth School of Business.
According to Acquisitions, Productivity and Profitability: Evidence from the Japanese Cotton Spinning Industry, acquired companies typically have better equipment, but are not as well managed as the acquiring company.
“One clear lesson of our findings is that acquisitions on average move productive resources to managers and organizations that are better able to use those resources — ‘better able’ in multiple dimensions — than their original owners,” Chad Syverson, Chicago Booth professor and co-author of the study, stated in a news release.
Findings show that more profitable companies realign production to better handle demand and implement management practices to make better use of existing productivity. This boosts success of the purchased firm, the study found.
While data for this study was acquired from the Japanese cotton spinning industry between the late 1800s to early 1900s, researchers believe ties between ownership, productivity and profitability remain applicable and can be applied in developing countries.