Strategic relatedness between bidding and target ﬁrms, as deﬁned in equa- tion (10.1), is not a suﬃcient condition for the shareholders of bidding ﬁrms to earn competitive advantages from mergers or acquisitions (Jensen and Ruback 1983; Lubatkin 1983). If the value of the combined cash ﬂow of target and bidding ﬁrms is publicly known, if several potential bidding ﬁrms can all obtain this cash ﬂow, and if semi-strong capital market eﬃciency holds (Fama 1970), then shareholders of bidding ﬁrms will, at best, gain only competitive parity from acquisitions. In this setting a ‘strategically related’ merger or acquisition may create economic value, but this value will be distributed in the form of superior returns to the shareholders of target ﬁrms. This conclusion follows directly from the equilibrium expected in perfectly competitive markets (Hirshleifer 1980), in this case the market for corporate control (Jensen and Ruback 1983).
The price of a target ﬁrm in such markets will rapidly rise to its NPV in creating synergies with bidding ﬁrms, that is, k will tend to 0. The price of a target will not be less than this level, for if it were, another bidder, seeing an opportunity for superior returns, would drive the price up (Barney 1986a).2 Bidding ﬁrms that complete a merger or acquisition in this setting will not obtain superior returns, even if they are completely successful in exploiting anticipated relatedness with a target, for the value of that relatedness will be reﬂected in the price of a target (Barney 1986a), and thus distributed as superior returns to the shareholders of acquired target ﬁrms.3
Diﬀerent bidding ﬁrms may have diﬀerent types of relatedness with tar- get ﬁrms, and these competitive dynamics still unfold. All that is required is that these diﬀerent bidding ﬁrms value targets at the same level. However, in real markets for corporate control, it seems likely that when diﬀerent bidding ﬁrms value the acquisition of targets at the same level, the type of relatedness that exists between one bidder and targets is likely to be quite similar to the type of relatedness that exists between other bidders and targets.4 This homogeneity in relatedness leads to a homogeneity in the valuation of targets, which in turn leads to zero economic proﬁts for bidders on acquisition.
The frequency with which markets for corporate control are perfectly competitive in this manner is ultimately an empirical question. However, in general these conditions seem at least plausible. It is not diﬃcult to imagine a set of similar ﬁrms pursuing the same strategy in an industry all becoming interested in a particular type of acquisition to implement that strategy. In this setting, perfect competition dynamics are likely to unfold, and ﬁrms that successfully acquire a target are likely to earn zero economic proﬁts for their shareholders. In all likelihood the manager who successfully ‘snatches’ a target from several competing ﬁrms will have paid a price for that target that fully anticipates any competitive advantages associated with that acquisition. Such acquisitions cannot be expected to generate superior returns for the shareholders of this successful bidding ﬁrm.
Empirically, Ruback’s analysis (1982) of DuPont’s takeover of Conoco suggests that this acquisition probably occurred in a perfectly competitive market. Also, Singh and Montgomery’s research (1987), which showed that strategically related acquisitions created more economic value than unrelated acquisitions, but that this value was captured by the shareholders of acquired ﬁrms, suggests that these acquisitions occurred in perfectly competitive markets.
Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.