Mergers Within the Same Industry: Reducing Competitive Uncertainty

Some industrial mergers are made between organizations in the same industry. Such within-industry mergers can represent either attempts to gain control over organizations with which one does business, as there are with in-industry transactions, or attempts to gain control over competitor organizations to increase the firm’s dominance in exchange relationships. Because of the ‘ large numbers of firms and activities included in the same two-digit SIC classifications, significant transactions occur between firms in the same industry, and thus the management of symbiotic interdependence must be considered along with the management of competitive uncertainty in developing predictions about the extensiveness of within-industry merging.

1. Symbiotic Interdependence

Following the previously developed arguments about the relationship between transactions interdependence and merger patterns, we would expect to observe a relationship between the proportion of mergers made within the same industry and the proportion of transactions within the industry. This hypothesis assumes that mergers are being , made to control symbiotic interdependence. Examining the proportion of mergers made within the same industry as the dependent variable, the following correlations were observed:

As with the entire sample of mergers, within-industry mergers are significantly related to patterns of resource exchange, although the relationships are not as strong. Again, the level of industrial concentra- tion does not predict the extent to which firms merge within their own industries, nor is profitability significantly related to merger activity. If anything the negative correlation with profitability indicates that contrary to what might be predicted from economic theory, there is a greater tendency to merge within the same industry in those industries. that are relatively less profitable. The number of large firms in the. industry also predicts mergers within the industry and does so independently of resource exchange patterns, as these variables are uncorrelated.

These results tend to reduce the likelihood that the familiarity argument is the explanation for merger activity. In considering mergers made only within the same industry, we can more plausibly argue that the degree of familiarity within each industry is constant. Differences in within-industry merger rates, therefore, can more confidently be attributed to variables other than familiarity, such as the pattern of resource interdependence.

2. Competitive Interdependence

The weaker relationship between mergers and resource exchanges for within-industry mergers suggests that other factors are operating. One such factor is competitive interdependence. Organizations may be acquiring firms within the same industry in order to reduce some of the uncertainty that derives from competition. Firms would acquire other firms in the same industry to manage competitive uncertainty when competitive uncertainty was most problematic. Previous research (Stern and Morgenroth, 1968; Pfeifer, 1972; Pfeifer and Leblebici,- 1973) has suggested that uncertainty is curvilinearly related to indus-trial concentration, in an inverted U-shaped relationship. When there u are many firms in an industry and concentration is relatively low, the ịl actions of any firm represents only a small proportion of the total, industry; thus, any firm has few consequential effects on most of the other firms. As concentration increases, an oligopolistic market staruc-ture is reached, in which firms have increasing impact on each other. As concentration increases even more, uncertainty begins to decrease. I With only a very few large firms operating, tacit coordination becomes possible, and each develops stable expectations concerning the others behavior.

Stigler (1964) found that when there were few firms, the prob-ability of detecting deviations from standard industry practice or pricing is greater than when there are many firms. The inverted U-shaped relationship between concentration and uncertainty, then, derives from two factors. As concentration increases, the impact of any one firm’s activities on the others increases. Similarly, as concentration ingreases, the ability to coordinate interfirm activity increases even in the absence of interorganizational structures or interfirm linkages. The greatest uncertainty arises when there are enoughTarge’ firms”to have major impact on each other but too many separate organizations to be tacitly coordinated.

To test our argument concerning the relationship between merg-ers within the same industry and intermediate levels of concentration, a graph was drawn with the proportion of mergers within the same industry on one axis and the concentration ratio on the other. It was  graphically determined that within-industry merger activity peaked at about the 40 percent ratio for four-firm concentration. This is approxi-mately the same as the mean value of concentration for industries in the study, which was 41 percent. The absolute value of the difference iin industry concentration from this intermediate value of 40 percent was computed for each industry in the sample. This variable, the difference in concentration, represents the deviation in concentration from an intermediate level. This difference in concentration measure correlated -.38 (p < .05) wijh the proportion of mergers within the same industry and -.39 (p < .05) with the proportion of acquired assets in the same industry. Both relationships are in the predicted direction, indicating that the proportion of mergers within the same industry is highest when concentration is intermediate and lowest when concentration deviates most from intermediate. The difference in concentration measure is uncorrelated with the measures of resource exchanges, indicating that it adds to the explanatory power of the other variables in accounting for mergers within the same industry. The difference in concentration is correlated with the number of larger firms, N had such a high correlation with iyhe proportion of mergers within the same industry.

The measures of resource interdependence and difference in con-centration are uncorrelated with each other, and they can be combined into a single regression equation to estimate the proportion of the variance in merger activity within the same industry that can be ex-plained. When the measures of sales and purchase interdependence are combined with differences in concentration in a multiple regres-sion, 37.8 percent of the variation in the proportion of mergers made within the same industry for the 20 industries is explained, while the formulation accounts for 35 percent of the variation in the proportion of assets acquired within the same industry.

Although considerations of symbiotic and competitive interdependence accounted for a significant portion of the pattern of merger activity, there was unexplained variance, or some mergers unaccounted for by the model. Not represented in the formulations considered so far are acquisitions of organizations outside the industries, with which the organizations transacted or operated. Mergers outside the pattern of transactions may be undertaken to move into new, more promising lines. By diversifying, firms may avoid previous patterns of dependence or diminish their importance. Since organizations facing dominant resource exchanges are more vulnerable to influence and lack the autonomy necessary for survival, they may enhance their survival by restructuring dependencies to counteract previously dominant exchanges.

Source: Pfeffer Jeffrey, Salancik Gerald (2003), The External Control of Organizations: A Resource Dependence Perspective, Stanford Business Books; 1st edition

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