New research from the Booth School of Business finds that low profits drive mergers more so then low productivity. The paper, “Acquisitions, Productivity and Profitability: Evidence from the Japanese Cotton Spinning Industry,” was written by Booth professor Chad Syverson, with co-authors Serguey Braguinsky of Carnegie Mellon University, Atsushi Ohyama of Hokkaido University and Tetsuji Okazaki of the University of Tokyo.
The paper found that less profitable businesses were more likely to be acquired then those that are less productive. When this exchange happens, the successful sales and management practices of the buying company are spread around, making better use of existing productivity and boosting the profitability of the purchased firm. In most cases, the acquired company had better equipment but was not managed as well 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,” Syverson said.
Interestingly, the data used in the study came from the Japanese cotton spinning industry in the late 1800s to early 1900s. Through this data, the researchers found that the ties between ownership, productivity and profitability are still relevant today. In fact, the paper found that the processes used by Japanese cotton spinners could be applied in developing countries.
“The case study is a bit unusual — we chose it in part because its incredibly detailed data lets us see things one usually cannot — but I think holds a lot of general lessons,” Syverson said. “Essentially, it tells us about what corporate acquisitions look like and what they accomplish — what determines who is the buyer and who is bought, and what happens financially and operationally to each.”