Mergers and acquisitions (M&A) and organic growth are two common strategies to achieve horizontal growth. In this study, we disentangle two distinct sources of firm performance corresponding to different theoretical perspectives on firm size: firms' bargaining power with respect to suppliers and customers
INTRODUCTIONMergers and acquisitions (M&A) and organic growth are two commonly used strategies for firms to achieve horizontal growth, i.e., increase their size within a single business. The performance implications of the two growth modes are ambiguous and mixed (Capron and Mitchell, 2012 through two distinct size-related theoretical mechanisms (Dranove and Shanley, 1995): enhanced bargaining power with respect to suppliers and customers 1 (Porter, 1980;Scherer and Ross, 1990), and operating efficiency arising from scale economies (Barney, 1991;Cockburn and Henderson, 2001;Makadok, 1999;Scherer and Ross, 1990).These theoretical drivers have been difficult to tease apart in previous research. First, existing 1 Bargaining power is related to the concept of market power; the latter being an industry level concept, while the former is a firm level concept. In order to emphasize the firm-specific effect of size on profitability, we consistently use the term bargaining power.
V. Moatti et al.research on the performance outcomes of M&A compared to organic growth is far from clear due to theoretical as well as measurement challenges. For example, it is difficult to compare bargaining power and scale economy explanations of firm performance in these modes with stock market or managerial survey data (Anand and Singh, 1997;Capron, 1999;Eckbo, 1983). Second, little research has attempted to disentangle the performance effects of growth and size increase in a given business per se from that of the firms' mode of growth since firms may endogenously self-select into the optimal mode of growth given their positions and constraints (Hamilton and Nickerson, 2003;Shaver, 1998). While some previous research shows systematic differences among the outcomes of M&A and organic growth (e.g., Woodcock, Beamish, and Makino, 1994), when endogeneity behind the choice of mode is accounted for, the two modes of growth are generally found to achieve similar performance (Brouthers, Brouthers, and Werner, 2003;Shaver, 1998).In this paper, we go beyond such studies and disentangle the specific effects of bargaining power and scale economies by using customized accounting measures from the retail industry (Kumar, Kerin, and Pereira, 1991;Pellegrini, 1994). We focus in this study on how opting for M&A rather than for organic growth influences these size-related performance effects and disentangle these sources of performance in a sample of 83 firms from the global retail sector over a 20 year period. Our empirical analysis has two unique features. First, using accounting-based data rather than financial or managerial data, we develop specific measures of firm scale-related efficiency and bargaining power vis-à-vis its customers and suppliers. In...
