Firm growth in the course of mergers and acquisitions

Abstract

This paper examines the effect of mergers and acquisitions on employment growth in newly acquired firm establishments. Based on a unique full sample of manufacturing and services firms in Switzerland, our main finding is that the relative size of a deal is an important growth determinant: While the initial size of the acquiring firm is positively related to an acquired establishment’s growth, the opposite holds true for the initial size of the acquisition. We also contribute to a controversial debate on firm growth in general by rejecting Gibrat’s law of proportionate growth for firm establishments in Switzerland. In fact, employment growth decreases with an establishment’s initial size and age—at the aggregate level as well as within separate subsamples of manufacturing and services firms.

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Fig. 1

Notes

  1. 1.

    By “establishment,” this study refers to a building or building complex of a firm which can either be a single-establishment firm, the headquarters of a multi-establishment firm, or be a companion establishment of a multi-establishment firm. A manufacturing establishment may also be referred to as “plant”.

  2. 2.

    The Swiss Federal Statistical Office defines four size groups for firms in Switzerland. Micro-firms are defined as having 0–9 employees, small firms have 10–49, medium firms have 50–249, and large firms have 250 or more employees. For convenience, the same thresholds are applied to characterize establishments here.

  3. 3.

    Note that total firm growth can be decomposed into internal establishment growth and external growth through the acquisition of additional establishments. Thus, the results for aggregate internal establishment growth are not necessarily equivalent to total firm growth.

  4. 4.

    See Swiss Federal Statistical Office (2006) for further information on the Business Census, including information on methods, its legal basis, and its usage. Also, a sample questionnaire is provided.

  5. 5.

    We thank an anonymous referee for pointing out that providing standard errors and related significance levels might actually not be appropriate when evaluating a full sample, depending on the type of research question. While it is true that here regression coefficients describe all available data and not just a sample in the usual sense, we take the view that our data should be seen as one possible realization of reality out of many potential realizations. Thus, in order to be able to draw conclusions about the mechanisms underlying this observed reality (our research objective), we believe that it is still appropriate to provide significance levels and related interpretations in the following. A more detailed discussion on this matter can be found, for example, in Berk et al. (1995).

  6. 6.

    For calculating these numbers, note that in the services sector, the total effect becomes positive when \(0.0310\times {\text {ln}}{(Acquirer \, Size)}+(-0.0485)\times {\text {ln}}{(Integration \, Size)}>0\) or \({(\text {ln}}{(Acquirer \, Size)}-{\text {ln}}{(Integration \, Size))}{/}{\text {ln}}{(Acquirer \, Size)}>1-\frac{0.0310}{0.0485}\approx 0.36\). In the manufacturing sector, this corresponds to \({(\text {ln}}{(Acquirer \, Size)}-{\text {ln}}{(Integration \, Size))}{/}{\text {ln}}(Acquirer \, Size)>1-\frac{0.0146}{0.0417}\approx 0.65\).

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Acknowledgments

We thank Stefan Buehler, Simon Evenett, Christina Felfe, Klaus Gugler, Giovanni Mellace, Farzad Saidi, Philip Schuster, Conny Wunsch, two anonymous referees, as well as seminar participants at the University of St. Gallen, ETH Zurich, the Swiss IO Day 2010 (Bern), the IIOC 2011 (Boston), and the EEA-ESEM Congress 2011 (Oslo) for helpful comments. We also thank the Swiss Federal Statistical Office for providing their Business Census data through Contracts No. 08350 and 140146. Financial support from the Swiss National Science Foundation through Grants No. PP0011-114754 and PBSGP1-138787 is gratefully acknowledged.

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Correspondence to Dirk Burghardt.

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Disclaimer: All views contained in this paper are solely those of the authors and cannot be attributed to the Swiss Competition Commission or its Secretariat.

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Burghardt, D., Helm, M. Firm growth in the course of mergers and acquisitions. Small Bus Econ 44, 889–904 (2015). https://doi.org/10.1007/s11187-014-9624-y

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Keywords

  • Firm growth
  • Employment
  • Gibrat’s law
  • Mergers and acquisitions
  • Deal size
  • Establishment-level data
  • Switzerland

JEL Classifications:

  • G34
  • L11
  • L25
  • M51
  • L26