The Industry Life-Cycle and Acquisitions and Investment: Does Firm Organization Matter?

1. The Industry Life-Cycle and Acquisitions and Investment:Does Firm Organization Matter? Vojislav Maksimovic Gordon Phillips University of Maryland

2. Does a firm’s organization predict how it invests in a market? Specifically we ask: 1. Does a firm’s organization predict its capital expenditures, acquisitions, plant births and closings? 2. Does the effect of organizational structure differ across competitive environments? 3. What is the role of: financial/resource dependence access to public capital markets Overview

3. Our approach differs because: • Literature has focused on the effect of firm organization on capital expenditures and has not generally studied the effect of firm organization on births, acquisition and closure decisions. • Competitive environment focus • We address these questions using a plant-level panel data from the LRD (US Census)

4. OUTLINE OF THE PRESENTATION 1. Motivation for study of firm organization and Industry life-cycle 2. Summary of our findings 3. Data, Variables and Estimation 4. Predicting Financial / Resource Dependence 5. Acquisition Results 6. Capital Expenditure, Birth & Death Results 7. What have we learned?

5. CONGLOMERATES AND INVESTMENT • Early papers on conglomerates claimed misallocation of resources produced conglomerate discount • Lang and Stulz (1994), Berger and Ofek (1995) • but see Campa and Kedia (2002), Villalonga (2004a,b) • Agency view: Shin and Stulz (1997), Rajan, Servaes and Zingales (2000), Scharfstein and Stein (2000) • but see Whited (2001)

6. Neoclassical view: • Multiple factors for growth: CAPEX + acquisitions + births – sales - closures • A fixed factor is the driver (Lucas (‘78) • What is it? • Organizational competence • Internal capital market • Matasuaka and Nanda (‘01), Maksimovic and Phillips (‘01, ‘02), Gomes and Livdan (‘03) • Role of industry Shocks in mergers: Mitchell and Mulherin (‘86), • This paper: Long-run Industry Life Cycle /differential industry shocks + organization form

7. Implications of neo-classical approach

8. Empirical version

9. Questions that need to be addressed: • Why the contradictory results between misallocation/optimal organizational form? • Data/technique differences? • Measuring different things? • What is the role of organizational form? • Is it the internal capital market? • Managerial talent? • Does organizational form come with differences in investment? • Do particular organizational forms have a comparative advantage in some competitive environments? • Nature of the exercise: • Data analysis to point the way for modeling.

10. Main Findings: • Much of the literature addresses differences in CAPEX across organizational types • These differences may be quite small. • Differences in acquisitions across types are economically significant. • In summary stats, single-segment firms are more financially/resource dependent. • In declining industries – low productivity firms are financially dependent • In growing industries – low and high productivity firms are financially dependnent • Conglomerates do mitigate the effect of financial dependence on acquisitions  no evidence of misallocation • Differences in acquisition rates are more significant for high-growth industries. • Evidence that conglomerate acquisitions in high growth industries add value.

11. Industries differ • Split industries by 25 year change in the real value of shipments (1972-1997), and examine the change in the numbers of firms. • In both declining and growing industries large differences in the change in the number of firms. • Especially in growing industries a decline in the number of producers of 30% is non uncommon.

12. Industry classification We split our industries into four categories: 1. Declining industries in which long-run demand and the long-run number of firms are both decreasing 2.Technological change industries in which long-run demand is decreasing but the number of firms is increasing 3. Consolidating industries in which long-run demand is increasing but the number of firms is decreasing 4. Growth industries in which long-run demand and the long run number of firms are both increasing

13. Data • Data from the Center for Economic Studies, U.S. Department of Commerce. • 50,000+ plants per year, 500,000+ firm-segment years, 1974-2000. • Plants are assigned to 4 digit SIC code. Multi-division firms are thus not assigned to one SIC code. • Aggregate up into 3 digit industry segments for each firm for each year using value of shipments. • Single segment if secondary segments < 10 % shipments. • Identification of whether or not the firm is publicly traded in the U.S.

14. Productivity Benchmarking • Plant-level benchmarking: • Three inputs, capital, labor, and materials: as explanatory variables. Output: value of shipments. • Adjust for inflation and depreciation adjustments. Include plant age. • Different ways of estimating productivity: ∙ • plant level v. firm-segment level • rolling panels (5 years lagged data) v. full period ∙ • firm-segment fixed effects and plant-level productivity

15. Financial Dependence • Define a division as financially/resource dependent if its divisional investment> divisional internal cash flow. • Advantage: simple and comparable to earlier work (Rajan and Zingales (1998)) • Estimate predicted dependence as a function of change in industry shipments, firm size, industry capital intensity, and divisional productivity. • Financial dependence is a descriptive concept  does NOT necessarily imply that firm is constrained. • Ask: Does the impact of predicted dependence on investment, plant birth, acquisitions and plant death differ across organizational form and public firm status?

20. Long-run Industry Effects and Plant Acquisitions

24. Robustness: breakdown into high and low productivity segments

25. Table 6: Productivity Changes after Plant Acquisitions

29. Main Findings: • Much of the literature addresses differences in CAPEX across organizational types • These differences may be quite small. • Differences in within-industry acquisitions across types are economically significant. • In summary stats, single-segment firms are more financially/resource dependent. Dependence could be financial – could be lower organizational ability. • In declining industries – low productivity firms are financially dependent • In growing industries – low and high productivity firms are financially dependnent • Conglomerates do mitigate the effect of dependence on acquisition • Differences in acquisition rates are more significant • For high-growth industries. • For efficient businesses in high-growth industries • Evidence that conglomerate acquisitions in high growth industries add value. • Conglomerates more likely to close down plants in declining industries.

30. Implications • How do conglomerates differ? • They mitigate dependence, especially for efficient businesses • They acquire more within their existing industries. • They are more likely to close plants. • They are bigger and more efficient…. • Differences most pronounced in growth industries. • Acquisitions by conglomerates result in increased productivity --- particularly in growth industries. • A broader question: • How much is driven by financial and how much by real factors?

31. Ongoing research …. • Following an acquisition approx 40% of the target’s plants are sold within 4 years. • In particular plants that do not belong to main divisions are sold. • Do acquisitions create an externality?