Geographic Overlap, Agglomeration Externalities and Post-Merger Restructuring

Abstract

We study how agglomeration forces influence post-merger restructuring. We hypothesize and find that geographic overlap of acquirer and target establishments creates the potential for (co)agglomeration benefits that will differ for horizontal and vertical mergers. In vertical mergers, the target establishments are more likely to be kept when the acquirer establishment is located in the same city, indicating that firms benefit from geographically proximate inputs for production. In horizontal mergers, local redundancy increases the likelihood of target establishment closure rather than being kept or sold, consistent with the hypothesis that the acquirer aims to contain local competition through closure rather than sale. Using proxies to capture three dimensions of (co)agglomeration: input sharing, knowledge spillover, and labor pooling, we find that both horizontal and vertical acquirers are more likely to keep target establishments in proximate cities when (co)agglomeration benefits are high. Retained target establishments benefiting the most from agglomeration externalities in horizontal mergers show a significant increase in productivity. In addition to explaining how acquirers restructure the firm post-acquisition, our findings show how agglomeration externalities are reinforced and expanded by establishment-level decisions made following mergers.