Geographic Overlap, Agglomeration Externalities and Merger Restructuring

We study how agglomeration forces influence the post-merger restructuring of the combined firm through the channel of the geographic overlap of acquirer and target establishments. We hypothesize and find that the geographic effect differs for horizontal and vertical mergers, and depends on the strength of (co)agglomeration externalities. In horizontal mergers, having the acquirer and target establishments in the same city reduces the likelihood of the target establishment being kept or sold, but increases the likelihood of closure. Closure is consistent with the hypothesis that horizontal mergers aim to reduce production redundancy or contain local competition. In vertical mergers, the target establishments are less likely to be sold when the acquirer establishment is located in the same city, indicating that firms benefit from geographically proximate inputs for production. Using proxies to capture three dimensions of (co)agglomeration: input sharing, knowledge spillover, and labor pooling, we find that the acquirer is more likely to keep target establishments in proximate cities when (co)agglomeration benefits are high. This holds for both horizontal and vertical mergers. When examining the post-merger performance of the kept target establishments, we find those that benefit from agglomeration externalities in horizontal mergers show a significant increase in productivity