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School of Business | Department of Finance | Finance | 2014
Thesis number: 13831
Post-acquisition inventory levels
Author: Morath, Roland
Title: Post-acquisition inventory levels
Year: 2014  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; yrityskaupat; corporate acquisitions; inventointi; inventory; toimitusketju; supply chain
Pages: 59
Full text:
» hse_ethesis_13831.pdf pdf  size:548 KB (560788)
Key terms: merger; acquisition; M&A; inventory; supply chain
Abstract:
Merging companies typically anticipate inventory reductions through pooling of inventory, higher purchasing power or elimination of planning uncertainties in a wider supply chain. In contrasts, companies appear to experience an inventory build-up in the quarters after an acquisition. This is the first attempt that I am aware of to develop an understanding for when, how and why the inventory build-up occurs. The research gap is addressed in this work with four research questions. (1) Does the phenomenon of inventory build-ups after mergers exist? (2) When does the inventory build-up occur and does it persist after the post-merger integration? (3) What happens in the post-merger integration and why does the inventory build-up occur? (4) Which companies are affected the most by the inventory build-up?

Creating awareness and understanding of the inventory build-up is important because companies may take wrong assumptions when deciding on their next acquisition. The additional inventory position constitutes an implicit premium to the deal value. Unrealistic expectations in the inventory development can affect post-merger integration when companies focus on the wrong actions. Therefore, decision makers should have well founded reasons when they anticipate inventory reductions. The research gap is addressed in this work with four research questions, based on data comprising 926 U.S. mergers in the period 1978-2009. Financial data for four quarters before and eight quarters after the merger is retrieved from Standard & Poor's Compustat database. I compare average inventory levels before and after the merger to show a substantial increase in inventory levels. A more detailed analysis of quarterly inventory growth rates shows when the inventory build-up occurs. Inventory responsiveness is used as a measure that reflects inventory growth adjusted for revenue growth. For a sub-sample of 58 deals, I decompose inventory into raw material, work in progress and finished goods. I use a least square dummy variable regression to show which companies are likely to experience strong inventory build-up.

The results of this study confirm that the inventory build-up exists. Mean inventory levels increase by $ 99.4 million or 21.6% in the first year after the merger. The higher inventory levels are not reverted in the second year after the merger as mean inventory increases to 35.3% above pre-merger level. The inventory build-up happens in the first and second quarter after the merger when inventory growth rates peak at 7.9% and 6.9% respectively. Revenue growth can partially explain the inventory build-up. However, other factors including operational changes in supply and production play a role. Companies that typically experience high growth in inventory levels operate in high volume businesses and target smaller companies for acquisitions.
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