Customer concentration and M&A performance

This paper examines how the target's customer concentration affects merger performance. We find that the acquirer purchasing a customer-concentrated firm experiences significantly lower stock market returns and worse long-run operating performance. The effect is more pronounced when customers face lower switching costs or the target undertakes a higher level of relationship-specific investments, exhibits higher cash volatility, or is acquired by a less well-known company. Further analysis shows that the negative association is mainly driven by corporate customers, while relatively safe government customers moderate the effect. We also find that shared major customers, overconfident CEOs, and poor corporate governance are more likely to increase the likelihood of customer-concentrated acquisitions. Overall, our findings suggest that higher customer concentration leads to lower value creation in mergers.

Automated summary

This study reveals that acquiring a customer-concentrated firm can significantly lower stock market returns and long-term operating performance. This effect is more pronounced when customers face lower switching costs or when the target undertakes higher levels of relationship-specific investments. Corporate customers drive the negative association, while relatively safe government customers can moderate the effect. Shared major customers, overconfident CEOs, and poor corporate governance are more likely to result in customer-concentrated acquisitions.