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Hamamatsu Corp. - Mid-Infrared LED 11/24 LB

Rivals Surge When Competitors Merge

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Gaynell Terrell

It's likely that each time deep-pocketed Lucent Technologies, JDS Uniphase Corp. or Corning Inc. buys a supplier, other companies benefit. A new study explains why more than half of the business rivals of a company targeted for acquisition typically experience a jump in market value.

Rival firms of takeover targets may see their stock climb as investors speculate on whether they -- perhaps with the same hot technology or a neat fit into a vertically integrated industry -- also are a merger target, said Ralph Walkling, professor of finance at Ohio State University's Fisher College of Business.

He and Moon H. Song of San Diego State University studied 141 companies that were takeover targets from 1982 to 1991, and 2459 rival firms in the same industries.

"It doesn't mean a company is doing badly because it is taken over," Walkling said. "Companies are worth more if a bidder has an alternate use."

That could include buying a supplier to ensure a reliable source of vital components -- or to keep that supply from a competitor.

The study also showed that the market often anticipates a takeover with a wholesale run-up of stock prices across an industry.

"If you have five rivals, and one of those rivals is similar to the target, it will experience more of a run-up than others," Walkling said.

Factors that influence whether a rival company is the next target include its size, level of management ownership and debt capacity, he said.
Opto Diode Corp. - Detector Spotlight 10-24 MR

Published: March 2000
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