The International Consortium on Agricultural Biotechnology Research (ICABR)
Valuation of Consolidation Events in the Agricultural Biotechnology Industry
Norbert Wilson, John King, Anwar Naseem, and Anthony Artuso
The last decade witnessed a significant change in the agricultural research and development industry structure, driven in large part by the scientific advances in agricultural biotechnology. Joint ventures, strategic alliances and consolidation occurred with greater frequency, but the most significant change to the industry structure resulted from the mergers and acquisitions of life-sciences companies. The large size and diverse nature of business activities conducted by these firms implies that the investments, assets and capabilities extend into many agricultural markets. The consolidation and concentration in the industry have raised concerns that the pace of innovation will slow and competition will decline in the agricultural input industry. However, industries experiencing transformation through rapid technological change face intense competitive pressures to profit from scientific opportunities that extend from the present to the future. Insights into how future markets are affected by competition in innovation markets are an important avenue of research for understanding the possible impacts of changes in industry structure.
In this paper, we analyze changes in industry structure from the perspective of financial markets. We employ the event-study methodology to understand market reactions to five mergers and ten acquisition activities of agricultural biotechnology related firms to investigate three issues: 1) Did investors react favorably to mergers and acquisitions (M&A) by agricultural biotechnology firms? Significant positive effects might indicate perceived synergies derived from complementarities in production, R&D performance or perceived profits from market power. 2) Did investors react unfavorably to firms not directly involved in M&As? The nature of such preferences, along with favorable reactions to consolidating firms, suggest that investors expected greater profits for consolidated firms than their industry competitors. 3) Did the perception of financial markets change over time? In light of contentious issues about the agricultural biotechnology in the late 1990s, we hypothesize that investors did not react favorably to M&As post-1998.
The results of this study indicate that the firms involved in the announcements of mergers or acquisitions tended to have positive and statistically significant abnormal returns. However, we find that if the event involved a life science firm, the abnormal returns were not statistically different from zero. A possible explanation for the differential effects could be that the agricultural division of many of the life sciences firms is too small for the market to respond to an agricultural merger or acquisition. We also find that the event effects of firms not involved in the merger or acquisition tended to be negative and significant, indicating that investors discounted the future earnings of firms that did not participate in M&A activity.
The negative effect on firms not directly involved with M&A activity, combined with the generally positive total effect for directly involved firms, suggests that changes in industry structure were competitive in nature. This result comports with an interpretation of industry change driven by competitive forces not only in present markets, but also in future markets through research and development efforts. However, several events behaved contrary to the general pattern of findings, suggesting that the competitive results of M&A activity must be interpreted with caution.
We did not find sufficient evidence to suggest that the market changed its opinion of M&A during the later part of the 1990s.