October 30, 2006

 

Mergers and acquisitions lead to higher labour productivity for processors
 

 

Mergers and acquisitions significantly improved labour productivity for processing plants in eight major food industries according to a USDA report from Economic Research Service done in conjunction with the US Census Bureau released in late October.

 

The industries covered in the USDA study include the meatpacking, meat processing, poultry slaughtering and processing, cheese making, fluid milk processing, flour milling, feed processing, and oilseed crushing industries.

 

The USDA researchers found that processing plants in these eight food industries were highly productive before being acquired and they significantly improved their labour productivity afterward.

 

By using plant-level Census of Manufacturers data from the US Census Bureau, USDA researchers obtained a detailed picture of plant outputs, inputs of labour and materials, costs of production, and plant assets. The

research concentrated on two merger waves, 1977-82 and 1982-87.

 

In the analyses, the labour productivity of plants acquired over 1977-82 and 1982-87 was compared with control groups of plants that were not acquired.

 

Firms in the eight industries transferred about 20 percent of industry market share to other firms through M&As over each of three 5-year periods: 1977-82, 1982-87, and 1987-92. Compared to only 7 percent of all output over 1972-77.

 

Output per worker improved dramatically during this period of rising concentration and M&A activity, according to the report.

 

Four major food industries the Meat, Poultry, Dairy, and Grain Processing Industries doubled their output per worker, and three of the industries realized at least 50-percent increases in output per worker over 1972-92.

 

Poultry experienced a vast increase in the processing of value-added products as plants switched from producing whole birds to producing poultry parts, according to the USDA study.

 

Data indicate that buyer firms kept about half the plants they acquired, closed about 25 percent, and sold about 25 percent. Although firms held and closed higher percentages of plants over 1982-92, the overall pattern

remained similar, the study said.

 

The USDA  report also indicates that, by 1987, buyer firms retained only 35 percent of the plants they had owned in 1977. Buyer firms sold about 30 percent of the plants they had owned in 1977 over 1982-87 after keeping them until 1982 and shut down about 35 percent of the plants they had held in 1977 by either 1982 or 1987.

 

Nonbuyer firms kept about 40 percent of the plants they owned in 1977 by 1987. 10 percent of the plants sold during the period were sold from 1982-87. Half the plants they owned in 1977 were closed by either 1982 or 1987, figures from the report revealed.

 

Acquired plants and the plants of buyer firms had above-average labour productivity. By contrast, the plants that nonbuyer firms kept had below average labour productivity and the plants they sold had above-average labour productivity.

 

These data indicate that nonbuying firms sold their most productive plants and kept less productive ones. Buyers, in contrast, kept their most productive plants and closed or resold less productive ones.

 

These data from the USDA suggests that firms had purchased highly performing plants during that period.  More important, the study showed that acquired plants were more likely to survive over time than non-acquired plants.

 

For more of the USDA article, please click here.