Professional Documents
Culture Documents
by Carmen Nobel There's a lot of worry afoot whenever companies merge. Wall Street worries about the stock price. Employees worry about potential job cuts. And consumers worry about the fate of their favorite products: Whither the price and the quality? It turns out that consumers need not worry too much, according to a recent study by Harvard Business School Assistant Professor Albert W. Sheen. In The Real Product Impact of Mergers, Sheen finds that mergers generally have little effect on product quality over time, even while product prices tend to decrease.
QUANTIFYING QUALITY
Sheen faced the challenge of tracking both product pricing and product quality before and after company mergers. As a finance scholar, he depends on quantitative data for his research. Product pricing is a bunch of numbers, obviously, and therefore easy to quantify. But product quality tends to be, well, qualitative. For this study, Sheen faced the unique challenge of trying to quantify the idea of quality. He found what he needed in back issues of Consumer Reports, a
"Though goods become more similar, they do not consistently increase or decrease in quality level"
frequently they were reviewed. The product's inherent utility mattered, too. "I didn't include smartphones, for example, which have only been around for a few years," Sheen explains, "and I didn't include things like computers, where quality can depend on how much memory it has. It's kind of amorphous. I wanted the kind of thing where you go into a store, you take it off the shelf, and you take it home with you." The research team also kept track of brand consolidation, noting that companies were most likely to prune brands post-merger when the marketplace was crowded with similar products. But in reviewing historic quality, they focused on brand names that had survived even after multiple mergers and acquisitionsHoover vacuum cleaners, for example. Analyzing the data, the team found that when two companies merge into one, their preexisting product lines started acting like an old married couple: They gradually become more similar to each other in terms of features and relative reliabilityat least in cases where both companies manufacture the same type of product. For instance, "If one vacuum brand had a
retractable cord and the other didn't, eventually, after the merger, they'd both have retractable cords," Sheen says. Even so, the reviews throughout the years indicated that overall product quality remained consistent post-merger. "Though goods become more similar, they do not consistently increase or decrease in quality level," Sheen writes in the paper, which has been accepted for publication in the Journal of Finance. That's good news for consumers, Sheen says, especially considering his finding that mergers result in lower prices relative to the competition. (On average, it took two to three years for the product convergences and price drops to take effect.)
companies own which brands, especially when each brand operates an individual retail outlet. Whirlpool Corporation, for example, owns the Whirlpool brand, of course, but it also owns KitchenAid, Maytag, and Jenn-Air. "We found that two brands run by the same company in the same product category are generally more similar in quality than two randomly selected brands," Sheen says. More generally, the findings show that merged companies often follow through on the operational efficiencies that they promise to their shareholders. "Basically, the findings offer direct evidence that merging companies are actually taking action, and in general it tends to lead to better value for consumers," Sheen says. "I think it confirms a lot of the positive reasons companies give when they engage in mergers."