Executive summary

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This paper examines the determinants of mergers across plant-size classes by comparing changes in domestic and foreign control in the Canadian manufacturing sector. It uses a sample consisting of all Canadian manufacturing plants operating within the period from 1973 to 1999 and splits the sample into plant-size quartiles for each industry.

This paper asks two questions:

1. Are the same forces at work across all size classes, or is there a discernible pattern suggesting systematic differences between large and small plants?
   The plant characteristics that are postulated to drive synergies are equally important or more important in the larger size classes.
   The effect of plant size itself is about the same across the first three plant-size classes. As plant size increases within each of these size groups, the probability of takeover increases monotonically.
   Size is not the only synergistic characteristic whose importance increases across size classes. The effect of embedded knowledge in non-production workers also is greater for larger plant sizes.
   Factors such as industry human-capital intensity and industry profitability/capital intensity both provide additional synergy for plant takeovers, regardless of plant-size group, and the importance of these characteristics often increases across size classes. When acquiring firms focus on industry characteristics as a rough signal that plants provide the type of capacity that permits the transfer of knowledge, it is the larger plants that are sought within these industries by the acquirers.
   In addition to the factors related to synergies, several other characteristics reinforce the tendency for a higher probability of control changes in large plants. Unrelated plants in the largest size classes are more likely to be divested. A less competitive environment is also more likely to see control changes occurring in larger plants.
2. Are there systematic differences between domestic and foreign plants that suggest different forces are at work in the two sectors? The probability of takeover for foreign-controlled plants is higher across all size classes. Differences between foreign and domestic plants are particularly large in the smallest size classes.
   These differences in the probability of takeover result partially from differences in plant characteristics (i.e., knowledge intensity) that make a foreign plant a more likely candidate for takeover. There are significant differences in the way in which some characteristics affect control changes in the foreign population as opposed to the domestic population. Declines in market share and wages, lead to a greater probability of takeover in the foreign sector, but not in the domestic sector. Foreign operations are more likely to respond to managerial failure by being divested.
   In contrast, domestic plants are more likely to be divested if they are younger and have had a growth spurt in sales. Divestiture here appears to be more related to a process that harvests success at an early stage of life by the divesting plant.