Do Mergers Hurt Product Quality?

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.

Sheen decided to pursue the product perspective of mergers in order to help determine the cause of post-merger financial effects. "On average, the previous research has shown that merging is a good thing in that profits and stock prices go up, but there has been little research on what the companies are doing, other than merging, to make those things happen," he says. "I had two goals in mind. One was to find direct on-the-ground evidence of what was happening. The other was to get a sense, from the consumer's perspective, of whether we should be happy or sad when companies merge."

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 ofConsumer Reports, a monthly magazine that has been publishing comparative consumer product reviews since 1936. The publication ranks competitive brands according to quality, based on in-house testing and customer surveys, and publishes the products' retail prices. "Decades of data, just staring at you," Sheen says. "They've used the same methodology all this time. It's this long, continuous, consistent data set."

By comparing a brand's ranking before and after a merger, Sheen reasoned, he could gauge the merger's effect on quality (at least in cases where the brand survived company consolidation). For example, if a brand ranked at the top of the rankings in a year before its parent company was acquired but ranked toward the bottom post-merger, the merger would seem to have a negative effect on quality.

To that end, Sheen enlisted a team of research assistants to chart information from Consumer Reports, from 1980 to 2008. The data set comprised 88 mergers and thousands of brand name products in 20 product categories. Including items such as vacuum cleaners, lawn mowers, power drills, and washing machines, the categories were chosen based on how 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 acquisitions—Hoover 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 reliability—at 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.)

UNDER THE SAME UMBRELLA

Mergers aside, the data also revealed proof of something savvy consumers know from experience: If one company owns two brands in the same product category, the products tend to be similar in quality, even if the company is charging a lot more for one brand than the other. So it behooves consumers to take note of which 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."

Harvard Working Knowledge