Portfolio effects in conglomerate mergers: the empirical evidence of leverage effects in Korean liquor market

In the article, we implement an empirical test on the portfolio effects of conglomerate mergers, using the data of Korean liquor market during the period 1990–2008 in which there have been several important conglomerate mergers between beer and soju companies. We find that the combined company could take the advantage of regional market dominance in the beer market in expanding regional market shares in the soju market. Such leverage effects are differentiated from the efficiency-enhancing portfolio effects that result in the combined company’s expanding shares over all regional soju markets regardless of the presence of dominance in the beer market. The common distribution channels of liquor wholesalers seem to play a pivotal role in the combined firm’s expansion of dominance in one market into another. Furthermore, we implement separate empirical tests for two subsamples of regionally dominant and nondominant soju companies in order to differentiate the leverage effects of foreclosure from those of toehold. The empirical results show the evidence of leverage effects only for a sample of nondominant soju companies. This implies that the leverage effects of conglomerate mergers between beer and soju companies in Korea had pro-competitive effects in that the combined firm could compete more effectively with regionally dominant companies with the leverage of dominance in the beer market as toehold.