Mergers and acquisitions is a high-risk sport. Firms that buy technology companies succeed better than those who acquire other types of companies.
KNOWLEDGE @ BI: Mergers and acquisitions
Over the past decade, companies have spent multiple billions of dollars on acquiring and merging with other companies. Many mergers and acquisitions have failed. Instead of contributing to increased value, many of the acquisitions helped to destroy value. Dreams of synergies have proved to be only dreams. Or rather nightmares. Profits have failed to materialise.
Fortunately, there are bright spots in the form of mergers and acquisitions that have contributed to increased value for shareholders in the company that acquires and takes over other companies.
What is it that makes some companies successful with acquisitions and mergers where so many others fail? What type of businesses are best positioned to add value to the company that is purchased? Is it possible to point out the winners and losers before the acquisitions take place?
Hunting for the success formula
In his doctoral project at BI Norwegian Business School, researcher Yuriy Zhovtobryukh has examined the impact of technology, ownership and origin on the outcomes of mergers and acquisitions. He also examined whether the interaction between technology and ownership, and between technology and origin can explain why some mergers and acquisitions succeed better than others.
Zhovtobryukh focused on U.S. listed companies in the 10-year period from 2002 to 2012, and obtained data for completed mergers and acquisitions during this time period. In excess of 1,000 (1,004) mergers and acquisitions are included in Zhovtobryukh’s study.
Approximately one in four acquisitions (249) included in the study were acquired by a technology company, while the remaining 755 cases of mergers and acquisitions are acquisitions of companies with no technological assets.
Role of technology
The study shows that firms that acquire technology companies create greater economic value for their shareholders than firms that buy up other types of businesses.
“A key source of value creation lies in the ability to create synergy between assets of the buyer and access to complementary technologies at the company that is acquired,” maintains Zhovtobryukh.
He also finds companies that have previous experience with mergers and acquisitions, profit even more from buying technology companies than those who do not have experience. It is also an advantage to acquire small rather than large companies. “Smaller size makes the transaction more manageable and reduces the risk of paying too much,” according to the strategy researcher.
Industrial owners have an advantage
In his study, Zhovtobryukh distinguishes between two main types of companies involved in mergers and acquisitions: Industrial companies and investment companies.
Industrial buyers add greater value when they acquire technology companies than when they take over other types of companies. For investment companies the opposite is true. They succeed best when they buy up other types of businesses than technology companies.
The study indicates that industrial companies have an advantage when it comes to buying technology companies. “Access to complementary assets and a focus on innovation appear to be a more important value creator than strong incentives for managers to cut unnecessary costs,” maintains Zhovtobryukh.
Does it matter if you buy up technology firms in your home country or abroad? What creates the most value for shareholders?
The study shows that technological acquisitions and mergers across national borders create significantly greater shareholder value than domestic acquisitions.
“A competitive advantage can be gained through strategic acquisitions of foreign technology companies,” maintains Zhovtobryukh. “Strategic acquisitions across national borders enables companies to establish a larger and more diverse technology base.”
According to Zhovtobryukh, technology firms represent an opportunity to identify synergies not all companies can extract. The recipe for a successful acquisition is to identify complementary resources that can turn one plus one into more than two.
“Such acquisitions pave the way for new solutions and can transform entire industries.”, claims Zhovtobryukh.
Yuriy Zhovtobryukh: The role of technology, ownership and origin in M&A performance, Series of Dissertation 2/2014, BI Norwegian Business School.