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Technology Driven M&As: Comparison of

Domestic and Cross Border Deals

Pooja Thakur

Rutgers University

180 University Avenue

Newark, NJ

ABSTRACT

This paper proposes to examine the relationship between technological

knowledge connectedness in large corporate groups and the M&A deals between these

groups. The paper also examines whether this relationship differs between domestic and

cross border M&As. Drawing on the literature on technology driven M&As, the paper

proposes to empirically test the hypothesis using data on patents from the USPTO. The

data for the M&A deals will be collected from Zephyr and Thompson Financial. The time

period for the study is between 1996 and 2005.

Technology Driven M&As: Comparison of Domestic and Cross Border Deals INTRODUCTION This research examines the relationship between technological knowledge connectedness in large corporate groups and M&A deals between corporate groups. According to them. According to Cantwell and Santangelo (forthcoming) there are two major motivations for M&As to occur and they are technology and scale related. M&As are a type of inter-firm linkage that have been on the rise since the 1970s. Unlike the earlier waves in M&As. and this study explains their incidence in terms of the technological relatedness of the firms. In today’s techno-socio- economic paradigm there is a rise in technological interrelatedness between formerly separate activities. The paper also examines whether this relationship differs between domestic and cross border M&As. and firms are unable to develop in-house the entire span of knowledge . for instance the ones during the inter war period which were motivated by market seeking activities and cartelization. Firms gain new technology either by developing it themselves within the firm or by acquiring it from outside through alliances and M&As. firms pursue technology driven growth to achieve new technological synergies through experimentation. the current increase in restructuring of the firms through mergers and acquisitions can be attributed to the increase in strategic asset seeking activity by the multinational firms. The paper proposes that greater the overlap between the technological activities of the corporate groups the greater the probability of M&As.

The section will also develop two hypotheses relating to the similarity of patenting between two firms and the difference in motives for domestic and cross border M&As. 2005). M&A can help acquiring firms to strengthen their technological competences and also to enter new technology markets. distribution channels and desirable market positions of the target company (Schweizer. The next section will give a brief literature review on technology motivated M&As and develop hypothesis. software and electronics (Sikora. Acquirers gain immediate access to technology. They find that patent stocks of the target firms are not attractive for the acquiring firms if there is no technological proximity between the . 2000). Evidence of the technology driven M&As can be found in the recent increase in acquisitions in high technology sectors such as biotechnology. This paper focuses on the technology-related motive that draws upon the acquisition of complementary capabilities through M&As as a means of facilitating innovative activities. This will be followed by the methodology section. The last section will discuss the potential contributions of this study. In a recent study. Thus they rely increasingly on inter-firm linkages and M&As in order to search for technological synergies though experimentation. Frey and Hussinger (2006) focus on the role of technology in M&As and examine whether firms use M&As to strengthen their core technologies or for entering new technology fields.they require. products. LITERATURE REVIEW This section looks at the different research papers on M&As and the role of technology driven acquisitions.

According to the authors. This .merging partners. The problems may arise due to differences in organizational cultures. But if the target firm has innovative assets in the related technology field then it is of higher value to the acquiring firms thus indicating that firms with similar technology profiles help strengthen core technologies. Ranft and Lord (2002) conducted a case study based research on acquisitions aimed at gaining new technologies. According to them. which didn’t add to the shareholder’s wealth. They find that the more embedded the firm in its international network the more likely that acquisition will be used as a mode of foreign entry. production technologies and marketing. but to also due to the technological relatedness of the two companies. The merger was driven not only to need to increase in size. Hence a firm may be able to tap into the technology not only of the target firm but also of its network of suppliers. In his paper on the merger of Sandoz and Ciba-Geigy. According to Havila and Salmi (2002) multinationals are networks and M&A impacts not just the two firms but also their business relationships. (2005) examine patent driven M&As by using a sample of Finnish firms and find that patenting is positively correlated with the probability that the firm is acquired. Yrkko et al. patenting may reflect industry specific technology shocks and M&A reflects the need for reorganization. This case study provides evidence that M&As between technologically close corporate groups is more probable especially in high technology industries. gaining of new technologies is difficult especially during post merger implementation. Fisher (1998) discusses how the M&A was intended to combine the complementary technologies and capabilities of the two companies to form Novartis.

will face less resistance during implementation. The first theory focuses on efficiency (Rumelt. 1988) which was developed from the . Cassiman et al. The fourth theory is the empire building theory where managers seek to maximize their own utility instead of their shareholders (Baumol. especially in terms of technology for a technology driven acquisition. The fifth theory is the process theory (Jemison and Sitkin. operational and managerial synergies. In his survey of theories on merger motives. So the authors find that M&As can either increase R&D efficiency. Trautwein (1990) found seven theories which can be broadly divided into theories that focus on shareholder’s interests while the other focuses on manager’s interests.indicates that firms which are similar to each other. 1959). The second is the monopoly theory where the M&As are planned to achieve market power and deter potential entrants to the markets (Chatterjee. Walsh. 1986) which results from three types of synergies: financial. Valuation theory argues that mergers occur when the managers have better information about the target’s value than the stock market (Steiner. An instance of this is when the target has undervalued assets that can be sold in pieces. or they can reduce technology competition and thus reduce the incentives for innovativeness. M&As impact the R&D activities of the merging firms as on one hand they enable firms to access new technological assets and enhance R&D efficiency through economies of scale and scope while on the other hand it may reduce the total expenditure on R&D due to the firms efforts to reduce duplication (Bertrand & Zuniga. 2006). 1986). (forthcoming) found that merged firms are less likely to expand their R&D to new fields or leverage their competences across markets. 1986. 1975). helping firms to increase their innovativeness.

. The alternative to markets is M&As or alliances and according to Vanhaverbeke et al. This is the least developed theory of merger motives and it deals with the cognitive simplifications and process factors that can affect a merger. 1991) and technology cannot be evaluated or transferred without difficulty (Vanhaverbeke et al. The number of prior ties indicate the amount of information the firms have about each other and this in turn reduces information asymmetry and other related impediments to acquisitions (Vanhaverbeke et al. There are other studies such as Gomes – Casseres (1996) and Roberts and Berry (1985) which have found that firms have propensity to acquire other firms with similar technological competences if they are in the same industry due to greater ability to evaluate the other firm’s assets.. (2002) there are several factors which influence the choice between the two. The last theory is disturbance theory (Gort. decisions regarding the external technology sourcing influence the composition of the technological resources owned by the companies and their competitive advantage. The literature on strategic alliances has also found that the overlapping industrial activities can influence the development of alliances between .literature on strategic decision making process. In this study the authors find that the ties between the two firms influence the possibility of subsequent link between the two. 1969) where mergers are caused by economic disturbances which influence individual’s expectations and level of uncertainty. The raider theory is when managers cause wealth transfers from the shareholders of the target companies (Holderness and Sheehan. 2002). M&As are increasingly becoming important modes of acquiring external technology especially in R&D intensive industries because the markets for technological know how are inefficient (Hennart. According to them. 2002). 1985).

the transfer of technology as well as assimilation and acquisition of new knowledge may be more difficult across countries (Kogut and Zander. Berger et al. According to Mowery (1988) complementarity of partners with little conflict of interests regarding overlapping businesses is essential for the success of the strategic alliance. (2001) find that cross border M&As have higher efficiency barriers such as geographical distance. (2005) suggest that patenting affects the probability of being acquired by foreign firms as . difference in regulatory and supervisory structures and high information costs. 1992). In this section we hypothesis that the propensity to merge will be greater only for domestic M&As and not for cross border M&As as cross border M&As are driven not only be the need to exploit its technology capabilities and knowledge assets but also to access foreign technology (Kuemmerle. the greater the similarity in the patenting activities of two firms the greater the probability of mergers and acquisitions between the firms. 1999). H1: Other things equal. Yrkko et al. different languages and cultures. Due to difficulties in communication. Cross border technology driven M&As are more likely to take place between less similar yet complementary firms inspite of having higher transaction costs that domestic mergers. The previous section hypothesized that the propensity to merger will be greater if the patenting activities of the two firms are similar.companies (Haggerdorn and Sadowski. 1999). Following this logic we can assume that the similarity of patenting activities of two firms makes them more aware of their technological relatedness and thus increases the chances of M&As.

economic and institutional environments and culture. METHODOLOGY This paper focuses on the technology-related motive behind M&As that uses the acquisition of complementary capabilities through M&As as a means of facilitating innovative activities. We use the USPTO data for studying Japanese patent driven M&As because US is the largest and technologically most developed market of . creating larger two way flow of knowledge. Thus we propose that the similarity in patenting activities will be less important in cross border M&As which may be driven by need to seek local capabilities. The sample of analysis will contain 17 of the largest Japanese firms that are involved in M&As in the period from 1996 till 2005. The M&As examined will include domestic as well as cross border deals. the similarity in the patenting activities of two firms is less important in cross border M&As as compared to domestic M&As. This is a citation-based study and data on citations will be gathered from the USPTO. H2: Other things equal.in their study finds that patenting exposes Finnish firms to cross border M&As while it has no significant impact on domestic M&As. as the two merging firms are likely to differ in terms of their technological profiles due to the difference in geographic locations (Bertrand & Zuinga 2006). The differences in technology characteristics may arise due to different labor and capital endowments. But cross border M&A can also generate stronger complementarities. The paper also looks at whether the technology related motive differs for cross border M&As when compared to domestic M&As.

.bvdep. The central purpose is to examine whether a higher level of prior knowledge exchange between the focal firm and another company leads to a higher likelihood of subsequent M&A deals between those firms and if this differs for cross border M&As. IPOs.com/en/ZEPHYR. the Zephyr dataset is an excellent source of available data on the acquisitions and mergers of MNCs. firm-specific and technological field-specific influences on the likelihood of cross-firm citation in general as opposed to intra-firm citation. OLS will be used and this will be tested against fixed effects (FE) and random effects (RE) estimates for greater reliability. We will examine the cross cited firm’s share of all patents that have been cited by patents granted to a focal firm. which will be one of the 17 Japanese firms. compiled by Bureau van Dijk (see http://www. The study will also control for industry-specific.html). Containing many years of detailed financial data on global MNC’s M&A activity. M&A deals will be from the period 1996-2005 and the data will be gathered from Thompson Financial and Zephyr dataset. joint ventures and private equity deals. firms and fields.the world (Archibugi. Citing patents will be drawn from the time period of 1975 – 1995 and the cited patents will be from the period of 1969 – 1995. which forms the dominant share of all citations for some industries. Since this is a panel data analysis. 1992) and we assume that all important inventions are patented in the US regardless of the country of origin.

POTENTIAL CONTRIBUTIONS This study proposes to examine the patenting activity of the firms prior to the M&A deal and this will make significant contributions to the literature as most of the studies focus on the patenting activities of the firms after the merger. . Prior studies have looked at the impact of M&As on the R&D activities of the firms but this will depend on the patenting activities of the individual firm. if the patenting activities are very similar then there may be restructuring after the merger to eliminate duplication of the R&D activities. For instance. By distinguishing between cross border and domestic M&As we hope to examine the role of technology in the acquisition motive of the firms.

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