Evaluation of IPO-firm takeovers: an event study

Abstract

The acquisition of innovative and entrepreneurial firms has become an important issue in gaining competition advantages. While there exists a fruitful and promising literature analyzing M&A activities in general, there is only limited evidence available on the acquisitions of high-tech start-ups and entrepreneurial firms by larger incumbents. This study addresses this issue and focuses on acquisitions targeted at public IPO firms. Our main interest is whether and how the stock market evaluates the specific human capital of the CEO and founder of the entrepreneurial target firm. While in general target firms assets are positively evaluated by market participants, this should not necessarily hold for assets owned by the founder of the target firm. The findings clearly show that stock market participants positively evaluate target firms intangible assets, as measured by patents. But that also the opposite holds if the assets are under control of the founder CEO. Our results thus strongly support conclusions derived from property rights or incomplete contract theory on joined ownership of assets and performance. We conclude that the acquirer’s post-acquisition performance strongly depends on the continued access to the targets’ specific intangible assets, which is not necessarily the case for the founder’s specific human capital.