Explaining the Length of the Due Diligence Process in Technology Acquisitions

Abstract

Drawing on information economics, the theory of the firm and the organizational learning literature, we theorize about the probability of length of the due diligence process. In particular, we examine to what extent uncertainty regarding the value of a target’s resources and differences between the acquiring and target firms lengthen the acquirer’s due diligence effort. Given that we focus on the (target) technological resources we investigate the role of technological uncertainty and absorptive capacity proxying them by the number of pending patent applications of target firms and the technological distance between the two firms’ patent portfolio, respectively. Further, we argue that business relatedness (similarity) reduces the understanding gap. Using a longitudinal data on completed and non-completed technology acquisitions in the UK, we find a significantly positive effect of targets’ pending patent applications on due diligence length that is amplified by technological distance but reduced by business relatedness. Our study contributes to the M&A literature by revealing that higher information gap and uncertainty prolong the due diligence process of the acquirers in the hope of effectively evaluating prospective target firms.