Firm Quality and Acquisition Performance

Abstract

Firm Quality and Acquisition Performance Abstract In this paper we study the operating performance of acquisitions where the buyer and target are in the same industry. Arguing from the resource-based view and other theories of heterogeneity among firms in an industry and year, we partition acquirers and targets according to their quality, which denotes their degree of valuable idiosyncratic capabilities relative to each other. We define four types of deal: Low-High, High, High-Low and Low-Low, consistent with a wide body of research in finance and strategy. Drawing on the extant literature on resource transfer in horizontal deals, we argue that in some types of acquisition, integration costs may overwhelm the benefits from transferring quality between the acquirer and target and test five hypotheses to examine the implications of this argument. Using a differences-in-differences design with propensity score matching over twenty-six years of data on U.S. public firms, we show that contrary to much research without a control group, the most profitable type of acquisition is Low-High, with High-High second. This finding potentially conflicts with the large literature on synergy. Issues of generalizability and implications for management are discussed.