Abstract
Acquisitions are competitive moves that disrupt an industry’s competitive structure. As a result, firms are often not passive observers of their rival’s acquisitions, but actively retaliate against such competitive moves. In this study, we explore these dynamics by analyzing one way in which multimarket contact may influence acquisition strategies, namely, the type of targets acquired. We contribute to the acquisition literature by clarifying the role that pre-acquisition competitive interdependencies play in firms’ acquisition strategies. Specifically, we suggest that high multimarket contact firms do not necessarily avoid acquisition activity. Instead, these firms are more likely to acquire targets that are less likely to incur retaliation from interconnected rivals. We also explore two important boundary conditions to this relationship: (1) the market’s competitive structure and (2) the location of the target firm. Our empirical tests of a sample of 741 bank holding companies from 1995 to 2014 offer support for our hypotheses.
Highlights
Acquisitions are seen as aggressive competitive actions (Adams et al, 2009) that shift a market’s competitive structure (Hankir et al, 2011)
From an multimarket contact (MMC) perspective, high MMC firms are expected to refrain from engaging in acquisitions altogether, as these firms generally avoid aggressive competitive behavior to lower the risk of any potential retaliation from their interconnected rivals (Bernheim and Whinston, 1990; Edwards, 1955)
The starting point was the observation that high MMC firms continue to engage in acquisitions despite the potentially high risk of retaliation from interconnected rivals
Summary
But instead sometimes actively retaliate against such competitive moves (Berger et al, 2004; Keil et al, 2013; King and Schriber, 2016). Since interconnected rivals are more likely to respond aggressively to competitive actions that pose a threat to the mutual forbearance equilibrium (Markman and Waldron, 2014), we expect that the focal firm perceives a relatively greater risk of retaliation should it acquire a large target firm. This suggests that high MMC firms that engage in an acquisition are more likely to acquire smaller target firms than low MMC acquirers. Among firms that engage in acquisitions, there is a stronger negative effect of MMC on target size for in-state acquisitions than for out-of-state acquisitions
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