Technology centrality, bilateral knowledge spillovers and mergers and acquisitions

Abstract

We construct a search and matching model, which features heterogeneous firms with different management skills and industry-specific knowledge capital, to study individual firms’ behavior in the M&A market. Two firms form a merger if the bilateral knowledge spillovers between them result in a productivity gain, generating a merger surplus larger than the transaction cost. Three key predictions are produced from the model: (i) acquirers with higher technology centrality and management skill exert higher search intensities; (ii) targets with higher technology centrality and lower management skill exert higher search intensities; and (iii) acquirer–target firm pairs with larger bilateral knowledge spillovers generate larger surplus and are more likely to consummate a merger deal. We find strong empirical support for these predictions from merger deals in the U.S. between 1984 and 2020.