The Economic Worth of the Firm’s Interorganizational Relationships in Acquisitions

Abstract

Listen

Translate article

One important question in research on mergers and acquisitions is how acquisitions create value for the shareholders of the acquiring firm. This study focuses on the main and contingent effects of the target firm’s network positions on the acquirer’s shareholder value creation. We posit that the target’s centrality and brokerage network positions offer resource and positional advantages, thereby increasing the stock market’s valuation of M&A deals. We further contend that the value creation of the target firm’s network position is dependent on the acquirer’s ability to exploit the target’s network positions and the synergistic combination of network resources. Results from the analysis of a sample of 728 completed acquisitions in the U.S. during 1990-2011 supports our major propositions. We find that the stock market responds positively to the target’s centrality. We also find that the combined centrality of two firms and their relative centrality enhance M&A performance. Furthermore, the positive effects of the target firm’s centrality on the acquirer’s shareholder value creation are stronger when the acquisitions are related deals or the acquirer has prior experience in the target’s industry. This study demonstrates that the target’s network positions and the synergistic combination of network resources are a source of value creation in M&As. It also provides insights into the conditions under which acquirers could realize benefits from the target’s network position and generate positive returns for the shareholders.