The Impact of Technological Distance on M&A Target Choice and Transaction Value

Abstract

ABASTRACT: Using a sample of 538 M&A transactions covering public and private US firms in a wide range of predominantly high technology industries, I investigate how the innovation characteristics of the target as well as the technological and product market distance between the target and the acquirer affect the acquirer’s choice of M&A targets and the transaction price. I match a set of non-chosen alternatives, either based on target sector affiliation and size or randomly, to each acquirer and estimate a conditional logit model. I show that the existence of an inverted U-shape relationship between technological distance and the likelihood of being chosen as a target is not very robust. Overall acquirers appear to prefer technologically close firms as targets. The higher the product market (technological) distance between the acquirer and the target, the more do acquirers prefer firms which are close in technological (product market) space. Regarding the role of acquirer characteristics, I find that the lower the acquirer’s return on assets and patenting growth, the more technologically distant firms are chosen. The relationship between technological distance and the transaction price is also investigated parametrically and semi-parametrically, but no statistically robust inverted U-shape relationship is found. I also provide possible explanations for the apparent inconsistency between the evidence found herein and previous studies on the impact of technological distance on post M&A innovation performance. These comprise insufficient robustness checks of the post M&A evidence and management myopia.