Unpatented Innovation and Merger Synergies

Abstract

The increasingly service-based U.S. economy places a high reliance on innovation. While there is considerable research on the importance of certain innovative activities such as patents, less attention has been paid to unpatented innovation, about which there is naturally less publicly available information. Our study exploits disclosure on the fair value of acquired innovation to show that unpatented innovation plays an important, though often ignored, role in merger value creation. We detail the importance of unpatented technology and show that traditional approaches that rely only on R&D expenditures and patents lead to both misclassification of merger types as well as underestimates of the impact of innovation in value creation. Indeed, our evidence suggests that, on aggregate, unpatented innovation accounts for a larger portion of synergies. We further show that higher (lower) gains accrue to the acquirer (the target) in relation to unpatented innovation, which is consistent with limited publicly available information about unpatented innovation reducing the target’s bargaining power.