Value Creation in Acquisitions Through the Looking Glass of IT: Examining the Effects of IT Distance on Acquisition Performance

Abstract

Although researchers have examined the role of dyadic dynamics (i.e., interactions between the acquirer and the target firm) in the success of acquisitions, little research attention has been paid to the role of information technology (IT). In this study, we extend this stream of literature by examining the effects of pre-acquisition IT distance (i.e., the difference between enterprise IT systems of the two firms that reflects system incompatibility and affects the cost of system integration) on the acquirer’s post-acquisition performance. To measure IT distance, we adopt a word embedding technique to map each firm’s IT portfolio to a low-dimensional embedding space and calculate the distance between IT vendors in that space. Using data on U.S. firms’ acquisition activities during 2007-2013, we find that IT distance is negatively associated with the acquirer’s post-acquisition performance. Also, the adverse effect of IT distance is stronger for acquisitions motivated by operational synergies, compared to those seeking non-operational synergies. This supports our theory that IT distance disrupts post-acquisition synergy creation, and more so when the combined firm has a greater need for tight integration to create acquisition synergies. This research contributes to the M&A literature in management and IS by introducing a novel concept of IT distance and by theorizing and empirically validating its performance implications in acquisitions. The findings of this study can inform practitioners about how to devise IT strategies in corporate acquisitions in order to mitigate IT risks and achieve greater post-acquisition performance.