Value Drivers from Prior Alliances with Targets in Mergers and Acquisitions

Abstract

Acquisitions are often associated with insipid performance returns for the acquirer for many reasons, the most prominent of which is information asymmetry. Prior alliances with the target firm can attenuate losses from asymmetric information and yield higher returns for the acquirer. Using learning, network, and property rights theories, we study acquisitions of alliance targets and calibrate the extent of value enhancement as a function of three sets of moderating factors – alliance-, network-, and market. Alliance-level factors include quantity, duration, and diversity. Network-level factors include network centrality, efficiency, and reputation. Market-level factors include demand uncertainty, competition, and technology intensity. Analysis of 1,499 acquisitions that occurred between 1990 and 2015 indicates that while alliance partner acquisitions are associated with higher stock returns for the acquiring firm, the aforementioned moderators affect the extent of returns. We find evidence of non-linear returns from alliance-level moderators, quantity and duration, and positive returns from market-level moderators. Some of the network-level benefits accrue at the time of the alliance announcement itself, leaving little residual value gains at the time of the acquisition. Our study contributes to a richer understanding of the drivers of value from prior alliances with the acquisition target.