When Do Acquiring Firms Earn Abnormal Returns

Abstract

Prior research argues that acquirers need to enjoy private, unique and inimitable synergy benefits with the potential target to earn abnormal returns from that acquisition. Yet, our understanding of factors that enable acquirers to identify such unique and inimitable synergies remains somewhat under-developed. In this paper, we build on social network theory to show that the positional embeddedness of the acquirer, in terms of its central location in a network of inter-firm relationships, provides it with preferential and timely information about private synergies with potential targets that other firms cannot either identify or replicate and thereby, enjoy abnormal returns from such acquisitions. However, if the target is also centrally located in the same network, information regarding synergy benefits in combining with it is not “sufficiently private” and status conferred by the target’s own positional embeddedness allows it to negotiate away some of those benefits from the acquirer. We develop hypotheses to explain how the positional embeddedness of the acquirer and target firm have a direct and joint impact on the acquirer’s ability to realize abnormal returns to their acquisitions and find empirical support by studying 410 acquisitions in a network of 13, 104 inter-firm ties in the US software industry.