Who Gains from M&A? The Effect of Industry Life Cycle on Post-M&A Innovation Performance

Abstract

Mergers and acquisitions (M&A) are popular strategies for firms seeking innovations, but previous studies show contradicting results about the effect of M&A on post-M&A innovation performance. I argue that the interplay between industry life cycle and firms’ incentives for innovation activities plays a critical role in determining the post-M&A innovation performance of acquiring firms. In this study, using datasets of granted patents and M&A transactions between 1980 and 2000, I analyze the effect of M&A on post-M&A innovation performance of acquiring firms. In particular, I focus on industries in the declining stage in which firms are desperate for but not able to create fundamental innovation due to their rigid structure. Industries are identified based on 3-digit SIC codes, and declining industry is defined through the sales growth rate, firm entering rate, and annual stock return. The results show that M&A transactions in declining industries lead to better post-M&A innovation performance of acquiring firms. Furthermore, diversifying M&A has more positive effect on innovation performance than consolidating M&A in declining industries. However, as an industry becomes more concentrated, the positive effect of M&A in declining industry decreases significantly. The study contributes to the existing literature on M&A by clarifying the key sources of conflicting findings with regard to post-M&A performance