Startup Acquisitions Research Articles

A Financial Capitalism Perspective on Start-Up Acquisitions: Introducing the Economic Goodwill Test

Abstract This paper discusses the acquisition of start-ups by major technology firms. Such transactions pose a significant anticompetitive threat, yet often escape competition scrutiny because they fail to trigger merger notification threshold tests. Alongside a financial analysis of historic acquisitions by Google, Apple, Facebook, Amazon and Microsoft, the paper introduces a new threshold test—the economic goodwill test. The economic goodwill test is a concerned with the value of a target’s net tangible assets as a proportion of total transaction value. The difference between these figures largely represents the gains an acquirer expects to realise from a strengthened competitive position, therefore reflecting the logic driving the mass acquisition of technology start-ups. Although a specific triggering figure is not prescribed, the economic goodwill test represents a useful innovation that could bring potentially anticompetitive start-up acquisitions under substantive merger review. More broadly, the paper argues start-up acquisitions are representative of the difficulties that competition law faces governing economic activity in the era of financial capitalism. The modern financial system creates a strong bridge between the present and the distant future. This enables firms to engage in future-oriented competitive strategies that challenge competition law’s static approach.

Startup Acquisitions as a Hiring Strategy: Worker Choice and Turnover

This study investigates the effectiveness of high-tech startup acquisitions as a hiring strategy (“acqui-hiring”) versus traditional hiring. Unlike regular hires who choose to join a new firm on their own volition, most acquired employees do not have a voice in the decision to be acquired. I theorize that this lack of choice instigates organizational mismatch, thereby elevating turnover rates among acquired workers. Using employee-level data from US Census, I find empirical support for higher turnover among acquired workers relative to regular hires, as well as the moderating role of organizational mismatch. Moreover, analysis of serial acquirers suggests that firms learn over time how to effectively retain acquired employees. Together, these results elucidate the conditions under which firms can harness new talent by acquiring startups.

Competition in the venture capital market and the success of startup companies: Theory and evidence

AbstractWe examine the effect of a competitive supply of venture capital (VC) on the exits (initial public offering or mergers and acquisitions) of startups. We develop a matching model with double‐sided moral hazard, and identify a novel differential effect of VC competition on the success of startups. Using VC data, we find evidence for this differential effect. For example, when the VC market becomes more competitive (Herfindahl–Hirschman Index decreases by 50% from its mean of 0.08), the absolute likelihood of success increases by 2.8% for startups backed by less experienced VC firms, but it decreases by 3.6% for startups backed by the most experienced VC firms.

Inventor Commingling and Innovation in Technology Startup Mergers & Acquisitions

How does knowledge recombination via inventor “commingling” in technology startup acquisitions relate to innovation outcomes? Commingled teams have inventors from the acquiring and acquired firms, and reflect collaboration benefits and costs of integrating human resources across organizational boundaries. The benefits to such team design are “unsticking” knowledge and introducing variety to the possible knowledge to be recombined, while the costs include disrupted team standard operating procedures and routines and the need for enhanced coordination. In addition, innovation efficacy of commingled teams may also depend on the form of inter-organizational R&D cooperation, ranging from less integrated (strategic alliances) to more integrated (M&As) structures. We argue that the control and authority associated with integrated structures aids innovation. We assemble a large panel dataset of technology startups which eventually experienced a merger, some of which also had a prior alliance with the acquirer. Using a difference-in-differences design, we find that innovation quantity, quality, and exploration all increase post-merger for firms with higher rates of inventor commingling. Since commingling can be endogenous to the cost of inventor collaboration, we exploit exogenous introductions of direct flights between the acquired and acquiring firms to instrument for commingling, and find robust results. Inventor-level commingling is also more effective under integrated collaboration structures.

Performance of Ethnically Diverse Startup Teams: An Empirical Test

Extant literature suggests that network diversity can generate positive outcomes for startups. We examine the case of ethnic diversity as a driver of network diversity and hypothesize that ethnic diversity increases startup acquisition likelihood. Furthermore, we hypothesize that the positive relationship between ethnic diversity and acquisition likelihood increases for teams with greater professional experience. We find empirical support for our hypotheses using a dataset of startups that participated in the Techstars accelerator program between 2010 and 2018. The implication of this study is that ethnic diversity in startup teams drives acquisition likelihood through the mechanisms of cognitive and network diversity which lead to information processing advantages, but that this effect is present mainly for more experienced teams.

Reforming EU merger control to capture ‘killer acquisitions’ – the case for caution

This article examines whether EU merger control rules should be recalibrated to address concerns said to arise from acquisitions of innovative start-ups by established digital platforms – commonly referred to as ‘killer’ or ‘nascent’ acquisitions. It assesses various proposals designed to remedy two failings: a perceived failure to review anti-competitive transactions due to inadequate jurisdictional thresholds and a perceived failure to detect competition problems during the merger review process. It argues that, given the large number of transactions already subject to merger control, any expansion of existing rules should occur only where there is clear evidence of a significant enforcement gap. In the view of the authors, there is no persuasive evidence that a material number of anti-competitive digital acquisitions are escaping antitrust scrutiny, that the analytical framework applied by the European Commission should be significantly changed, or that the methodological tools employed to review concentrations are unfit for purpose. The authors therefore disfavour wide-ranging changes to the EU's rules and instead propose a series of incremental improvements to ensure that EU merger enforcement is tailored to the digital age.

The Paradox of Startup Acquisitions: Eliminating Competition and Creating New Competitors

The past few decades have seen a significant increase in the acquisitions of startups by incumbents, raising concerns regarding their potential anti-competitive effects. By developing a dynamic perspective, this study argues that these acquisitions can prompt acquired employees to leave to launch their own ventures, which reflect an often-overlooked long term aspect of acquisitions. We provide empirical support for this argument by analyzing employee-employer matched data from US Census on high-tech startup acquisitions and their workforce in 1990-2011. Moreover, effects on employee entrepreneurship are amplified when the target startup is relocated to the acquirer’s location, and largely muted when left in its original location. Overall, our study highlights the importance of post-acquisition mobility patterns in shaping the dynamics of incumbents’ acquisitions of entrepreneurial firms.

Antitrust Limits on Startup Acquisitions

Should there be limits on startup acquisitions by dominant firms? Efficiency requires that startups sell their technology to the right incumbents, that they develop the right technology, and that they invest the right amount in R&D. In a model of differentiated oligopoly, we show distortions along all three margins if there are no limits on startup acquisition. Leading incumbents make acquisitions partially to keep lagging incumbents from catching up technologically. When startups can choose what kind of technology they invent, they are biased toward inventions that improve the leader’s technology rather than those that help the laggard incumbent catch up. Further, upon obtaining a pure monopoly, the leading incumbent’s marginal willingness to pay for new technologies falls abruptly, which diminishes private returns on future innovations. We consider antitrust measures that could mitigate these problems.

Роль фондовых рынков в стимулировании инновационных процессов

The paper deals with the role of the stock market in innovative development, basically in case of the U. S. The author shows how the NASDAQ has provided tangible financial incentives for growth of high-tech industries, emphasizes the relationship between innovation and the financial sector, the importance of competition for capital in technological development. It is shown that the development of NASDAQ and increased competition of stock markets allowed high-tech U.S. companies to benefit from country’s strong financial sector and specialized market structures. The prerequisites for the successful emergence of biotech and ICT start-ups, as well as the venture market in the U.S. are still strongly connected with stock markets. However, the comparative analysis also revealed growing global competition from the Chinese stock markets. At the same time, in the last decade a new bubble is emerging on the U.S. stock market, which, as shown by the analysis of the median revenues of the major companies, differs from similar situations before the dot-com crisis and before the 2008–2009 crisis. Revenues of the largest companies in recent years have been growing along with their capitalization, which suggests that the bubble may take much longer to collapse than before. The author also shows the intensification of competition between stock exchanges and over-the-counter financing mechanisms for innovative companies: SME acquisitions by major corporations, intensification of mergers and acquisitions around the world. The role of mergers and acquisitions, which have become an alternative to IPOs, has become increasingly important over the past decade as a financing mechanism for innovative companies. In the last decade, the ICT-companies have dominated by market capitalization and gained sufficient market power to meet the demand for new developments and acquisitions of start-ups. This over-the-counter financing mechanism increases market uncertainty and may contribute to suboptimal solutions in the high-tech sector. However, the author found that the observed decline in U.S. IPOs is primarily affecting the ICT sector, while pharmaceutical and biotech companies continue to be actively listed.

Information Frictions in the Market for Startup Acquisitions

We document and quantify herding effects in the market for startup acquisitions, examining international acquisitions. Analyzing a sample of 5,725 Israeli venture-backed startups, we implement a machine learning algorithm to generate dyads of technologically similar companies. Difference-in-differences and instrumental variable models show that the initial acquisition of a startup by a foreign company increases the chances that another technologically related startup is subsequently acquired by a foreign company by 61%. Instead, the effect is null when an initial acquisition is enacted by an Israeli firm. Consistent with informational herding, we show that the reaction of foreign firms intensifies with the prominence of an initial acquisition. The less informed foreign acquirers respond more strongly to prominent acquisitions than to non-prominent acquisitions of Israeli startups, relative to the better informed. We further show that Israeli firms minimally react to the foreign acquisition of Israeli startups. The analysis of VC reactions and startup sales prices confirms an increase in the foreign demand for Israeli startups, following an initial acquisition.

Killer acquisitions and PayPal/iZettle

In PayPal/iZettle the CMA has, for the first time in a Phase II investigation, directly considered the issue of ‘killer acquisitions’. It assessed whether PayPal's acquisition of iZettle might have been motivated by an intention to prevent future competition from an emerging rival. This article first explores the wider concerns surrounding killer acquisitions, putting the PayPal/iZettle decision in context. It explains the difficulties that some countries face in ensuring that high value acquisitions of innovative start-ups with low revenues are still subject to regulatory control, and the steps that countries like Germany and Austria have taken to resolve this. It then analyses the CMA's decision, highlighting the importance that the CMA placed on the parties’ internal documents for determining the rationale for the transaction and the justification for the amount paid. The article concludes by noting that potential killer acquisitions are likely to remain on the radar of competition regulators (in Europe and the UK) for some time to come.

Digital Conglomerates and EU Competition Policy

The paper analyses firms’ motivations and the competitive effects of digital conglomerates with the relevant industrial organisation and strategic management literature. On that basis, it makes recommendations to improve the methodologies and modes of operation of EU competition policy in the digital sector. The paper first shows that some of the characteristics of the digital economy may explain digital conglomerates. On the supply-side, those include the important economies of scope in product development as product innovation and development are often modular and based on shared inputs (such as data, hardware and software). On the demand-side, those include the consumer synergies generated by product ecosystems. The paper then shows that the pro- and anti-competitive effects of conglomerates are amplified in the digital economy. Regarding the anti-competitive effects, bundling may allow big platforms to envelop their smaller competitors in adjacent markets, raise entry barriers for innovating entrants or soften competition by increasing differentiation. The control of key sharable inputs may increase the incentives to refuse access or decrease the costs of an anti-competitive product proliferation strategy. Those effects are even stronger when the digital conglomerate has achieved the position of gatekeeper for access to customers or to specific products. Those anti-competitive effects should always be balanced with the positive welfare effects of digital conglomerates that are equally amplified. Moreover, conglomerate acquisitions of innovative start-ups may in some circumstances lead to a decrease in innovation, which is detrimental to welfare. The paper finally recommends some improvements in the enforcement of EU competition policy in digital markets. (i) Dynamic efficiency should be prioritised over static efficiencies; (ii) Market power should be assessed dynamically by focusing more on potential competition and by defining markets for sharable inputs and innovation capabilities; (iii) The theories of harms should be adapted to the firms’ incentives in the digital economy, in particular the anti-competitive bundling theories need to be extended, the threshold to impose access under the essential facilities doctrine needs to be adapted to the characteristics of data and the effects of a merger on innovation need to be directly taken into account; (iv) Antitrust intervention should be quicker and more agile and the standard of proof should not only take into account the risk of type I and type II errors but also the cost of those errors.

The digital dilemma: Winning and losing strategies in the digital talent race

The emergence of a digital economy has changed companies’ business and talent model. However, the gap between supply and demand for digital skills and talent poses a serious dilemma for many companies: do they acquire tech start-ups as a talent strategy or reinvent the company as a tech firm, hire new digital talent and reskill current employees? Recent research on start-up acquisitions and a new report from the US Business–Higher Education Forum and Burning Glass Technologies reframe this dilemma by shedding new light on foundational skills for the digital economy and strategies for acquiring new talent and reskilling employees.

Antitrust Limits on Startup Acquisitions

Should there be limits on startup acquisitions by dominant firms? Efficiency requires that startups sell their technology to the right incumbents, that they develop the right technology, and that they invest the right amount in R&D. In a model of differentiated oligopoly, we show distortions along all three margins if there are no limits on startup acquisition. Leading incumbents make acquisitions partially to keep lagging incumbents from catching up technologically. When startups can choose what technology they invent, they are biased toward inventions which improve the leader's technology rather than those which help the laggard incumbent catch up. Further, upon obtaining a pure monopoly, the leading incumbent's marginal willingness to pay for new technologies falls abruptly, diminishing private returns on future innovations. We consider antitrust measures that could help to mitigate these problems.

Acquiring startups in the energy sector: a study of firm value and environmental policy

AbstractMergers and acquisitions are important activities for the growth of firms. In the energy sector, acquiring firms can obtain eco‐friendly technology and premiums, as well as tangible assets, through the acquisition of energy firms. Among many energy firms, an acquired startup is more effective since the acquisition price is relatively inexpensive and the acquiring firm is also exposed to entrepreneurial culture. In this study, to test the acquisition effect, datasets from Worldscope and CrunchBase are used. It is observed that, despite the advantages of an acquisition, the effect of a startup acquisition is negative. However, firms in environmentally sensitive industries benefit from such acquisition activity. The acquisition price of energy startups is overestimated due to increasing demand for acquisitions. On the other hand, the eco‐premiums also help dirty firms make a profit.

The Race of Unicorns: Startup Acquisitions Before IPO to Signal Company Quality

Assets are reallocated less efficiently through mergers and acquisitions (M&As) between private firms compared to the public ones. I develop a theoretical framework to explain how information imperfections inhibit efficiency gains through private acquisitions. Two startups of different qualities are seeking initial public offerings (IPOs) for costly real options and can acquire each other before IPO. Investors initially cannot distinguish their qualities but can observe whether an acquisition occurred. I show that efficiency loss in private acquisitions is not generated by the quality of the acquirer, but rather due to a lower probability of completing deals. Furthermore, undertaking acquisitions before IPO generates a positive signal about firm quality during stock issuance. Lastly, I document empirical evidence in support of this signaling effect.

Competition in the Venture Capital Market and the Success of Startup Companies: Theory and Evidence

We examine the effect of a competitive supply of venture capital (VC) on the exits (initial public offering or mergers and acquisitions) of startups. We develop a matching model with double‐sided moral hazard, and identify a novel differential effect of VC competition on the success of startups. Using VC data, we find evidence for this differential effect. For example, when the VC market becomes more competitive (Herfindahl–Hirschman Index decreases by 50% from its mean of 0.08), the absolute likelihood of success increases by 2.8% for startups backed by less experienced VC firms, but it decreases by 3.6% for startups backed by the most experienced VC firms.

Predictable Exodus: Startup Acquisitions and Employee Departures

This study investigates the effectiveness of high-tech startup acquisitions as a hiring strategy (“acqui-hiring”) versus traditional hiring. Using population-level data from US Census, I find that acquired workers exhibit significantly greater rates of turnover than regular hires, especially among high-earning individuals. I explore a theoretical mechanism based on the premise that, unlike regular hires who voluntarily choose to join a new firm, most acquired employees do not have a voice in the decision to be acquired. I posit that this lack of worker choice instigates organizational mismatch, thereby elevating turnover rates among acquired workers. Moreover, I document that firms learn from prior acquisitions how to effectively retain acquired employees. Together, these results elucidate the conditions under which firms can harness new talent by acquiring startups.

Success Factors of Start-Up Acquisitions: Evidence from Israel

Objective :This article aims to explore the factors behind successful M&A of start-up companies. Research Design & Methods : The objectives of this qualitative study are pursued in the context of acquired high-tech start-ups in Israel. The study employed semi-structured interviews. The practical model for analysing the transcribed interview responses was based on Shkedi’s (2003) method, drawing also from the grounded theory tradition in the process of coding and interpreting data categories. Findings: The results of this research highlight the communication climate (comprising factors such as openness, trust, supportiveness and interest of top managers in the employee’s well-being) as a vital behavioural mechanism influencing post-acquisition performance. Also, we found that effective knowledge transfer to the acquired company is one of the essential determinants of success.company is one of the essential determinants of success. Implications & Recommendations: M&A require a clear business plan, that which is based on realistic needs. A major fault in many start-ups is focus on technology rather than on strategy. Many start-ups are established and staffed by engineers and scientists who often believe, erroneously, that a good product will sell. Contribution & Value Added: In extant research, most attention has been paid to the acquiring company perspective on success. In contrast, this study focuses on the seller’s perspective and contribution to M&A success, instead of on the buyer’s perspective.

The redBus in Saga: Managing the Start-up Acquisition Phase

In June 2013, redbus.in, a bus ticketing website, was acquired by the Ibibo Group, a subsidiary of South Africa based internet and media firm Naspers Ltd, for USD 135 million. Soon after signing the deal, Phanindra Sama - CEO and co-founder of redBus, went for a holiday to London along with his parents. Sama remained incommunicado during the 10 day trip by not acquiring a local number and not accessing his emails. During Sama's absence, senior management team of Alok Goel and Satish Gidugu at redBus along with three mid-level managers submitted their resignation. Apart from employees of redBus, the Ibibo takeover team was also ‘foxed’ as desperate calls and emails to Sama elicited no response. This case examines the chaos created due to Sama's absence and helps in understanding the issues when a technology start up is acquired.