Organization analytics: understanding technological acquisitions

Part of organization analytics is to unearth the mechanism at play when considering a major strategic decision. A typical example of such a strategic decision is the consideration to build, buy borrow or buy.  According to Laurence Capron and Will Mitchell, both INSEAD faculty, and authors of the book – Build, Borrow or Buy  It is even one of the most challenging questions an executive team faces—and the wrong answer can break a firm.

In a recent study – with Killian McCarthy of Groningen University – we looked at the analytics behind the strategic decision to opt for a technological acquisition. Interestingly enough, the literature on technological acquisitions assumes that firms exist in an ‘aspatial world’; the benefits of a technological acquisition are assumed to be directly realizable, irrespective of where the target firm is located.

The transaction cost and international business literatures suggest, however, that the liabilities of distance and foreignness create some real-world hurdles, which hinders the exchange of information. Distance and borders, therefore, should be significant predictors of post-acquisition innovation performance. We test this assertion by applying a modified version of the event study – which allows us to describe the impact of the merger not only in terms of what happened but in terms of how that differed from what was expected to have happened had they not made an acquisition – to the patent portfolios of 3,683 high tech acquirers in the period 2000- 2012. Our study – that was presented at the Academy of Management in Vancouver this year – we find that only 21.04% of acquirers filed more patent applications in the year after the acquisition than they had been expected to produce alone; 79%, in other words, failed to produce additional innovation. Looking at the impact of geography on this equation, we support a ‘liability of distance’ hypothesis and show that every 1,000 kilometre between the target and the acquirer costs 3.57 patent applications. Counter intuitively, however, we do not find support for a ‘liability of foreignness’ hypothesis, but show, in fact, that else equal, cross-border deals result in 3.70 additional patent applications. For high tech acquirers, therefore, foreignness appears to be an asset. Considering the substantial monetary and innovative value that patents may hold, and the lack prior research linking geography and innovation, we make some important contributions.

Our findings provide fruitful ground for more directed analysis of where to buy and how then to develop an appropriate pre- as well as post acquisition plan to make the acquisition work to the advantage of the acquirer. This study is positioned as part of the research activities of the Centre for Organization Restructuring.

The paper is available upon request with the authors.

logo jpg centre for org restructuring