The Impact of Mergers and Acquisitions on Innovation

Sam BoutinUndergraduate – Whittier College

Fatos RadoniqiAssistant Professor of Finance – Whittier College

Overview Background

Literature Review

Research Question

Data

Methodology

Results

Conclusion

What Are Mergers?

VW

Vertical Mergers

VW

Horizontal Mergers

VW

Why this may raise Concern

VW

Submit request for approval

Request received

Merger Denied

Merger Approved

Must file for approval with the Federal Trade Commission and the Department of Justice

Authorities then have 30 days in which to decide weather or not the merger can take place or if it is in violation of antitrust laws Antitrust laws are in place to

protect consumer welfare and preserve competition

How Are Mergers Monitored

Three Possible Reasons for MergerProductive Efficiency Theory stating that a firm merges in order to take advantage of economies

of scale

Market Power Theory stating that a merger happened solely for the purpose of increasing

the market share of the acquiring company

Agency Cost Merger happens solely because the CEO of the acquiring company wants

control over a larger firm

Productive Efficiency Market Power1. Consequences for the

merging firms:Profits, growth rates, markets shares, productivity, etc.

2. Consequences for industry rivals

3. Consequences for the economy (e.g. social welfare)

As a result of (1) and (2)

Significance of horizontal mergers

Importance of Understanding

These Motives

Why Should We Care?

Source: Institute of Mergers, Acquisitions and Alliances

Literature ReviewEckbo 1981 tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders

because they increase the probability of successful collusion among rival producers Ahuja and Katila 2001 Examines the impact of acquisitions on the subsequent innovation performance of acquiring firms

finding that among large tech firms R&D intensity increasesGrabowski and Kyle 2008 Analyze Mergers and alliances in pharmaceuticals and the impacts these have on R&D finding that

small firms gain the most benefits from mergers with larger firmsZhao 2009 Examines weather technological innovation is a motivating factor in firms’ acquisition decision and

how said acquisition affects subsequent innovation finding that before an acquisition a firms innovation goes down then recuperates to a higher level after a successful merger

Desyllas and Hughes 2010 explore whether acquirers become more innovative after a merger finding that a large knowledge

base tends to increase R&D productivity Filson, Olfati and Radoniqi Found that in large pharma mergers, cumulative abnormal returns on portfolios of rivals predict post-

merger changes in combined firms R&D intensity

Research Question   Are the reactions of companies and their rivals indicative of post merger R&D intensity?

Announcement DatesActual DatesR&D Intensity Cumulative Abnormal Returns

Data

Data SourcesThomson One

M&A Announcement Data

Securities and Exchange Commission

Competitor Info in Company 10-k

HooversCompetitor Info

WhartonCompustatCenter for Research and Security Prices (CRSP)

Data DescriptionAnalyzed mergers that happened between 1990-2014These were large mergers: transaction value > $500 millionMergers were in research intensive industries (High tech)212 total mergers that satisfied these criteria

Narrowing the FieldOnly 156 mergers had (Compustat) data on acquirers past and future R&D intensity

Observations

Acquirer CARs 156

Target CARs 142

Acquirer Rivals’ CARs

146

Target Rivals’ CARs

104

R&D Intensity Change Initial Observations

65.30%

34.70%

Change In R&D Intensity

Positive Negitive

102 mergers saw positive changes in R&D

54 mergers saw negative changes in R&D

Further AnalysisFrom here on you will focus only on the positive portion to see how CARs relate to it Leaving us with a sample size of 102 mergers which we

had found had positive R&D intensity changes

Methodology Event study methodologyAnnouncement New Information change in Research and Development Intensity

ProblemsIs R&D intensity an accurate representation of innovation?How does one separate it from other events?

Results

Series1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.40.31

-0.689

-0.378

Reaction of Acquirer to Announcement

Positive Acquirer CARs Negitive Acquirer CARs Differnce

Series1

-1

-0.5

0

0.5

1

1.5

0.912

-0.0873

-0.8252

Reaction of Targets to Merger Announcements

Positive Target CARs Negitive Target CARs Differnce

Series1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.3689

-0.631

-0.2621

Acquirers’ Rivals Reactions to Announcements

Positive Acquirers' Rivals CARs Negitive Acquirers' Rivals CARs Differnce

ConclusionAre the reactions of the rivals and the companies themselves indicative of post merger R&D intensity?

Yes the companies themselves display a rise in R&D Intensity post merger even though the stock price of the acquiring firm may go down. The Rivals react negatively to a competitors merger if that merger has increased the acquiring firms R&D.

Thank You!