summer research - pooja

8/7/2019 Summer Research - Pooja

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Technology Driven M&As: Comparison of

Domestic and Cross Border Deals

Pooja Thakur

Rutgers University

180 University Avenue

Newark, NJ

ABSTRACT

This paper proposes to examine the relationship between technological

knowledge connectedness in large corporate groups and the M&A deals between these

groups. The paper also examines whether this relationship differs between domestic and

cross border M&As. Drawing on the literature on technology driven M&As, the paper

proposes to empirically test the hypothesis using data on patents from the USPTO. The

data for the M&A deals will be collected from Zephyr and Thompson Financial. The time

period for the study is between 1996 and 2005.


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Technology Driven M&As: Comparison of Domestic and Cross

Border Deals

INTRODUCTION

This research examines the relationship between technological knowledge

connectedness in large corporate groups and M&A deals between corporate groups. The

paper proposes that greater the overlap between the technological activities of the

corporate groups the greater the probability of M&As. The paper also examines whether

this relationship differs between domestic and cross border M&As.

M&As are a type of inter-firm linkage that have been on the rise since the 1970s,

and this study explains their incidence in terms of the technological relatedness of the

firms. According to Cantwell and Santangelo (forthcoming) there are two major

motivations for M&As to occur and they are technology and scale related. According to

them, firms pursue technology driven growth to achieve new technological synergies

through experimentation.

Unlike the earlier waves in M&As, for instance the ones during the inter war

period which were motivated by market seeking activities and cartelization, the current

increase in restructuring of the firms through mergers and acquisitions can be attributed

to the increase in strategic asset seeking activity by the multinational firms.

Firms gain new technology either by developing it themselves within the firm or

by acquiring it from outside through alliances and M&As. In todays techno-socio-

economic paradigm there is a rise in technological interrelatedness between formerly

separate activities, and firms are unable to develop in-house the entire span of knowledge


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they require. Thus they rely increasingly on inter-firm linkages and M&As in order to

search for technological synergies though experimentation. Acquirers gain immediate

access to technology, products, distribution channels and desirable market positions of

the target company (Schweizer, 2005). M&A can help acquiring firms to strengthen their

technological competences and also to enter new technology markets. Evidence of the

technology driven M&As can be found in the recent increase in acquisitions in high

technology sectors such as biotechnology, software and electronics (Sikora, 2000). This

paper focuses on the technology-related motive that draws upon the acquisition of

complementary capabilities through M&As as a means of facilitating innovative

activities.

The next section will give a brief literature review on technology motivated

M&As and develop hypothesis. This will be followed by the methodology section. The

last section will discuss the potential contributions of this study.

LITERATURE REVIEW

This section looks at the different research papers on M&As and the role of

technology driven acquisitions. The section will also develop two hypotheses relating to

the similarity of patenting between two firms and the difference in motives for domestic

and cross border M&As.

In a recent study, Frey and Hussinger (2006) focus on the role of technology in

M&As and examine whether firms use M&As to strengthen their core technologies or for

entering new technology fields. They find that patent stocks of the target firms are not

attractive for the acquiring firms if there is no technological proximity between the


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merging partners. But if the target firm has innovative assets in the related technology

field then it is of higher value to the acquiring firms thus indicating that firms with

similar technology profiles help strengthen core technologies.

Yrkko et al. (2005) examine patent driven M&As by using a sample of Finnish

firms and find that patenting is positively correlated with the probability that the firm is

acquired. According to the authors, patenting may reflect industry specific technology

shocks and M&A reflects the need for reorganization.

In his paper on the merger of Sandoz and Ciba-Geigy, Fisher (1998) discusses

how the M&A was intended to combine the complementary technologies and capabilities

of the two companies to form Novartis. The merger was driven not only to need to

increase in size, which didnt add to the shareholders wealth, but to also due to the

technological relatedness of the two companies. This case study provides evidence that

M&As between technologically close corporate groups is more probable especially in

high technology industries.

According to Havila and Salmi (2002) multinationals are networks and M&A

impacts not just the two firms but also their business relationships. Hence a firm may be

able to tap into the technology not only of the target firm but also of its network of

suppliers. They find that the more embedded the firm in its international network the

more likely that acquisition will be used as a mode of foreign entry.

Ranft and Lord (2002) conducted a case study based research on acquisitions

aimed at gaining new technologies. According to them, gaining of new technologies is

difficult especially during post merger implementation. The problems may arise due to

differences in organizational cultures, production technologies and marketing. This


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indicates that firms which are similar to each other, especially in terms of technology for

a technology driven acquisition, will face less resistance during implementation.

M&As impact the R&D activities of the merging firms as on one hand they

enable firms to access new technological assets and enhance R&D efficiency through

economies of scale and scope while on the other hand it may reduce the total expenditure

on R&D due to the firms efforts to reduce duplication (Bertrand & Zuniga, 2006). So the

authors find that M&As can either increase R&D efficiency, helping firms to increase

their innovativeness, or they can reduce technology competition and thus reduce the

incentives for innovativeness. Cassiman et al. (forthcoming) found that merged firms

are less likely to expand their R&D to new fields or leverage their competences across

markets.

In his survey of theories on merger motives, Trautwein (1990) found seven

theories which can be broadly divided into theories that focus on shareholders interests

while the other focuses on managers interests. The first theory focuses on efficiency

(Rumelt, 1986) which results from three types of synergies: financial, operational and

managerial synergies. The second is the monopoly theory where the M&As are planned

to achieve market power and deter potential entrants to the markets (Chatterjee, 1986).

Valuation theory argues that mergers occur when the managers have better information

about the targets value than the stock market (Steiner, 1975). An instance of this is when

the target has undervalued assets that can be sold in pieces.

The fourth theory is the empire building theory where managers seek to maximize

their own utility instead of their shareholders (Baumol, 1959). The fifth theory is the

process theory (Jemison and Sitkin, 1986; Walsh, 1988) which was developed from the


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literature on strategic decision making process. This is the least developed theory of

merger motives and it deals with the cognitive simplifications and process factors that

can affect a merger. The raider theory is when managers cause wealth transfers from the

shareholders of the target companies (Holderness and Sheehan, 1985). The last theory is

disturbance theory (Gort, 1969) where mergers are caused by economic disturbances

which influence individuals expectations and level of uncertainty.

M&As are increasingly becoming important modes of acquiring external

technology especially in R&D intensive industries because the markets for technological

know how are inefficient (Hennart, 1991) and technology cannot be evaluated or

transferred without difficulty (Vanhaverbeke et al., 2002). The alternative to markets is

M&As or alliances and according to Vanhaverbeke et al. (2002) there are several factors

which influence the choice between the two. According to them, decisions regarding the

external technology sourcing influence the composition of the technological resources

owned by the companies and their competitive advantage. In this study the authors find

that the ties between the two firms influence the possibility of subsequent link between

the two. The number of prior ties indicate the amount of information the firms have about

each other and this in turn reduces information asymmetry and other related impediments

to acquisitions (Vanhaverbeke et al., 2002).

There are other studies such as Gomes Casseres (1996) and Roberts and Berry

(1985) which have found that firms have propensity to acquire other firms with similar

technological competences if they are in the same industry due to greater ability to

evaluate the other firms assets. The literature on strategic alliances has also found that

the overlapping industrial activities can influence the development of alliances between


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companies (Haggerdorn and Sadowski, 1999). According to Mowery (1988)

complementarity of partners with little conflict of interests regarding overlapping

businesses is essential for the success of the strategic alliance. Following this logic we

can assume that the similarity of patenting activities of two firms makes them more aware

of their technological relatedness and thus increases the chances of M&As.

H1: Other things equal, the greater the similarity in the patenting activities of two

firms the greater the probability of mergers and acquisitions between the firms.

The previous section hypothesized that the propensity to merger will be greater if

the patenting activities of the two firms are similar. In this section we hypothesis that the

propensity to merge will be greater only for domestic M&As and not for cross border

M&As as cross border M&As are driven not only be the need to exploit its

technology capabilities and knowledge assets but also to access

foreign technology (Kuemmerle, 1999).

Cross border technology driven M&As are more likely to take place between less

similar yet complementary firms inspite of having higher transaction costs that domestic

mergers. Berger et al. (2001) find that cross border M&As have higher efficiency barriers

such as geographical distance, different languages and cultures, difference in regulatory

and supervisory structures and high information costs. Due to difficulties in

communication, the transfer of technology as well as assimilation and acquisition of new

knowledge may be more difficult across countries (Kogut and Zander, 1992). Yrkko et al.

(2005) suggest that patenting affects the probability of being acquired by foreign firms as


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in their study finds that patenting exposes Finnish firms to cross border M&As while it

has no significant impact on domestic M&As.

But cross border M&A can also generate stronger complementarities, creating

larger two way flow of knowledge, as the two merging firms are likely to differ in terms

of their technological profiles due to the difference in geographic locations (Bertrand &

Zuinga 2006). The differences in technology characteristics may arise due to different

labor and capital endowments, economic and institutional environments and culture.

Thus we propose that the similarity in patenting activities will be less important in

cross border M&As which may be driven by need to seek local capabilities.

H2: Other things equal, the similarity in the patenting activities of two firms is

less important in cross border M&As as compared to domestic M&As.

METHODOLOGY

This paper focuses on the technology-related motive behind M&As that uses the

acquisition of complementary capabilities through M&As as a means of facilitating

innovative activities. The paper also looks at whether the technology related motive

differs for cross border M&As when compared to domestic M&As.

The sample of analysis will contain 17 of the largest Japanese firms that are

involved in M&As in the period from 1996 till 2005. The M&As examined will include

domestic as well as cross border deals. This is a citation-based study and data on citations

will be gathered from the USPTO. We use the USPTO data for studying Japanese patent

driven M&As because US is the largest and technologically most developed market of


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the world (Archibugi, 1992) and we assume that all important inventions are patented in

the US regardless of the country of origin.

Citing patents will be drawn from the time period of 1975 1995 and the cited

patents will be from the period of 1969 1995. We will examine the cross cited firms

share of all patents that have been cited by patents granted to a focal firm, which will be

one of the 17 Japanese firms.

M&A deals will be from the period 1996-2005 and the data will be gathered from

Thompson Financial and Zephyr dataset, compiled by Bureau van Dijk (see

http://www.bvdep.com/en/ZEPHYR.html). Containing many years of detailed financial

data on global MNCs M&A activity, IPOs, joint ventures and private equity deals, the

Zephyr dataset is an excellent source of available data on the acquisitions and mergers of

MNCs.

Since this is a panel data analysis, OLS will be used and this will be tested against

fixed effects (FE) and random effects (RE) estimates for greater reliability. The study will

also control for industry-specific, firm-specific and technological field-specific influences

on the likelihood of cross-firm citation in general as opposed to intra-firm citation, which

forms the dominant share of all citations for some industries, firms and fields. The central

purpose is to examine whether a higher level of prior knowledge exchange between the

focal firm and another company leads to a higher likelihood of subsequent M&A deals

between those firms and if this differs for cross border M&As.
http://www.jisc-collections.ac.uk/catalogue/coll_bvd_he.aspx#zephyrhttp://www.jisc-collections.ac.uk/catalogue/coll_bvd_he.aspx#zephyr


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POTENTIAL CONTRIBUTIONS

This study proposes to examine the patenting activity of the firms prior to the

M&A deal and this will make significant contributions to the literature as most of the

studies focus on the patenting activities of the firms after the merger. Prior studies have

looked at the impact of M&As on the R&D activities of the firms but this will depend on

the patenting activities of the individual firm. For instance, if the patenting activities are

very similar then there may be restructuring after the merger to eliminate duplication of

the R&D activities. By distinguishing between cross border and domestic M&As we

hope to examine the role of technology in the acquisition motive of the firms.


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REFERENCE

Archivugi, D. (1992) Patenting as an indicator of technological innovation: a review,

Science and Public Policy, 19(6): 357- 363.

Baumol, W.J. (1959), Business Behavior, Value and Growth, Macmillan, New York.

Chatterjee, S. (1986), Types of synergy and economic values: The impact of

acquisitions on merging rival firms, Strategic Management Journal, 7(2): 119-139.

Berger, A.N., DeYoung, R. and Udell, G.F., (2001) Efficiency barriers to the

consolidation of the European financial services industry. European Financial

Management7, pp. 117130.

Bertrand, O., and Zuinga, P. (2006) R&D and M&A: Are cross border M&A different?

An investigation on OECD countries, International Journal of Industrial

Organizational, 24: 401-423.

Cassiman, B., Colombo, M., Garrone, P., Veugelers, R., (forthcoming)

The impact of M&A on the R&D process: an empirical analysis of the

role of technological and market relatedness, Research Policy.

Fisher, L.M (1998), Post-merger integration: How Novartis became No. 1, Strategy

and Business, 2(2): 70-78.

Gomes-Casseres, B. (1996), The Alliance Revolution: The new shape of businesses

rivalry, Harvard University Press, Cambridge, MA.Gort, M. (1969), An economic disturbance theory of mergers, Quarterly Journal of

Economics, 83: 624-642.

Haggerdorn, J. and Sadowski, B. (1999), The transition from strategic technology

alliances to mergers and acquisitions: An exploratory study, Journal of Management

Studies, 36(1): 87-106.

Hennart, J-F. (1991), The transaction costs theory of joint ventures: An empirical study

of Japanese subsidiaries in the United States, Management Science, 37:483-497.

Holderness, C.G., and Sheehan, D.P., (1985), Raiders or saviors? The evidence on six

controversial investors, Journal of Financial Economics, 14:555-579.

Jemison, D.B., and Sitkin, S.B., (1986), Corporate acquisitions: A process perspective,

Academy of Management Review, 11:145-163.


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Kogut, B., Zander, U., (1992) Knowledge of the firm, combinative

capabilities and the replication of technology, Organization Science, 3

(3):383 397.

Kuemmerle, W. (1999) The drivers of foreign direct investment into

research and development: An empirical investigation, Journal of

International Business Studies, 30(1): 1-24.

Roberts, E. and Berry, C., (1985), Entering new business: Selecting strategies for

success, Sloan Management Review, 26: 3-17.

Ranft, A. L and Lord, M.D. (2002), Acquiring new technologies and capabilities: A

grounded model of acquisition implementation Organizational Science, 13(4):420-441.

Rumelt, R., (1986) Strategy, Structure and Economic Performance, (rev. ed.) Harvard

Business School Press, Boston, MA.

Sikora, M. (2000) M&A almanac: 1999 M&A profile, Mergers and Acquisitions, 35:

25-39.

Steiner, P.O., (1975), Mergers: Motives, Effects, Policies, University of Michigan Press,

Ann Arbor, MI.

Trautwein, F. (1990), Merger motives and merger prescriptions, Strategic Management

Journal, 11(4): 283-295.

Vanhaverbeke, W., Duysters, G., and Noorderhaven, N., (2002), External TechnologySourcing through Alliances or Acquisitions: An Analysis of the Application-Specific

Integrated Circuits Industry, Organization Science, 13(6): 714-733.

Walsh, J.P. (1988) Top management turnover following acquisitions, Strategic

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