Fact of the Week: Technology Sector Firms Pay a Higher Premium to Acquire Innovative Target Firms

Source: Mattheo Kaufmann and Dirk Schiereck, “Acquiring for innovation: Evidence from the U.S. technology industry,” Journal of Economic Dynamics and Control 152, March 2023.

Commentary: In a recent Journal of Economic Dynamics & Control paper, Mattheo Kaufmann and Dirk Schiereck analyzed mergers and acquisitions data from Refinitiv’s Securities Data Company Platinum database, patent data from United States Patent and Trademark Office, and daily stock prices from the Refinitiv’s Datastream to examine the role of corporate innovation on mergers and acquisitions in the technology sector. Looking at these datasets, the authors found that acquiring firms are willing to pay a higher premium for innovative target firms. Indeed, the average innovative target firm received a takeover premium and cumulative abnormal stock returns that were 4.2 and 5.6 percentage points, respectively, higher than their non-innovative counterparts. When the acquiring firm is also innovative, the study found that the acquiring firm will pay higher premiums for the innovative target firm than their non-innovative counterparts, and the target firm’s cumulative abnormal returns are also magnified. In the paper, “innovative” firms are defined as those with “at least one matched patent within the last ten years before the acquisition” while the non-innovative firms are those without a matched patent.

Moreover, the authors also concluded that a firm’s announcement of acquisition also has an impact on its rivals. Indeed, they found that an acquirer’s rivals generally increased their R&D spending in the years after the acquirer made an acquisition announcement; however, innovative rivals increased spending between 4.4 to 16.2 percent more than the non-innovative rivals. Similarly, the authors found that both innovative and non-innovative rivals of acquiring firms engaged in technology acquisition after the acquiring firm made an acquisition announcement. However, the innovative rivals were more likely to acquire than their non-innovative counterparts—24 percent of innovative rivals acquired compared to 12 percent for non-innovative rivals. The author concludes by noting that part of their findings provides insight for “why technology markets gravitate towards monopolistic or oligopolistic structures.”