The effect of R&D spending on a firm’s profitability and market value in M&As: evidence from Nasdaq listed companies

Mergers and acquisitions have been part of companies’ strategies to improve their profitability and market valuation. The purpose of this study is to examine the effects of R&D expenditures on the acquirer’s profitability and stock market valuation in two different cases: when the acquiring firm is a technological company and a non-technological company. The target company for both is a technological company. Firstly, it is hypothesized that R&Ds of the acquirer enhance the stock market valuation more for technology acquirers than for non-technological counterparts. The comparison of stock market valuations is performed in the year when the company acquires a technological company. Secondly, this study shows how technological and non-technology acquirers can convert R&D spending into future profitability within one year after the M&A being completed. The sample consist of 186 technological M&As and 50 M&As where the acquirer is a non-technological company. The chosen acquirers are Nasdaq listed companies which completed a merger or acquisition between 2010 and 2017. The methodology used is OLS regression analysis. The key findings of the study reflect that in the year when the M&A is completed there is no correlation of R&D expenditures with stock price when a technological or a non-technological company acquires a technological company. The other important finding is that in the long run a technological company can convert R&D spending into future profitability more efficiently than a non-technological company by acquiring a technological company. Technological M&As have more potential to realize synergies after the M&A. During the year of the M&A R&D spending increase in both companies, which means that during the year of acquisition companies cannot utilize the synergies created from the acquisition of the technological company. Keywords: mergers and acquisitions, R&D, profitability, stock market valuation