Innovation and Mergers and Acquisitions

Abstract

The purpose of this event study is to examine the effect of mergers and acquisitions on the post-acquisition innovation activity of the acquiring firm, and to study the stock market performance around the announcement date when acquiring target firms that own patents prior to the acquisition. This thesis measures corporate innovation by using the number of patents and the number of citations a patent receives as indicators for the quantity and quality of innovation, respectively.

This research utilizes a data set of 547 acquisitions by firms displaying patenting activity in the United States between January 1, 1995 and December 31, 2010, and a number of control variables for firm and deal characteristics. Additional tests include examining the relation between M&As and innovation with a subsample of patent-intensive acquirers. Based on the output from the OLS regression estimation, the data is consistent with M&As having no impact on the quantity of innovation output post-acquisition. Yet, the results indicate a positive relationship between M&As and the number of citations a patent receives in the post-acquisition period. The increase is even more pronounced in the subsample of patent-intensive firms. Furthermore, acquiring a target firm with existing patents shows a positive relation to the value creation in the five-day event window, measured with the acquirer cumulative abnormal returns.

The findings of this paper convey that mergers and acquisitions may boost firms’ R&D efforts by increasing the quality of the innovation output, especially when the target owns patent rights prior to the deal.