theroleoftechnologicalsynergyinmergersandacquisi.docVIP

The Role of Technological Synergy in Mergers and Acquisitions James S. Ang Department of Finance Florida State University Tallahassee, FL 32306-1110 Telephone: (850) 644-8208 Fax: (850) 644-4225 E-Mail: jang@ Chaopeng Wu School of Management Xiamen University Xiamen 361005, P. R. China E-Mail: wuchaopeng@163.com First draft: July 05, 2011 This draft: October 25, 2011 Abstract: While there is a large amount of finance literature on the importance of synergy in mergers, there have been relatively few empirical studies that identify the specific sources of synergy and estimate their magnitudes. In this study, we concentrate on the value of synergy from combining two companies with complementary technologies. We identify several dimensions of technological synergy between acquirers and targets constructed from their patent portfolios data. Based on 2,626 horizontal acquisitions from 1977 to 2004, we find technological synergy is a positive determinant of merger premium. It also has a positive effect on the expected total synergy gain to the acquirers and target shareholders. The effect of technological synergy on total synergy gain is stronger if the acquirer and target are in less-competitive industries and if the target is under financial constraint. We verify our measures of technological synergy could capture acquirer’s expected technological synergy, i.e., increase in subsequent RD investment, and realized technological synergy in increase in the number of patents in the post acquisition period. 1. Introduction Researchers have shown that merger and acquisition could increase the combined value of the target and acquiring firms, which suggests that, these acquisitions generates synergistic gains. Many theories have emerged to explain how synergy is created through acquisitions: more efficient management (Lang, Stulz and Walking, 1989), economies of scale (Ravenscraft and Scherer, 1989; Houston et al., 2001), the redeployment of assets to more