Academic journal article Financial Management

Impact of Visibility and Investment Advisor Credibility on the Valuation Effects of High-Tech Cross-Border Acquisitions

Academic journal article Financial Management

Impact of Visibility and Investment Advisor Credibility on the Valuation Effects of High-Tech Cross-Border Acquisitions

Article excerpt

Since foreign high-tech firms exhibit a high level of asymmetric information, there is much investor skepticism surrounding the potential benefits to US firms that acquire them. However, the investor perception may be more favorable when the acquisitions involve more visible targets and advice from investment banks with a strong reputation. Based on a sample of 503 high-tech cross-border acquisitions, bidding-firm shareholders experience positive but statistically insignificant valuation effects overall. However, bidder firms experience positive and significant valuation effects when the foreign high-tech target receives a high level of media attention and when the acquisition is endorsed by a top-tier investment bank. Visibility and credibility enhance the perceived benefits of acquiring foreign targets that have substantial intangible assets and a high level of asymmetric information.

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High-tech companies exhibit a high degree of asymmetric information between managers and shareholders that complicates the valuation of their assets. Companies in high-tech industries, such as biotechnology, electronics, computer software, and hardware, are forced to manage their assets aggressively in order to keep up with the pace of technological change. Mergers and acquisitions enable high-tech companies to build core businesses, extend existing lines of business, and even expand geographically. According to a McKinsey Quarterly Report (2002, #1), "Transactions and consolidations can often fill holes in a product line, open new markets, and create new capabilities in less time than it would take to build businesses internally. Such moves may be prerequisites to achieving a dominant position--the best assurance for survival."

Technology firms are unique because they have a large proportion of intangible assets that are difficult to value. Market participants may not fully understand the proprietary technologies in which the firm engages, because the technologies often involve highly specialized knowledge. Market participants may be unable to forecast which technologies will survive competition and emerge as leaders in their markets as consolidation takes place within industries and across global markets. Furthermore, information asymmetry may be a function of risk-taking incentives caused by the managerial compensation structure. As many technology company managers are paid with options, they have an incentive to take more risk, which may cause value destructive behavior and exacerbate asymmetric information problems. Finally, success in technology companies is dependent upon highly illiquid intangible assets that are difficult to replace, such as human capital. All of these conditions cause a high degree of asymmetric information.

The uncertainty surrounding the valuation of high-tech assets is even more pronounced in the global context because there may be limited information that is disclosed about the assets. Given that foreign assets are geographically distant, the target may be more costly to evaluate and more difficult to monitor than a domestic target. From the perspective of a US parent that may acquire foreign high-tech assets, there is uncertainty about the potential integration of those assets with existing assets, because it may involve the cooperation of different cultures and country regulations. Furthermore, cultural differences between the bidder and target may obscure the value of assets under consideration and the ability of the bidder to manage the foreign workforce. If the technologies involved in the acquisition require highly specialized knowledge, shareholders may not be able to ascertain whether the assets being acquired will add value.

This study investigates whether cross-border acquisitions of high technology targets create value for US acquiring firms, and attempts to determine why some of these cross-border acquisitions create more value than others. …

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