Academic journal article Financial Management

Takeovers of Technology Firms: Expectations vs. Reality

Academic journal article Financial Management

Takeovers of Technology Firms: Expectations vs. Reality

Article excerpt

Theodor Kohers (*)

The distinctive high-growth, high-risk nature of technology-based industries raises important questions about the creation of wealth in takeovers of technology firms. Although acquiring firm shareholders respond favorably to high-tech takeover announcements, these acquirers generally underperform industry-matched benchmarks and size- and book-to-market matched control portfolios in the long run. A key factor related to poor post-merger performance is a low bidder book-to-market ratio, especially when combined with a bidder ownership structure with high potential for agency problems. These findings suggest that the market tends to exhibit excess enthusiasm about the expected benefits of certain high-tech acquisitions.

High-tech firms play a critical role in promoting technological advancements, scientific discoveries, and efficiency gains, making them valuable, innovative leaders in today's economy. Acquiring firms have been drawn to technology firms and the distinctive growth opportunities and productivity gains they can provide. From the acquirer's perspective, purchasing a technology firm can have distinct efficiency advantages over trying to develop the technology internally. Prior research has shown that these growth opportunities in high-tech industries often lead to positive bidder investor sentiment towards high-tech acquisitions and the future benefits that can result from these combinations.

This paper examines whether the high expectations regarding the future merits of these investments are actually justified. Is the positive reaction from bidder shareholders an unbiased forecast of the future long-term performance of high-tech mergers? Alternatively, are bidder investors' perceptions of high-tech deals overly optimistic, reflecting a high-tech hype mentality? To address these questions, the post-merger performance of acquirers that purchase target firms operating in high-tech areas is examined, (i.e., young and emerging industries that focus on the explorative development and manufacture of new technology). While "high tech" encompasses a number of different industries, from biotechnology to information technology to electronic devices, the key characteristic of all these different areas is their focus on innovation. Thus, new evidence is provided on the effects of technology acquisitions and the longer-term value implications that these investments have for acquiring firms that may or may not also be from high-tech sectors.

In addition to assessing the bidder value effects of high-tech acquisitions, we also test for evidence of agency problems in the high-tech takeover decisions made by acquiring-firm managers. An examination of these factors, which have not been addressed or tested in prior studies, sheds light on which types of firms are particularly susceptible to agency problems and how these factors can adversely affect bidder-firm performance. In examining these issues, the findings of this study have implications for corporate governance, high-tech investments, and market efficiency.

The results show that, although the initial market reaction to high-tech mergers is positive for acquirers, these mergers significantly underperform both industry-matched and size/book-to-market-matched control portfolios over the three-year period following the merger. The poor performance for acquirers, however, predominates among glamour bidders, or those firms with low book-to-market ratios. Glamour bidders with a higher risk of agency problems show even worse post-merger performance. On the other hand, institutional ownership in the acquiring firm has a positive influence on acquirer long-run abnormal returns, but the method of payment has no significant impact on the bidders' post-merger abnormal returns. In sum, these findings suggest that the market tends to exhibit excessive enthusiasm toward the expected benefits of certain high-tech mergers, since many of these benefits do not materialize. …

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