M&A Target Selection for Innovation: Determinants from a Knowledge-Based Perspective

Abstract

Recently concluded M&As differ from the M&As concluded in the past. Generally, M&A is known as an instrument to increase market share, obtain economies of scale and scope, access new markets, and diversify a firms fields of business. However, many recent M&As are conducted for the purpose of acquiring the knowledge and technologies of the target firm as the strategic importance of external technology acquisition is substantially increasing to cope with high technological and market uncertainty and rapid technology change. In academics, this type of M&A is referred to as technological M&A and is distinguished from conventional-purpose M&As. Technological M&As are receiving growing attention in terms of their role in creating innovation and sustaining a competitive advantage, benefits usually not obtained through non-technological M&As. Accordingly, there are ongoing discussions on how a firm utilizes technological M&As to generate innovation and a growing body of literature examines the determinants of technological M&As innovation creation. Through technological M&As, firms obtain new knowledge and technology from the target firm. Newly acquired knowledge contributes to creating innovation by itself and is combined with the existing knowledge of the acquirer firm to create innovation beyond what is possible for single firm. All of this implies that innovation through technological M&As depends on the knowledge characteristics of the acquirer and target firm. Accordingly, the extant literature states that the examination of knowledge characteristics of the acquirer firm and target firm is important to predict post-M&A innovation performance. In other words, to create more and diverse innovation, firms need to identify the knowledge characteristics of both the acquirer and target to select an appropriate target. To systematically examine factors which need to be considered in technological M&A target selection, this dissertation adopts multiple dimensions of both the determinants and the resulting innovation performance. First, the dissertation investigates determinants in terms of the acquirer firm, target firm, and dyadic perspectives. These three perspectives help to examine the influence of individual firm characteristics as well as of the reciprocal characteristics between the acquirer and target firm on the performance of technological M&As. In other words, they contribute to identify the characteristics of the target firm generating more post-M&A innovation, the characteristics of the acquirer firm allowing it to exploit the acquired knowledge well, and the reciprocal characteristics creating more synergies. In contrast to this dissertation, the extant literature has the limitation of only examining the determinants from one perspective. Second, the post-M&A innovation performance of the acquirer firm is examined in terms of an increase in innovation quantity and innovation diversity. Through technological M&As, an acquirer firm intends to generate innovation beyond what is possible using its existing knowledge base. In other words, an acquirer firm is conducting technological M&As for the purpose of increasing both innovation quantity and innovation diversity. The extant literature, however, focuses only on the investigation of factors which affect innovation quantity. Therefore, an examination of the effects of determinants of the increase of both innovation quantity and innovation diversity advances the understanding of technological M&As. Throughout three chapters, by adopting these diverse perspectives, the dissertation examines three important components of technological M&A target selection: the basic considerations for selecting a M&A target, factors for increasing post-M&A innovation quantity and factors for increasing post-M&A innovation diversity. This approach provides a comprehensive view on technological M&A target selection. Chapter 3 examines the effects of the acquirer firm and target firms knowledge base structure on technological M&A. Because the knowledge of the acquirer firm and target firm will be combined through the technological M&A to create innovation, the characteristics of the acquirer firm and target firms knowledge base should be examined in advance. Also, because this approach helps to identify what kind of acquirer firm and target firm is suitable for a technological M&A strategy, it highlights the basic considerations for M&A target selection. According to the empirical results, first, acquirer firms with knowledge in diverse fields can obtain higher post-M&A innovation quantity. Second, different from the acquirer firm, the target firms with specialized knowledge increase the post-M&A innovation quantity. Third, synergy effects from technological M&As are created when the acquirer firm has a broad knowledge base while at the same time the target firm has an expertise in a specific area. In summary, this chapter empirically proves that a technological M&A strategy, which is mostly conducted by established conglomerates to obtain the knowledge and technology of start-up firms, contributes to an increasing innovation performance. Chapter 4 examines the factors which have a profound effect on increasing knowledge absorption and consequently increasing innovation quantity. Among the various dyadic factors, the dissertation focuses on the role of knowledge similarity and knowledge digestibility. Empirical analysis results present two findings. First, the acquirer firm needs to select an M&A target which has a modest level of similar knowledge. A high similarity between the knowledge bases of the acquirer firm and target firm provides a similar language and recognition structure helping the absorption of the acquired knowledge but reduces the quantity of acquired new knowledge. Second, more innovation can be generated when the acquirer firm selects a target firm with a digestible size of knowledge. This finding undeceives that the acquirer firm needs to select a target considering its capability of absorbing and digesting knowledge although a target firm with a large amount of knowledge is attractive in terms of new knowledge acquisition. In summary, this chapter highlights that a firm with a large amount of knowledge completely new to the acquirer firm would seem to be a good target in terms of knowledge acquisition, but would have negative effects in terms of knowledge exploitation and ultimately decrease post-M&A innovation quantity. Chapter 5 examines the effects of determinants of the target firm as well as dyadic perspectives on post-M&A innovation diversity. Innovation diversity, having received growing attention by recent innovation-related research, is regarded as an important option to cope with a fast changing environment. Firms utilize an external technology acquisition strategy such as technological M&A to rapidly increase their innovation diversity. Empirical results on post-M&A innovation diversity, first, show that a firm with a large amount of knowledge contributes to generating innovation in diverse fields. Second, the target firms relatively bigger size of the knowledge base also contributes to an increase of the innovation diversity. In summary, in contrast to innovation quantity, this chapter confirms that the innovation diversity increases when an large, in relative and absolute terms, amount of knowledge penetrates into the acquirer firm and disrupts the existing routines. Overall, this dissertation reveals factors to be considered in selecting a target for technological M&A and elucidates the relationship between technological M&A and its resulting innovation performance in terms of multiple dimensions. The dissertation provides the following key findings and contributions. First, the dissertation highlights the importance of examination of post-M&A innovation diversity. In the environment of high technological and market uncertainty, firms have a difficultly in predicting and coping with the volatile future. Accordingly, it is important that a firm has capabilities for creating innovation in diverse fields to respond to the fast-changing environment and ensure future success. Lots of firms conduct M&A to increase their innovation diversity. Thus, it is necessary to identify the factors which affect post-M&A innovation diversity. The dissertation empirically proves that selecting a proper target firm contributes to increase post-M&A innovation diversity. Second, the dissertation emphasizes that an acquirer firm should consider the diverse dimensions of innovation and determine their priority among the dimensions in the phase of target selection. According to the findings of the dissertation, the determinants can have different effects on the different dimension of innovation performance. The relative size of the target knowledge base, in particular, has a negative effect on the increase of innovation quantity while it has a positive effect on the increase of innovation diversity. Therefore, as this dissertation did, research in this field needs to re-examine the factors which affect the post-M&A innovation quantity to identify their effect on the post-M&A innovation diversity. Third, the dissertations uncovers the effects of knowledge base structure on post-M&A innovation performance. The extant literature focused on the examination of effects of the knowledge base contents including the knowledge relatedness of the acquirer firm and target firm or the knowledge size in the new field to the acquirer firm. Because the structure of knowledge base affects the efficiency of internal R&D and external technology sourcing strategy as well as determines the characteristics of future innovation, the examination of knowledge base structure in the context of technological M&A is necessary to select a proper target firm. In conclusion, this dissertation highlights that selecting a proper target firm is important to successfully utilize technological M&A and contributes to establishing a strategy of target firm selection which is the first step of technological execution.