Elsevier

Research Policy

Volume 34, Issue 2, March 2005, Pages 195-220
Research Policy

The impact of M&A on the R&D process: An empirical analysis of the role of technological- and market-relatedness

https://doi.org/10.1016/j.respol.2005.01.002Get rights and content

Abstract

Using information on 31 in-depth cases of individual M&A deals, we show that technological and market-relatedness between M&A partners distinctly affects the inputs, outputs, performance and organisational structure of the R&D process. While the findings in the literature on the effect of M&A on R&D are quite mixed, we can sharpen results by analysing data at the level of the R&D process. This comes at the price of a smaller sample and more qualitative data, for which caution in the interpretation is necessary. M&A between partners with ex-ante complementary technologies result in more active R&D performers after the M&A. In sharp contrast, when merged entities are technologically substitutive, they significantly decrease their R&D level after the M&A. Moreover, R&D efficiency increases more prominently when merged entities are technologically complementary than when they are substitutive. These two findings on the R&D level and the performance support the scope economy effect of M&A, on the one hand, and reject the scale economy effect of M&A, on the other. Next, for cases in which partners were active in the same technological fields before the M&A, the reduction of R&D is more prominent, while the R&D efficiency gain is smaller if merged entities were rivals in the product market prior to their merger than if they were non-rival. This suggests that rival firms reap little technology gains from mergers.

Introduction

Firms have been using mergers and acquisitions (M&A) intensively as instruments for growth for many years. Concurrent with the heavy M&A activity, innovation has become increasingly important as a way for companies to achieve and maintain a competitive advantage. With both M&A and innovation being centrepieces of today's competitive strategy development, it is important to understand the consequences of M&A transactions on the innovative potential of firms. Unfortunately, most of the existing studies on the effects of M&A are limited to shareholder value or short-run firm performance (Mueller, 1980, Jensen and Ruback, 1983). The link between M&A and R&D is, despite its importance, even less well examined in the literature, at least directly. Views on how technological activities of firms are affected through M&A are often conflicting. For instance, R&D inputs can either increase or decrease: R&D may decrease after M&A due to the elimination of duplicated R&D; but M&A may realise scale and/or scope economies in R&D and therefore merged firms may have a bigger incentive to perform R&D than before their M&A. Results of testing which theoretical hypotheses fit the data better are mixed (Hall, 1999, Hitt et al., 1991, Ravenscraft and Scherer, 1987). Only a limited number of empirical studies really focus on the consequences of M&A on companies’ technological activities, at least directly. Most of these empirical studies were carried out in the US and tend to find, on average, negative effects on R&D inputs; however, all show a high variance in results and hence fail to find any robust results.

The contribution of this paper is two-fold. First, we advance the discussion at a conceptual level by arguing that the impact of M&A on R&D and innovation depends on the relatedness between the target and the acquirer. We contend that both technological-relatedness and market-relatedness distinctly affect the relationship between M&A and innovation and should be accounted for simultaneously. To the best of our knowledge this has not been accomplished yet in the literature. The impact of a merger between firms active in the same technological fields is expected to lead to a rationalisation of the R&D process, while firms active in complementary technological fields are more likely to realise synergies and economies of scope in the R&D process through their merger. Relatedness on the output market is another important dimension. M&A activity through the aggregation of markets could lead to economies of scale in output and/or distribution. This will feedback into the innovation process. Similarly, economies of scope in product markets, or product diversification, will lead to efficiencies in the R&D process and hence indirectly stimulate R&D. Finally, increasing market power in the output market will have a positive effect on R&D performance, but there is no consensus in economic thinking as to whether it will lead to more or less R&D activities. While technological- and market-relatedness of partners in M&A might condition the measurable impact of M&A on the R&D process, we believe that addressing both these different effects jointly already constitutes an important conceptual contribution.

A second contribution of this paper is empirical. Sufficiently detailed data is required for advancing the joint analysis of the distinct effects of technology and market relatedness on the impact of the M&A on the R&D process. Using a new EU data set which was collected by directly interviewing key personnel of high- and medium-tech firms that have been involved in M&A, we measure the effects of M&A at the R&D management level rather than at the firm level, as was done in previous empirical studies. As a consequence, we can accurately link a particular M&A deal to associated changes in the R&D strategy. Although the sample is rather small – 31 deals and 62 companies – the data obtained provide in-depth information for each M&A deal. In particular, we have collected not only traditional R&D indicators, such as R&D expenditures, R&D personnel, or patent counts, but also in-depth measures such as change in R&D portfolios and the degree of R&D reorganisation. Wherever possible, these data were cross-checked with published documents such as year reports, press releases, newspaper articles and industry publications. As a result of these in-depth measures, we can study not only to what extent M&A have an impact on R&D but also how, by scrutinising the dynamic reorganisation processes of the firms associated with M&A. Furthermore, from the data, we construct indicators for technology- and market-relatedness, which allow us to test the impact of relatedness in more depth than has been done in existing studies. Nevertheless, some caution is in order when interpreting our results as they are derived from survey data with a limited sample size.

Our results can be summarised as follows. First, when merged entities are technologically complementary, they become more active R&D performers after the M&A. In sharp contrast, when merged entities are technologically substitutive, they significantly decrease their R&D level after the M&A. Second, R&D efficiency increases more prominently when merged entities are technologically complementary than when they are substitutive. These two findings on R&D level and performance support the scope economy effect of M&A on the one hand and reject the scale economy effect of M&A, on the other. Third, if we focus on the cases in which merged entities are technologically substitutive, the reduction of R&D is more prominent and the R&D efficiency gain is smaller if merged entities were rivals in the product market prior to their merger than if they were non-rival. This suggests that rival firms reap little technology gains from M&A.

Finally, we also dig into the sources from which changes in R&D activities originate. We find that when merged firms are technologically substitutive, key employees tend to leave more often, the R&D portfolio becomes more focused, the R&D horizon becomes shorter and internal funds available to R&D decrease.

The paper is organised as follows. Section 2 surveys the existing literature on the impact of M&A on R&D. We draw from both the economics and the technology management literature. Section 3 summarises the major theoretical effects M&A can have on the R&D process as found by the existing literature. In addition, we discuss the consequences of these effects for our measures of R&D input, output, performance and organisation, depending on the technology- and market-relatedness between the merging entities. Section 4 describes the data and Section 5 reports the results of our statistical analysis. The section concludes with a discussion of how the relatedness between partners in the M&A conditions these discussed effects. Concluding remarks are presented in Section 6.

Section snippets

Literature review

In sharp contrast with the extensive literature that exists on the impact of M&A on the financial and economic performance of companies, only a limited number of studies focus directly on the consequences of M&A on the companies’ technological activities. Furthermore, only empirical studies exist, while the theoretical literature remains mute on this issue. Nevertheless, the theoretical literature on M&A indirectly provides several predictions about the relationship between M&A and R&D. In our

Research design

The major conclusion from the existing studies is that any results on the relation between M&A and the innovation process are weak and/or difficult to generalise. First, most data used to analyse these effects in the economics literature are standardised large sample data such as R&D expenditures, patent counts and productivity. These data could reveal to what extent mergers and acquisitions have an impact on innovation, but they do not tell us how. The importance of zeroing in on the

Description of the data

Our sample includes 31 merger or acquisition deals in medium- and high-tech industries concluded in the last 15 years, with 62 firms involved. This sample cannot be regarded as representative of the M&A population because the sample is not random. Interviewees selected the acquisition for which to respond to the questionnaire. One would expect managers to select deals that they considered a success.3

Empirical results on the impact of technology- and market-relatedness

This section discusses the empirical results relating to the effects of M&A on the R&D process. In particular, we are interested in assessing the role played by technology- and market-relatedness of the combining firms. We proceed in two steps in order to convince the reader both of the relevance of these dimensions and the need to analyse the effects of the M&A at the R&D process level directly.

First, we will consider a limited selection of traditional indicators. They capture changes in R&D

Conclusions and discussion

The results of the preceding section confirm our hypothesis that the ex-ante-relatedness between merger partners matters and that market- and technology-relatedness have important separately identifiable consequences for the impact of a M&A on the new entity's R&D and innovation process. To uncover these different consequences one needs to examine the impact of a specific M&A deal on the R&D process at a sufficiently disaggregate level. At this point, the main contribution of the paper is

Acknowledgements

The paper is based on the results from the project “Mergers and Acquisitions and Science and Technology Policy”, financed by the European Commission, DG Research (Contract No. ERBHPV2-CT-1999-13). The study was carried out by an international team of researchers from different universities: Catholic University of Leuven, Politecnico di Milano, IESE Business School (Barcelona), Universitat Pompeu Fabra (Barcelona), Reading University, INSEAD, Politecnico di Torino and IDEA Consult. The full

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