essays on mergers & acquisitions and innovation

173 Pages·2010·0.94 MB·English

ESSAYS ON MERGERS & ACQUISITIONS AND INNOVATION
by Yu Yu
This thesis/dissertation document has been electronically approved by the following individuals:
Rao,Vithala R. (Chairperson)
Kadiyali,Vrinda (Minor Member)
Nicholson,Sean (Minor Member)
ESSAYS ON MERGERS & ACQUISITIONS AND INNOVATION

A Dissertation
Presented to the Faculty of the Graduate School
of Cornell University
In Partial Fulfillment of the Requirements for the Degree of
Doctor of Philosophy

by
Yu Yu
August 2010
© 2010 Yu Yu
ESSAYS ON MERGERS AND ACQUISITIONS
Yu Yu, Ph. D.
Cornell University 2010

While innovation and growth can be promoted internally through focus on
research and development (R&D), many firms find acquisition from external sources
to be a speedy and attractive alternative. Despite the numerous theories of merger and
acquisition (M&A) in the literature, no empirical study has tackled the problem of
target selection in an acquisition. The existing studies on M&A outcomes also fail to
control for the endogenous matching between the acquirer and the target.
Essay 1 of this dissertation is the first to study the target selection criteria in an
empirical setting. It quantifies the elusive concept of synergy by developing new
measures of similarity and complementarily between the acquirer and the target that
are more comprehensive than the existing measures in the literature. Using an
innovative application of the discrete choice model, I find that firms use acquisition to
promote growth and innovation in areas of strategic interest. Specifically, acquirers
choose target firms whose product markets match their own R&D projects, and target
firms whose R&D projects match their own product markets.
Essay 2 enriches the modeling approach for merger partner selection in essay
1. I use a game-theoretic matching model and study the impact of matching on merger
performance. With a Bayesian estimation method, I apply the model to 1895 mergers
in five high-tech industries that occurred between 1992 and 2008. I find that the
unobserved strategic fit between the two merging partners has a significant effect on
the post-merger innovation abilities of the combined firm. Managers wisely choose
merger partners that deepen their technical knowledge, but under-estimate the
challenges in integrating foreign partners and partners with similar technology. I also
find evidence of estimation bias due to matching induced endogeneity.
Essay 3 of the dissertation is a comprehensive review of the M&A related
research published in top marketing journals. This review will provide marketing
scholars with a research background on M&A, both in terms of theories and marketing
applications of those theories. This review will help readers to appreciate the
contribution made by marketing researchers to M&A knowledge, and hopefully
inspire more marketing scholars to incorporate M&A topic in their research.
BIOGRAPHICAL SKETCH

Yu Yu was born in Changchun, China and received her early education in her
hometown. She received her Bachelor’s Degree in Finance from Nan Kai University
in Tianjin, China in 2002 before she came to the United States. She spent two years in
the Economics PhD program in Indiana University-Bloomington and moved to Ithaca,
New York to pursue her doctoral studies in Marketing at Cornell.

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I dedicate this dissertation to my husband and my parents
谨以此论文献给我的父母和先生
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ACKNOWLEDGMENTS

I would like to wholeheartedly thank my dissertation advisor Vithala R. Rao
for encouraging, advising, and supporting me at every stage of the dissertation. He
never reserved his time or attention when it came to my meeting requests. He
supported me professionally and emotionally through difficult times. He is a
wonderful advisor to have. I also express my deep gratitude to my committee
members Vrinda Kadiyali, and Sean Nicholson. Vrinda provided many perspectives
towards my research ideas along the way, and Sean’s deep knowledge in
healthcare/pharmaceutical research and empirical data sources benefited me greatly. I
am very fortunate to have them on my committee.
I also thank Sachin Gupta for his guidance during the early stages of my PhD
study. I learned invaluable lessons from him on research and teaching.
Finally, special thanks to Vikrant Tyagi who helped me in numerous ways on
the dissertation.

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TABLE OF CONTENTS

Biographical Sketch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Dedication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... ix

1. Promoting Growth and Innovation through Acquisition: A Choice Modeling
Approach.....................................................................................................................10
1.1 Abstract...................................................................................................................10
1.2 Introduction............................................................................................................10
1.3 Theory and Hypotheses..........................................................................................17
1.3.1 Theory............................................................................................................17
1.3.2. Hypotheses...................................................................................................20
1.4 Model and Estimation Method...............................................................................25
1.4.1 Model Specification.......................................................................................25
1.4.2 Model Robustness and Out of Sample Prediction.........................................31
1.4.3 Methodological Challenges...........................................................................32
1.5 Data.........................................................................................................................36
1.5.1 Sample and Data Collection Procedure.........................................................36
1.5.2 Summary Statistics........................................................................................40
1.5.3 Measurement of Synergy...............................................................................41
1.6 Results....................................................................................................................45
1.6.1 Conditional Logit Result...............................................................................45
1.6.2 Bootstrapping Test.........................................................................................49
1.6.3 Predictive Power............................................................................................50
1.6.4 Tests for Nonlinearity of R&D and Market Intensification..........................51
1.6.5 Test for Financial Synergies..........................................................................51
1.7 Discussion and Implications...................................................................................52
1.8 Limitations and Directions for Future Research....................................................53
References....................................................................................................................55

2. Measuring the Impact of Mergers on Innovation with a Matching Model...........60
2.1 Abstract...................................................................................................................60
2.2 Introduction............................................................................................................61
2.3 Theory and Literature Review................................................................................69
2.3.1 Theory............................................................................................................69
2.3.2 Literature Review..........................................................................................74
2.4 Model......................................................................................................................78
2.4.1 The Merger Game..........................................................................................78
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2.4.2 Roommate Game...........................................................................................82
2.4.3 Structural Empirical Model...........................................................................88
2.5 Simulation Results..................................................................................................97
2.6 Empirical Specification..........................................................................................99
2.6.1 Dependent Variables...................................................................................100
2.6.2 Independent Variables.................................................................................102
2.7 Data.......................................................................................................................107
2.7.1 Summary Statistics......................................................................................109
2.8 Results..................................................................................................................111
2.9 Summary...............................................................................................................119
2.10 Limitations and Future Research........................................................................120
Reference....................................................................................................................122

3. Review of Merger and Acquisition Research in Marketing Literature..............131
3.1 Introduction..........................................................................................................131
3.2 Review of M&A Theories....................................................................................132
3.2.1 The strategy heories.....................................................................................133
3.2.2 Process theories...........................................................................................134
3.2.3 Financial theories:.......................................................................................136
3.2.4 Governance theories:...................................................................................137
3.2.5 Competence theories...................................................................................138
3.3 Review of M&A Research in Marketing..............................................................140
3.3.1 Merger and acquisition process:..................................................................148
3.4 Conclusions and Future Research Directions.......................................................158
References..................................................................................................................162

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