Published November 12, 2019
Businesses that focus on innovation are more likely to be acquired — and command a higher price when they are — according to new research from the School of Management.
Recently published in the Journal of Banking and Finance, the study found that firms with larger innovation output and more research and development (R&D) investment are more likely to be acquired, receive unsolicited bids and receive multiple bids from companies seeking innovation through acquisition.
“When Google acquired Motorola in 2011, the $12.5 billion buyout was 73% higher than its market value,” says study co-author Kee Chung, the Louis M. Jacobs Professor of Financial Planning and Control. “Motorola’s patents drove up the buyout price because they allowed Google to protect the Android operating system and enhance its competitive position in the mobile marketplace.”
The researchers analyzed more than 30 years of data on R&D and patents to calculate a firm’s innovation inputs and outputs, takeover premiums and the likelihood to receive unsolicited bids and multiple bids. They say that while previous research has explored the motives for and results of corporate takeovers, their study reveals innovation as a new factor.
“Through our examination of decades of data, it’s clear that innovation is a motive for corporate takeovers,” says lead author Jennifer Wu, clinical assistant professor of finance. “Innovative firms are more likely to be acquired and receive greater takeover premiums in the market for corporate control.”
While the greater premiums are good for the companies being bought out, the study revealed that for the acquiring firm, the higher price is worth paying.
“These types of mergers are beneficial on both sides,” says Wu. “The acquired company gets a bigger payday because of their cache of patents, but the newly merged company sees improved performance thanks to the influx of innovation.”