How Buyers Cope with Uncertainty When Acquiring Firms in Knowledge-Intensive Industries: Caveat Emptor

Abstract

Knowledge often cannot be acquired in efficient factor markets due to asymmetric information and because it may be bundled in teams or networks. As a result, knowledge is frequently the focus of corporate acquisitions. However, variations in quality are harder to observe for knowledge-based assets than tangible assets. This creates dilemmas for buyers whenever a target's industry is knowledge-intensive. This study finds that buyers cope by: 1) offering lower bid premia; 2) paying in stock; and 3) increasing information through lengthy negotiations and by avoiding tender offers. However, unrelated buyers do not apply these strategies. Their information needs may be lower if they do not intend to integrate the target. These findings have implications for further work in strategic management and organizational theory.

Keywords: Knowledge, Human capital, Mergers & Acquisitions

JEL Classification: G34, L100, J41