Choosing the Right Target: Relative Preferences for Resource Similarity and Complementarity in Acquisition Choice

Yu, Yu, Nita Umashankar, and Vithala Rao (2016), “Choosing the Right Target: Relative Preference for Resource Similarity versus Complementarity in Acquisition Choice,” Strategic Management Journal. DOI: 10.1002/smj.2416.

Posted: 21 Jan 2016

See all articles by Yu Yu

Yu Yu

AIG

Nita Umashankar

Georgia State University

Vithala R. Rao

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: January 20, 2015

Abstract

Research summary: Corporate acquisition is a popular strategic option for firms seeking new resources. However, little research exists on the question of why one firm is chosen over another. We develop a model relating characteristics of similarity and complementarity between acquirers’ and target firms’ key resources, including their products and R&D pipelines, to the likelihood of the acquirers choosing a particular firm. We construct measures of similarity and complementarity between and across products and R&D pipelines, and test their effects using a novel application of the choice model. Findings reveal that acquirers view similarity and complementarity differently, based on the resource they are comparing. When making comparisons to their own R&D pipelines, acquirers prefer similarity over complementarity whereas when making comparisons to their product portfolios, they prefer complementarity over similarity.

Managerial summary: Corporate acquisition is a popular way for firms to grow and obtain innovative resources. However, we know little about why acquirers choose one firm over another. We capture the influence of similarity and complementarity between acquirers’ and target firms’ products (current innovative value) and R&D pipelines (future innovative value) on whether a particular target firm is acquired. Insights from the pharmaceutical industry reveal that acquirers value similarity and complementarity in target firms differently, based on whether the comparison being made is with respect to their products or their R&D pipelines. Regarding their R&D pipelines, acquirers prefer that the target firm has similar, rather than complementary, resources. However, the opposite is true concerning their own products: acquirers prefer that the target firm has complementary, versus similar, resources.

Keywords: acquisition, similarity, complementarity, innovation, choice model

Suggested Citation

Yu, Yu and Umashankar, Nita and Rao, Vithala R., Choosing the Right Target: Relative Preferences for Resource Similarity and Complementarity in Acquisition Choice (January 20, 2015). Yu, Yu, Nita Umashankar, and Vithala Rao (2016), “Choosing the Right Target: Relative Preference for Resource Similarity versus Complementarity in Acquisition Choice,” Strategic Management Journal. DOI: 10.1002/smj.2416., Available at SSRN: https://ssrn.com/abstract=2719123

Yu Yu

AIG ( email )

175 Water Street
New York, NY 10038
United States
8625961551 (Phone)

Nita Umashankar (Contact Author)

Georgia State University ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Vithala R. Rao

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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