Takeovers of Technology Firms: Expectations vs. Reality

Abstract

The distinctive high-growth, high-risk nature of technology-based industries raises important questions about the creation of wealth in takeovers of technology firms. Although acquiring firm shareholders respond favorably to high-tech takeover announcements, these acquirers generally underperform industry-matched benchmarks and size- and book-to-market matched control portfolios in the long run. A key factor related to poor post-merger performance is a low bidder book-to-market ratio, especially when combined with a bidder ownership structure with high potential for agency problems. These findings suggest that the market tends to exhibit excess enthusiasm about the expected benefits of certain high-tech acquisitions.