67 Pages Posted: 12 Sep 2018
Date Written: August 28, 2018
Firms have incentives to acquire innovative targets to discontinue the development of the targets' innovation projects and preempt future competition. We call such acquisitions "killer acquisitions." We develop a parsimonious model in which killer acquisitions arise from an incumbent's desire to prevent the profit cannibalization of existing products that are substitutes for (or overlap with) the target's innovation. We provide empirical evidence for this phenomenon by tracking detailed project-level development for more than 35,000 pharmaceutical drug projects. Acquired drug projects are less likely to be developed when the acquired project overlaps with the acquirer's portfolio of products and projects. This pattern is more pronounced when the acquirer has strong incentives to protect its market power due to weak existing competition. Alternative interpretations such as optimal project selection and human capital and technology redeployment do not explain our results. Conservative estimates indicate that about 6.4% of all acquisitions in our sample are killer acquisitions and that such acquisitions often occur just below thresholds for antitrust scrutiny.
Keywords: Innovation, Mergers and Acquisitions, Drug Development, Competition
JEL Classification: O31, L41, G34, L65
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