Patent-Right Uncertainty and Mergers and Acquisitions

Abstract

The legal boundaries of patents are more uncertain than commonly assumed. This uncertainty can increase costs from holdup, licensing, and litigation, which decreases the estimated value of synergies arising from the acquisition of innovation. We find that this uncertainty is important for target selection. Firms are less likely to be acquired when their patents are in thickets that expose firms to more patent-right uncertainty. Conversely, firms are more likely to be acquired when their patents form thickets that shield firms from this uncertainty. Furthermore, these relations depend critically on the acquirer's or target's ability to impose costs on the other.

Keywords: Innovation, mergers and acquisitions, patent rights, patent thickets, uncertainty