Anticipated versus Actual Synergy in Merger Partner Selection and Post-Merger Innovation

Past research has primarily focused on what happens after a merger has occurred. This research attempts to find out whether anticipated benefits from the merger do actually accrue. The authors characterize the effects of observed variables on whether pairs of firms merge, vis-à-vis roommate matching, and then link these factors to post-merger innovation (number of patents). They jointly estimate the two models using MCMC methods with a unique panel data set of 1,979 mergers between 4,444 firms across industries and countries from 1992 to 2008. They find that similarity in national culture and technical knowledge has a positive effect on both partner selection and post-merger innovation. However, anticipated synergy from sub-industry similarity is not realized in post-merger innovation. Further, firms overlook key sources of synergy when selecting a merger partner. For example, financial synergy from higher total assets and complementarity in total assets and debt leverage and knowledge synergy from breadth and depth of knowledge positively influence innovation but not partner selection. Furthermore, firms fail to anticipate factors that dilute synergy (e.g., higher debt levels) and merge with firms that detract from their innovation potential. Overall, the results reveal some incongruity between anticipated and realized synergy, offering implications for firms using mergers as a way to increase their innovation potential