Genetic Codes of Mergers, Post Merger Technology Evolution and Why Mergers Fail

This paper addresses the key determinants of merger failure, in particularthe role of innovation (post-merger performance) and technology (ex-anteselection) when firms decide to separate. After a brief review of the existingliterature we introduce a model of process innovation where merged firmsexibit intra-merger spillover of knowledge under different market regimes,depending on whether firms integrate vertically or horizontally. Secondly,we describe an ideal matching pattern for ex-ante selection criteria of tech-nological partnering, abstracting from financial market power issues. In afinal section we test the model implications for merger failure for M&A datafrom the US biotechnology industry in the 90s. We find that post-mergerinnovation performance, in particular with large spillovers, increases theprobability of survival, while we have no evidence that market power ef-fects do so in long run. Additionally, we find extensive technology sourcingactivity by firms (already in the 90s) which contradicts the notion of failureand suits well the open innovation paradigm.