Genetic codes of mergers, post merger technology evolution and why mergers fail

This paper addresses the key determinants of merger failure, in particular the role of innovation (post-merger performance) and technology (ex-ante selection) when firms decide to separate. After a brief review of the existing literature we introduce a model of process innovation where merged firms exibit 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 technological partnering, abstracting from financial market power issues. In a final section we test the model implications for merger failure for M&A data from the US biotechnology industry in the 90s. We find that post-merger innovation performance, in particular with large spillover, increases the probability of survival, while we have no evidence that market power effects do so in long run. Additionally, we find extensive technology sourcing activity by firms (already in the 90s) which contradicts the notion of failure and suits well the open innovation paradigm.