Value Creation in Acquisitions Through the Looking Glass of IT : Examining the Effects of IT Distance on Acquisition Performance

To explain the disproportionate success in acquisition strategies, researchers have examined the role of dyadic dynamics (i.e., interactions between the acquirer and the target firm). In this study, we extend this stream of literature by examining the effects of pre-acquisition IT distance (i.e., the degree of incompatibility of enterprise IT systems between acquiring and target firms prior to acquisition) on the acquirer's post-acquisition performance. To measure IT distance, we adopt a word embedding technique to map each firm's IT portfolio (discrete) in a low-dimensional embedding space (continuous) and calculate the distance between IT vendors in that space. Using data on firms' acquisition activities, we find that IT distance is negatively associated with the acquirer's acquisition performance. Also, the adverse effect of IT distance is stronger for acquisitions motivated by operational synergies, compared to those seeking non-operational synergies. This supports our theory that IT distance disrupts acquisition performance when the combined firm has a greater need for tight integration to create acquisition synergies. Lastly, our findings suggest that IT distance mostly disrupts long-term strategic synergy rather than short-term cost-saving synergy. This research contributes to the IS literature by introducing a novel concept of IT distance and by theorizing and empirically validating its performance implications in acquisitions. The findings of this study can inform practitioners about how to devise IT strategies in corporate acquisitions in order to mitigate IT risks and achieve greater acquisition performance