Although complementarity between products and/or technologies of bidders and targets is considered a key driver of M&A deals, many observed mergers are inefficient: Complementarity gains in actual mergers are lower than the gains that could have been obtained were the targets acquired by different bidders. In this paper we propose a possible reason for the existence of inefficient mergers, which is based on search and information frictions. Our model examines three such frictions: target's obsolescence risk, difficulties in evaluating complementarity gains, and competitive interaction among potential bidders in output markets. We test the model's predictions using two established measures of complementarity gains in mergers: product similarity and technological overlap. Both sets of tests indicate that the degree of inefficiency in observed M&As is related to targets’ and bidders’ characteristics in ways consistent with the model's predictions. More generally, our results suggest that search and value discovery are important determinants of merger outcomes.
- Product similarity
- Technological overlap