Horizontal acquisitions of growth potential

Fan Xia and Gordon Walker

Industrial and Corporate Change, 2025, vol. 34, issue 3, 633-652

Abstract: We analyze the operating performance of horizontal acquisitions between firms that differ in their growth potential: (I) low-potential firms that buy targets with high potential; and (II) high-potential firms that buy low-potential targets. These two types of acquisition have been the topic of research at three levels of analysis: the industry, the firm, and the transaction. At the industry level, incumbents in the core and innovative startups in the periphery are presumed to have complementary assets managed more effectively through co-ownership. In this vein, studies have focused chiefly on incumbents buying startups. We redress this imbalance. At the firm level, research on real options for growth has examined how multi-business firms exploit their relatedness in entry and exit decisions. Here, we study growth potential in terms of real options in horizontal deals and analyze their effect on post-acquisition performance. At the transaction level, a number of studies have focused on post-acquisition organizational structure and the transfer of knowledge between incumbents and startups. We expand this research by estimating the presumed flow of growth potential capabilities in both High–Low and Low–High deals. Our method uses a difference-in-differences fixed effect model design with Coarsened Exact Matching and Kernel-weighted Propensity Score Matching among comparable firm pairs to measure synergy and to control for endogeneity and portfolio effects using data on U.S. firms over 30 years. We also use a novel accounting adjustment formula to calculate comparable post-M&A operating performance.

Date: 2025
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