To acquire or not to acquire? Duration of due diligence in technology acquisitions

Huma Javaid (), Xavier Castaner, Panos Desyllas and Orietta Marsili
Additional contact information
Huma Javaid: Manchester Institute of Innovation Research, The University of Manchester
Xavier Castaner: Department of Strategy, Globalisation and Society, The University of Lausanne
Panos Desyllas: School of Management, The University of Bath
Orietta Marsili: School of Management, The University of Bath

No 2023-02, MIOIR Working Paper Series from The Manchester Institute of Innovation Research (MIoIR), The University of Manchester

Abstract: Based on information economics and organizational learning literatures, we investigate how information asymmetry and uncertainty regarding the value of technological resources of target firms influence the due diligence process after an acquisition announcement is made by the acquirer. We study how information asymmetry between the acquirer and target firm captured by the technological distance between the two firms’ patent portfolio extends the due diligence process. Additionally, we study how uncertainty about target firms’ technological resources explained by the pending patent applications of target firms tends to prolong the duration of due diligence. Further, we argue that business similarity reduces information asymmetry between the acquirer and target firm and shortens the duration of due diligence. We test the predictions on a sample of acquisitions of privately held technology firms in the UK and find a significantly positive effect of targets’ pending patent applications on due diligence duration that is amplified by technological distance but reduced by business similarity. The findings of the study contribute to the M&A literature that higher information asymmetry and uncertainty lengthen the due diligence process of the acquirers when evaluating prospective target firms.

Keywords: Mergers and Acquisitions (M&A); Due diligence; Information asymmetry; Uncertainty (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-03
New Economics Papers: this item is included in nep-bec, nep-com and nep-inv
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https://documents.manchester.ac.uk/display.aspx?DocID=66932 Submitted version (MIOIR WP Series), 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bdj:smioir:2023-02

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