DOES IT PAY-OFF TO CAPTURE INTANGIBLE ASSETS THROUGH MERGERS AND ACQUISITIONS?

Abstract

Firm-specific intangible resources, such as brand equity and patent stock, are more likely to be valuable than tangible assets. Acquiring firms come to possess the tangible and intangible assets of the target firms. The purpose of this paper is to determine the long-run performance effects of acquiring intangible assets versus tangible assets through M&A activity. Results show that the concentration of intangible assets has a negative effect on the long-run abnormal returns to the buyers. Also the buyers of target firms with highly tangible targets, on average, break-even. The penalty associated with buying highly intangible targets amount to an average economic loss of 11% over the 60-month post-event period for the acquirers sampled in 1988-1991. This is a significant and persistent economic loss that requires further investigation. One of the contributions of this paper is to conceptualize M&A activity as a method to obtain/internalize intangible assets that are more likely to be the source of competitive advantage. Doing so provides the groundwork for studying corporate governance capability as a source of competitive advantage. The novel methodology used to define and calculate long-run abnormal returns provides a theoretically sound alternative to the traditional event study framework and eliminates various biases associated with calculating cumulative abnormal returns over longer horizons. Overall, firms on average are better off to undertake M&A activity to realize growth opportunities based on their current intangible asset stock by buying highly tangible targets, rather than trying to acquire highly intangible assets of the target firm.

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