The impact of technological proximity and M&A on rival firms

With a view to advancing arguments for what could influence the market reaction to merger and acquisition (M&A), we analysed the closeness of two innovative firms, using patent counts in different technology classes, and its impact on market sentiment measured by cumulative abnormal returns. Examining the consequences on competitors when patents of acquirers & targets are « related » or « unrelated » (conglomerate view), we found a correlation between merging firms and acquirers’ rivals regarding the impact of technological proximity. First, the higher technological proximity within one specific industry between the merging firms, the more positive will be market reaction to merging firms, but also to acquirers’ rivals. This suggests an « in-play » effect created in the competitors’ abnormal returns in response to M&A involving technological proximity. Second, the technological proximity across different industries between the merging firms has a negative influence on market response to merging firms, but also to acquirers’ rivals. This suggests that technological proximity beyond firms’ frontiers leading to a conglomerate process is perceived by the market as being detrimental to both the acquirer and its identified rivals.