Killer Acquisitions ∗

This article demonstrates that incumbent firms acquire innovative targets to discontinue the development of the targets’ innovation projects in order to preempt future competition. We call such acquisitions “killer acquisitions.” We illustrate the phenomenon using a model with product market competition, innovation, and endogenous acquisition decisions. In our model incumbent firms have incentives to acquire innovative targets and then terminate the targets’ project development when those products have strong replacement effects. This killer acquisition motive is stronger when the acquirer-target product overlap is high and when product market competition is low. Empirically, we exploit the setting of drug development, in which we are able to track detailed project-level development histories of more than 55,000 drug projects. We show that acquired drug projects are less likely to be continued in the development process, and this result is particularly pronounced when the acquired project overlaps with the acquirer’s development pipeline and when the acquirer has strong incentives to protect its market power. We also show that alternative interpretations such as optimal project selection, organizational frictions, and human capital redeployment do not explain our results. Our findings have implications for antitrust policy, startup exit, and the process of creative destruction.