Complementarities in Mergers and Acquisitions

We examine theoretically and empirically the determinants of the degree of complementarity between bidders and targets in mergers and acquisitions. Our paper extends existing literature, which demonstrates that firms that have stronger complementarities are more likely to become merger partners, by addressing the heterogeneity in bidders’ and targets’ complementarity in observed acquisitions. Our model, which features scarce targets that are gradually discovered by potential bidders, demonstrates that the important determinants of expected merger complementarity are target’s bargaining power, the ease of target’s discovery, growth in bidders’ industry, and the extent of competitive interaction in it. We test the model’s predictions using two separate datasets, which we use to define two types of merger complementarity – based on the similarity between bidder’s and target’s product offerings and, alternatively, based on the overlap in their technologies. Both sets of tests support the model’s predictions and, more generally, indicate that there is wide heterogeneity in the degree of complementarity in mergers and acquisitions, which is systematically related to bidders’, targets’, and industry characteristics.