Value Creation in UK High Technology Acquisitions

The fifth merger wave in the USA and the parallel fourth merger wave in the UK that occurred in the 1990s was characterised by a large number of acquisitions of firms operating in high technology areas such as the telecommunications, computers, the Internet, biotechnology, communications etc. These mergers accompanied and, in fact, were triggered by stunningly high market valuations of high technology firms around the world. Value creation logic of these mergers rests on real options i.e. new growth opportunities with a large scope for valuation errors and potential value destruction. High tech acquisitions are also driven by managerial risk incentives. While the traditional agency model assumes managerial risk aversion and under-investment in high tech opportunities, the behavioural agency model allows for risk seeking by managers leading possibly to overinvestment. Corporate governance mechanisms can correct both underand overinvestment thereby ensuring value enhancing high tech acquisitions. In this paper, we estimate long term wealth gains to acquiring firm shareholders following acquisitions of high technology targets. High tech acquisitions of the 1990s greatly underperform industry peers and companies with similar size and book-to-market ratio thereby destroying shareholder value. However, acquisitions by high tech firms of other high tech firms create value, although ostensibly they multiply risk. Interestingly, we find a negative relationship between management shareholdings and post-acquisition performance of high tech acquisitions. High managerial ownership seems to reduce managers’ risk aversion and encourage overinvestment in value diminishing high tech acquisitions. Monitoring mechanisms such as institutional blockholders, board structures, and board subcommittees, have no moderating effect on managers’ overinvestment.