Differentiating Characteristics of Acquiring Firms

The IUP Journal of Business Strategy, Vol. 8, No. 1, pp. 51-70, March 2011

Posted: 25 Jul 2011

See all articles by Shantanu Dutta

Shantanu Dutta

The University of Ontario Institute of Technology (UOIT)

Date Written: July 25, 2011

Abstract

In this study, we examine the differentiating characteristics of acquiring firms and focus on the M&A (Mergers and Acquisitions) motives from the perspective of agency theory. We use an out-of-sample dataset that involves all completed Canadian M&A deals between 1997 and 2002. With respect to firm-specific financial and technical variables, we found that firms with higher cash reserves, better past performances, and a higher R&D (Research and Development) focus (high-tech firms) are more likely to be the acquirers. With respect to the firm-specific governance variables, we found that acquiring firms have higher pay ratios (option pay plus option value dividend by cash pay), lower inside director ratios, higher board sizes, and lower blockholder ownerships. However, these results are not supported in multivariate analysis. The results from differentiating characteristics analyses have highlighted at least two motives behind an acquisition decision. First, we found strong support for an ‘empire building’ motive behind M&A. Our results indicate that firms with higher levels of cash reserves are more likely to be acquirers. In other words, firms with more CEO discretion and excess resources tend to grow in size through acquisition. Second, we found support for a strategic motive for high-tech firms behind M&A. High-tech firms were more likely to make an acquisition in order to stay innovative and preempt competition.

Suggested Citation

Dutta, Shantanu, Differentiating Characteristics of Acquiring Firms (July 25, 2011). The IUP Journal of Business Strategy, Vol. 8, No. 1, pp. 51-70, March 2011, Available at SSRN: https://ssrn.com/abstract=1894499

Shantanu Dutta (Contact Author)

The University of Ontario Institute of Technology (UOIT) ( email )

2000 Simcoe Street North
Oshawa, Ontario L1H 7K4
Canada

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