Competitive Externalities in Acquisitions

Abstract

While acquisitions are a popular means of corporate development, it is often uncertain whether acquirers capture positive value. This uncertainty is further compounded by the profound competitive implications associated with acquisitions. To shed more light on these implications, we develop the concepts of negative and positive competitive externalities in acquisitions in more detail and outline a framework that explains which acquisitions give rise to which competitive externalities. We then predict their impact on acquirers’ and rivals’ value capture under different synergy and information conditions, providing several insights: First, when negative competitive externalities exist, when no bidder can create unique synergies and bidders are aware of the synergies and externalities, bidders engage in value-destroying acquisitions to avoid negative externalities. A bidder with unique synergies only captures positive value if the unique synergies exceed a rival’s negative competitive externalities. Second, information advantages of one bidder over others are a key factor enabling positive value capture even when competitive externalities exist. Third, faced with positive competitive externalities, bidders may lack incentives to acquire even if further synergies exist, and the most capable acquirer may not capture the most value. Our paper sheds light on competitive externalities in acquisitions and provides important insights for strategic management research.