Ex Ante & Ex Post Effects of Patent Synergy: M&A Natural Experiment Approaches

Abstract

We analyze the ex ante effects of patent portfolio synergy on M&A incidence and deal value, and the ex post effect on buyers’ cumulative abnormal returns (CARs). To address endogeneity concerns, we construct a novel natural experiment identification strategy from instances where a “buyer A” succeeds in buying a “target A” and fails in its attempt to acquire a “target B,” and a “buyer B” inversely acquires “target B” and fails to buy “target A,” such that we principally observe random assignment within the set of four firms (we call this the CFB-T Model). We confirm the validity of this strategy in the large differences between summary statistics of the counterfactual sample and those of the population of all public U.S. firms. In our regression analyses, we use this CFB-T structure to create buyer pair purchasing power fixed effects, we use the exogenous termination of M&A as randomly assigned M&A treatment, and we use unexpected mutual fund redemption surges as an instrumental variable for market value and market-to-book ratio. We found in our ex ante IV regression and “exogenous acquisition” regression analysis that buyers are up to twice as likely to merge with patent-synergistic targets than non-synergistic targets, that buyers tradeoff mutual fund flows target price discounts for patent synergy, and that buyers otherwise pay on average a 14% premium in patent-synergistic M&A. In our mixed methods ex post analysis, we found that buyers in patent-synergistic mergers experience 3% higher CARs, across our CFB-T fixed effects identification strategy and our instrumental variable approach.