External acquisition of new technology is a growing trend in the innovation process in information technology industries. Despite its importance, there has been little empirical research on the timing of strategic decisions when opportunities arise. Should firms acquire early to avoid higher prices when the technology and its usage are more mature, or should they wait until a proven track record is established so that a better valuation of the opportunity can be obtained? Through a combination of real options, complementary assets, and dynamic capabilities perspectives, we derive our hypotheses on the impact of target age on the value created for the buyer. Applying an event study methodology to new technology acquisitions in the telecommunications industry from 1995 to 2001, we find evidence that supports acquiring early in the face of uncertainty. Furthermore, we find that the intellectual property (such as patents held by the target) moderates the impact of target age. Our data set is created by combining data from multiple sources including acquisition announcements, patent data from the U.S. Patents Office, Internet searches on small, privately held targets, and data from standard databases such as Compustat and the Center for Research in Security Prices (CRSP). In summary, the equity markets reward the acquisition of younger companies. While patent ownership by the target does not impact the value creation from younger acquisitions, the equity markets penalize the acquisition of older companies that do not own patents. This research contributes to our understanding of the valuation of technology acquisitions in industries characterized by emerging standards and high levels of uncertainty.
Ransbotham, Sam and Mitra, Sabyasachi, "Target Age and the Valuation of Innovation Acquisitions in High Technology Industries" (2006). ICIS 2006 Proceedings. 109.