Innovation Efficiency and Inventor Risk in Takeovers

Takeovers are risky board-level decisions, as many of them fail to deliver the synergies expected from combining the resources of both firms, with realizing R&D synergies being an important facet. This study is the first to examine how innovation efficiency (IE) changes after completed takeovers and what role the relative size of the target’s inventor team plays. Drawing on the knowledge-based view, the acquired knowledge is held by inventors rather than residing in (formerly invented) patent portfolios, and its realization requires coordination. I argue that IE declines after takeovers because acquirers adjust their R&D budgets in anticipation of synergies that do not materialize immediately and because management attention shifts toward short-term financial results at the expense of long-term R&D. Since coordination costs increase with the number of people to be integrated, I expect a sharper decline when the target’s inventor team is large relative to that of the acquirer. The analysis covers US takeovers completed between 2004 and 2020 and links United States Patent and Trademark Office patent and inventor data with financial and transaction data. As predicted, IE declines after takeovers, the decline increases with the relative size of the acquired inventor team, and it persists for five years. For boards, the relative size of the target’s inventor team is thus an indicator, available at announcement, of an innovation risk that needs to be assessed before signing. JEL classification: G32, G34, O32, O34, J24