A recent article from Research in International Business and Finance (2023, RIBAF) titled ‘‘Does acquisition lead to the growth of high-tech scale-ups? Evidence from Europe’’ examines ‘‘the post-acquisition revenue and employment growth of high-tech scaleups within multi-country settings’’.
The evidence suggests the possibility of various outcomes; including that initial disruptions to sellers may be commonplace as companies go through periods of ‘adjustment’. However, data inevitably shows that these acquisitions do have a positive impact overall on company growth, especially in terms of employment and revenue.
In recent years, relatively little attention has been given to the post-acquisition growth of new high-tech companies. Clearly, this may be surprising as buyers are known to target these firms for growth opportunities whilst sellers increasingly seek larger, more strategic partners in order to scale their company successfully.
One major point coming from this research concerns the difference between foreign and domestic ‘’cumulative revenue and employment growth’’ statistics.
The research paper states that ‘’high-tech, high-potential startups, more recently referred to as “scaleups” are targeted by corporate investors as a significant proportion of their value is related to intangible assets in the form of research and development, intellectual property rights and growth opportunities.
By employing a ‘propensity-score matching approach’, researchers found ‘’that nationality matters such that the targets of foreign-owned acquirers exhibit significantly higher cumulative revenue and employment growth than their domestic counterparts’’.
In 2003, Gans and Stern coined the expression ‘The Market for Ideas’ to explain high-tech M&A markets where buyers seek innovative products and services and sellers seek investment to fund the expensive and risky commercialisation process. In a globally competitive economy, even the largest firms supplement internal capabilities by ‘in-sourcing’ product or process innovations through both acquisition and collaboration.
Within financial and management sectors, the research paper found ‘’high-tech targets (having) higher probability of achieving post-acquisition growth because of the alignment of buyers’ and sellers’ motivations.
On the buyer’s side, the acquisition of a high-tech scaleup presents the opportunity to grow via a low-risk alternative to R&D expenditure. This is achieved through the appropriation of the target’s intellectual property or the diversification of technological capabilities.
On the sellers’ side, it is well established that access to finance for growth is an important motive in the decision by private firms to seek an acquisition partner, particularly for owners in high-tech sectors’’ (RIBAF, 2023)
Between 2010 and 2018, 21,800 unlisted, high-tech scaleups were acquired and the value of the small proportion of deals reported was 1.2 trillion dollars (Mind the Bridge, 2018). High value deals such as the sale of WhatsApp (US) to Meta (US), Skype (Luxemburg) to Microsoft (US) and Flipkart (India) to Walmart (US) are the subject of international headlines, pointing to a growing interest in the seller’s side of the story.
‘’The post-acquisition growth of scale-ups is also an important issue for entrepreneurial/innovation finance, with many countries seeking to replicate the success of Silicon Valley,’’ states RIBAF.
Much of the research examines “the role of equity in the early stage funding of prototype development. However, recently, researchers have highlighted the need for empirical evidence on ‘second stage funding’ for ventures that need significant funds to realize their growth potential.
This shortage of risk capital beyond the start-up stage is a key contributory factor in Europe’s failure to match the United States in scaling high-tech startups’’ (RIBAF, 2023)
Viewed from the lifecycle perspective, acquisition represents a “harvesting event that provides an exit for investors”; however entrepreneurs have long sought partners in order to access financial resources.
A strong performing acquisitions market increases the probability scaleups will be acquired by deep-pocketed companies thus reassuring investors of successful exits. If found to boost growth, the acquisition by large established firms could complement or provide an alternative to late stage venture capital in funding innovation and entrepreneurship in Europe.
These findings are highly relevant to researchers, policymakers and managers.
Firstly, from a policy perspective, the EU, OECD and World Economic Forum agree that scaleups are the key drivers of innovation, economic growth and competitiveness, creating flexible, sustainable and innovative employment opportunities.
They affirm: ‘’We provide important evidence on post-acquisition growth in high-tech scaleups using a large-scale multi-country European sample. It suggests that matching targets to acquirers with complementary assets and deep pockets can enable the scaling process and in turn long term revenue and employment growth in the economy
Thus accepting that many high growth start-ups will be acquired might lead to better support structures, advice and training for their founders…” However, “the EU is still at a significant disadvantage to the United States in terms of later stage risk finance”. . (RIBAF, 2023)
Secondly, (they) contribute to the under-researched area of cross-border acquisitions of high-tech scaleups. Contrary to received wisdom, (they) find that the targets of foreign acquirers experience higher post-acquisition growth in revenues and employment compared to the targets of domestic acquirers.
Thirdly, the important ‘takeaway’ for managers in both targets and acquirers relates to the importance of the first year in planning and managing the post-acquisition integration process… (They) find that growth dips in the first year, then stabilizes and accelerates in the years following acquisition.
This suggests that the adjustment process is complex and that managing the first year is important in realizing the growth dividend. Overall, taking a longer term perspective enables a greater understanding of the revenue and employment effects of acquisitions (RIBAF, 2023).
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