Face‐to‐face interactions and the returns to acquisitions: Evidence from smartphone geolocational data

Abstract

Research Summary We examine the effect of face‐to‐face interactions between acquirers and targets before the acquisition announcements on acquisition returns. We argue that frequent interactions increase the target management's trust in the acquirer and benefit the acquirer by mitigating competition in the bidding process. For a sample of U.S. domestic acquisitions, we use smartphone geolocational data to measure the movement of people between merging companies in the months before the announcement. We find that with more frequent interactions, acquirers earn higher stock market returns at the announcement and targets receive fewer later bids from other bidders. Moreover, more frequent interactions are associated with lower returns to public targets vis‐à‐vis their acquirers. The effect of interactions is weaker when shareholder‐manager agency problems in the target are less severe. Managerial Summary Previous research shows that while acquisitions can create synergistic gains, the presence of potentially competing bidders forces acquirers to pay a high price for their targets, which makes acquisitions generally unprofitable for acquirers. We provide evidence suggesting that frequent social interactions between the acquirer's and the target's management in the pre‐acquisition phase increase the target management's trust in the acquirer, making it more willing to cede control to the acquirer and less eager to seek alternative bidders. By mitigating competition in the bidding process, social interactions make acquisitions more profitable for acquirers vis‐à‐vis targets. Social interactions are less effective when the target's management owns a larger share of the target or is better monitored by shareholders (e.g., in companies with concentrated ownership or private companies).

Transportation networks and competition in the market for corporate control

“…To capture some value, the focal acquirer needs to have an advantage over the latent acquirers of the target (Barney, 1986(Barney, , 1988. For instance, studies have shown that superior information about the target's value (Cai & Sevilir, 2012;Capron & Shen, 2007;Uysal et al, 2008), social relationships with the target's management (Testoni et al, 2022), uniquely valuable synergies with the target (Capron & Pistre, 2002), or vertical relationships with the target (Ahern, 2012) can provide an advantage in the bidding process, allowing the acquirer to leave less acquisition value to the target.…”

Renewing the resource‐based view: New contexts, new concepts, and new methods

“…For instance, researchers with access to data on internal email traffic (Kleinbaum, 2012; Srivastava, Goldberg, Manian, & Potts, 2018) or, more recently, data on Zoom calls, could study intra‐firm networks of communication and coordination. Similarly, researchers could use data documenting movements of firms' executives to study interactions between firms, for instance, using cell phone data to examine face‐to‐face interactions between acquirers and targets (Testoni, Sakakibara, & Chen, 2022).…”

Not All Friends Are Alike: A Categorization of Friendly Acquisitions Integrating the Acquired Firm Profile with the Acquirer's Approach

“…Findings reported by Andrade, Mitchell and Stafford (2001) show that the percentage of hostile acquisitions fell from approximately 14% in the 1980s to only 4% a decade later. In a recent study, Testoni, Sakakibara and Chen (2022) assert that over the last three decades, most acquisitions have tended to be friendly transactions pursued by a single bidder. In an extensive meta-analysis, King et al (2021) discuss a relationship between continuous measures employed for target results and performance, without identifying any study that takes into account either the impact of distinct categories of target firms on post-deal results or the moderating influence of the target knowledge on this relationship in the context of the acquirer's full or partial strategy.…”

“…Findings reported by Andrade, Mitchell and Stafford (2001) show that the percentage of hostile acquisitions fell from approximately 14% in the 1980s to only 4% a decade later. In a recent study, Testoni, Sakakibara and Chen (2022) assert that over the last three decades, most acquisitions have tended to be friendly transactions pursued by a single bidder. In an extensive meta‐analysis, King et al.…”