Small and Startup IT Firms, Information Chasms, and the Market for Acquisitions

Abstract

Small and startup IT (SSIT) firms are responsible for a lot of important IT innovations in the IT industry. Several SSIT firms are then bought by larger, more established IT companies that want to drive their innovation, add new product and service lines, or limit competition. However, because SSIT firms are often small and difficult to find, it is hard for many of them to show acquiring firms how good they are. We discuss three “information chasms” to explain why it is difficult for SSIT firms to show how good they are, and we suggest that the SSIT firms that successfully cross these “information chasms” can become acquired for a higher price. Using a dataset of over two hundred acquisitions of SSIT firms in the IT industry from the mid-2000s to the mid-2010s, we find that our hypotheses are confirmed. When SSIT firms invest in activities that eliminate uncertainty about the firm’s knowledge resources and promote the firm, they are acquired at a higher price. In addition, purchasers pay a premium for SSIT firms that continue to utilize mature IT during acquisitions.