Geographic overlap and acquisition pairing

• Author: Zhuo Chen,Prashant Kale,Robert E. Hoskisson
• DOI: http://doi.org/10.1002/smj.2742
• Published date: 01 February 2018
• Date: 01 February 2018

RESEARCH ARTICLE

Geographic overlap and acquisition pairing

Zhuo Chen | Prashant Kale | Robert E. Hoskisson

Jones Graduate School of Business, Rice

University, Houston, Texas

Correspondence

Robert E. Hoskisson, Jones Graduate School of

Business, Rice University, 6100 Main Street,

Houston, TX 77005.

Email: robert.hoskisson@rice.edu

Research Summary:This study examines the role of geo-

graphic factors in explaining acquisition pairing using a

novel conditional logic methodology. Drawing from infor-

mation asymmetry arguments regarding acquisition deci-

sions, we theorize that geographic overlap between the

acquirer and potential targets’businesses and operations

enables the acquirer to collect more information about the

potential target through its multiple business operations that

are geographically proximate. We also demonstrate moder-

ating boundary conditions. In particular, we examine

acquiring firm characteristics, acquiring firm size and geo-

graphic dispersion, which both weaken the relationship

between geographic overlap and acquisition pairing. Like-

wise, we examine two dyadic distance moderators, geo-

graphic distance and product dissimilarity, both of which

increase information asymmetry between the acquirer and

potential targets, which increases the effect of geographic

overlap in facilitating acquisition pairing.

Managerial Summary:Firms pursuing acquisition activi-

ties face severe information asymmetry when evaluating

potential targets. This study investigates how acquiring

firms leverage geographic conditions to overcome infor-

mation asymmetry and choose targets that they can better

evaluate. We find that acquirers are more likely to choose

targets that have subsidiaries or business operations over-

lapping in the same states as the acquirers themselves.

This is particularly true for small acquirers, which lack

resources and capabilities to seek external assistance, and

acquirers that have business operations in more concen-

trated locations. We also find that acquiring targets with

geographically overlapped business operations is espe-

cially salient when the target’s headquarters is distantly

located from the acquirer or when the target offers dis-

similar products from the acquirer.

Received: 17 August 2016 Revised: 21 September 2017 Accepted: 23 September 2017 Published on: 10 January 2018

DOI: 10.1002/smj.2742

Strat Mgmt J. 2018;39:329–355. wileyonlinelibrary.com/journal/smj Copyright © 2017 John Wiley & Sons, Ltd. 329

KEYWORDS

acquisition, geographic overlap, information

asymmetry, target selection

1|INTRODUCTION

An important issue for merger and acquisition (M&A) research is to understand how acquirers

choose their respective targets (Baum, Li, & Usher, 2000; Bena & Li, 2014; Capron & Shen, 2007;

Chakrabarti & Mitchell, 2013; Schildt & Laamanen, 2006). When firms seek external resources

through M&As, they are often constrained by a lack of information and knowledge in properly eval-

uating the assets and abilities of potential targets. Information regarding the target’s financial and

strategic conditions is asymmetrically distributed between buyers and sellers (Ragozzino & Reuer,

2011), and it is expensive for buyers to conduct research to fully understand each aspect of a pro-

spective target (Stiglitz, 2000). Additionally, even if the target is willing to disclose information to

the potential acquirer, such information may not be credible (Akerlof, 1970). As Reuer (2005)

notes,

This is because sellers have natural incentives to inflate their representation of the

quality of the offering in order to command a higher sale price, while acquirers already

assume that sellers are presenting their best face. (p. 15)

Therefore, such information asymmetry between acquirers and their prospective targets creates

barriers in the pre-acquisition evaluation process and the acquiring firm needs to rely on internal or

external channels to overcome it.

Our study focuses on the newly increased attention scholars are devoting to understanding the

role of geographic factors (Chakrabarti & Mitchell, 2013, 2016; McCann, Reuer, & Lahiri, 2016;

Ragozzino & Reuer, 2011) in reducing information asymmetry and thereby explaining the rate of

acquisition pairing. Acquisition pairing refers to the final consummation of an acquisition between

two parties. In order for this to happen, the acquiring firm should first have a rough idea of what

type of targets they are interested in and that such potential targets fall into their choice set of tar-

gets. Second, the acquiring firm will try to collect information about each potential target. The more

information the acquiring firm successfully obtains for that particular target, the better evaluation the

acquiring firm can perform, and the more likely acquisition pairing will occur. We argue that infor-

mation asymmetry is more salient in the second stage because it requires much more information to

fully understand a potential target than simply to know its existence, and it is harder to find such

detailed information. Extant studies noted above generally suggest that if the headquarters (HQ) of

the acquirer and target are geographically proximate, it is easier for the acquirer to collect required

information about that target that, in turn, leads to a higher likelihood of acquisition pairing.

In this article, we extend this research stream in several important ways. From a theoretical

standpoint we argue that while the distance between the acquiring and target firms’HQ might be

useful in explaining acquisition pairing, other geographical factors might also be important. First,

we propose that geographical overlap between the two firms’operations and activities would

330 CHEN ET AL.