M&A wave in IT firms and its impacts on firm value and IT industry

Abstract

We are in the midst of the highest merger and acquisition wave in our history. Especially the tone of mergers and acquisitions within Information and Telecommunications industry has been most buoyant since 1990s. In this situations, this study was motivated to investigate some peculiar reasons and impacts of the buoyant merger and acquisition deals in the IT industry. IT industry is found to have some peculiar characteristics. First, the most likely important characteristic of IT industry is that it is a very growing industry and a critical source of new economic strength. Second, IT industry particularly shows larger network effect than any other industry. Third, unlike traditional economics, in IT industry, returns to scale increases gradually according to the scale of production increases because of the unusual cost structure of IT industry that shows the feature of high fixed costs but low marginal costs. And fourth, it is easy to secure a leadership position through first entry and early presence in IT industry markets. That is, IT industry has a strong first-mover effect or a winner-take-all effect. Besides these immanent characteristics, external environments such as deregulation in anti-trust policy against M$\amp$A activities and booming stock markets have contributed to the significance of M$\amp$A strategy in IT industry. In this study, the structure of IT industry is divided into equipment and component manufacturing industry sector, networking industry sector, and application service industry sector. According to this division, 76 M$\amp$A cases of IT industry collected in U. S. stock market since 1998 are categorized into horizontal M$\amp$A which means participants in a M$\amp$A deal belong to the same industry sector and vertical M$\amp$A in which adversely participants belong to different industry sectors defined above. Through an event study analysis to valuate each M$\amp$A case in terms of merging companies`` stock price movement and...