Analyzing Complementarities Using Software Stacks for Software Industry Acquisitions

Abstract

The existence of product complementarities is especially relevant in network-type industries, such as information technology and communications, where systems of complementary components made by different manufacturers have to be assembled. Relying on the characteristics of software markets and drawing on the economic theory of complementarity, this paper investigates how complementarity creates value in mergers and acquisitions between software companies. We introduce and empirically validate the software stack. In a sample of mergers and acquisitions, in which either the acquirer or the target is a software firm, we find values of abnormal returns consistent with previous results. However, when we use the concept of stack, we find an inverse curvilinear relationship between abnormal returns and the distance between acquirers and targets in various layers of the stack.

Strategic complementarities in M&As: evidence from the US information retrieval services industry

“…Despite the dominant logic that strategic similarity fosters value creation, there are fundamental arguments that complementary differences are more crucial for M&A success [7]. Thus, complementarity, as a relatively new concept in the M&A literature, has a promising denotation [26,43,59]. Our study of strategic complementarities in ISR industry M&As contributes to augment the understanding of the M&A phenomenon.…”

M&As and market value creation in the information security industry

“…Barney (1988) showed that combining complementary assets has the potential to create resources that are rare and harder to imitate and substitute, and is therefore value-creating. Prior literature has emphasized the importance of product complementarities to the success of an M&A between two firms (Gao and Iyer, 2006;Kude et al, 2012). It has also been shown in (Kim and Finkelstein, 2009) that acquiring firms in different geographies is value generating to the acquirers.…”

An Integration of the Resource Based View and Real Options Theory for Investments in Outside Opportunities

“…In the literature, there is no generally accepted empirical measure of complementarities as they are either difficult to operationalize, or imprecise in defining the value of complementarities, or require information for which data is not readily available. An interesting measure of complementary is the "stack" representation proposed by Gao and Iyer (2006), where several units or "layers" interact to each other according to a strict ordering relationship. Thus, two firms are technologically complementary if they operate in adjacent layers (Gao et al, 2008).…”