09-11-2024
Technology acquisitions are critical strategic investments for firms to access external technological resources and buttress internal research and development. We are interested in the fact that these acquisitions are also often fraught with information asymmetries, where acquirers know less about the target’s resources and prospects than the target. This can lead to inefficiencies in due diligence, potential breakdowns in negotiations, and the risk of overpaying for sought-after technologies.
To mitigate these risks, some firms may avoid a specific acquisition altogether. Others — like Cisco — might partner before acquiring to gain knowledge about the prospects of a technology before committing.
In order to forge ahead with an acquisition, firms can employ specific contractual safeguards. Material Adverse Change (MAC) clauses allow acquirers to abandon or renegotiate deals if new information arises or conditions change prior to closing. Negotiations center on exclusions to MACs, which identify specific conditions that do not allow the buyer to reverse course. eBay and others put in place contingent earnouts, which reduce overpayment risks by tying part of the payment to the target's performance post-closing.
When the buyer lacks information on the target’s technologies, it can turn to more expansive MACs or negotiate an earnout. If the buyer believes it has adequate information on the target’s technologies, whether through patents or other means, it might not need to contract for such protections for a high-tech acquisition.
Firms would therefore be well-advised to weigh the pros and cons of these contractual safeguards when drafting M&A agreements. MACs are well-known to be the subject of litigation. In the case of earnouts, the target might become focused on meeting near-term targets, such that innovations falter or scientific personnel leave. As with other contractual safeguards, there is no panacea, so firms should think through such tradeoffs during M&A dealmaking.
Jeffrey Reuer is a professor of strategic management who has led executive training sessions and seminars on strategic management for various organizations, ranging from startups and nonprofits to consultancies and large multinationals. His research uses organizational economics to investigate firms’ external corporate development activities and growth strategies, including strategic alliances, acquisitions, and international joint ventures.
Sandip Bisui is an assistant professor of strategic management whose research revolves around the applications of information economics in corporate strategy, knowledge and innovation.
