Strategy in Motion: The Market Impact of Shifting Acquisition Motives

What is it about?

Research often considers the performance of a single acquisition, or the effects of a single acquisition on the performance of the acquiring firm (e.g., [1]). This shows that the acquisition motive matters. For example, [2] finds that acquisitions aimed at exploitation outperform acquisitions aimed at exploration. Firms often, however, make multiple acquisitions, back-to-back [3–5]. And research recognizes that firms must both explore and exploit to sustain their competitiveness [5]. There is evidence too to suggest that firms use some acquisitions to explore and others to exploit. For example, in 2020, Alphabet, the mother company of Google, bought Dataform, to exploit its data analytics capabilities, and in 2021, it bought Fitbit, to explore the wearables market. This raises a number of interesting questions. For example, do investors take the ’portfolio’ of acquisitions into account when reacting to an announcement of an acquisition? Does the market react to the switch in strategy from exploration to exploitation? And if it does, does the market prefer a switch to exploration or exploitation? our study shows that the stock market responds more positively to a switch towards exploration after exploitation, compared with the alternative. In so doing, we contribute to the literature on acquisition motives, by showing that prior announcements matter in explaining market reactions, and we contribute to the literature on ambidexterity, by showing that the market favors firms that oscillate between exploration and exploitation.

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Why is it important?

The finding that the stock market responds more positively to a switch towards exploration after exploitation is important as it provides insight into the motives for acquisition and how they affect market reactions. The study shows that prior announcements about a company's acquisition strategy are an important factor in explaining market reactions. This information can be valuable for companies and investors alike, as it may help them make more informed decisions about acquisitions. Furthermore, it shows that the market favors firms that are able to oscillate between exploration and exploitation, suggesting that this is an important factor in a company's long-term success.