The Stock Market’s Valuation of R&D and Market Concentration in Horizontal Mergers

It is well documented that acquirers often pay a very large premium to acquire companies in related industries. There are many explanations as to the source of this premium. This study isolates two variables, R&D-intensity and market concentration, and correlates their value individually and jointly to the value of the acquired company. The results indicate that change in market concentration and R&D is positively correlated to the merger deal premium in a horizontal merger. Furthermore, deal premiums tend to follow an inverted U curve pattern relative to market concentration change. The study also shows that cost synergies and macro economic growth impact deal premium values. Key words: mergers, R&D, market concentration, deal premium