Technology Acquisitions: Performance and Functionality as Differentiators

The acquisition of high-tech startups is of increasing importance for incumbents as a path of technology sourcing. Combining qualitative and quantitative research, we introduce a novel categorization of such acquisitions based on how the startup’s technology relates to the acquirer’s existing products. Specifically, we distinguish between acquisitions aimed at improving product performance and those that add new functionality. Taking a decision making perspective with a focus on the technological and market risks of both types of acquisitions, we theorize how this categorization relates to acquisition timing and deal value. We argue that performance-focused acquisitions should take place earlier in a target's life cycle than functionality-focused ones, and that the deal value of performance-focused acquisitions is higher at comparable target maturity stages. We test our hypotheses using a unique dataset of 215 acquisitions mainly by U.S. firms in the field of artificial intelligence. Our findings lend support to our hypotheses on acquisition timing and deal value. Based on these findings we derive management implications for acquirers as well as for startups.