M&A synergies and trends in IPOs

The recent decline in IPO activity can be explained by the small firms' increasing preference for being acquired rather than growing independently. This paper sheds light on this explanation by focusing on the nature of the firms facing this decision and their potential merger synergies. First, the above explanation should be particularly true for Young Innovative Companies (YICs), which are often superior to incumbents in originating innovations but face greater difficulties in bringing them to the market. Second, a firm's trade-off between being acquired and remaining independent strongly depends on the extent of the synergies arising from a potential merger, which are however difficult to assess ex-ante. Using a new, text-based measure of business similarity as a proxy for M&A synergies, we document that YICs facing the potential to develop larger synergies are the main responsible for the decline in IPOs. Compared to 15 years ago, the quarterly number of IPOs conducted by these firms has decreased by 20. At the same time, while M&A activity of other firms has declined, the number of acquisitions involving this particular type of firms has remained stable over time.