The Impact of M&A on Rivals' Innovation Strategy

We investigate the effect of M&A on the innovation strategy of merging firms' competitors. We argue that while merging firms may reduce their commitment to innovation in the period following the deal because of an increased focus on short-term M&A implementation and financial considerations, rival firms can on the contrary exploit this moment of inertia to broaden their research and outperform rivals, producing more impactful innovations. We suggest merging firms' competitors increase the breadth of their technological search, even though this may be risky: If their attempts do not achieve the desired results, the consequences are relatively less harmful, as also their competitors are slowing down their innovation pace in the aftermath of M&A. Using data from European firms in the pharmaceutical industry, we find evidence consistent with these hypotheses.