When Firms are Desperate to Grow via Acquisition: The Effect of Growth Patterns and Acquisition Experience on Acquisition Premiums

Abstract

In this paper we draw on work in behavioral learning theory and risk taking to examine whether firms desperate for growth overpay for acquisitions, and we develop a theory of desperation in the context of growth. We suggest two key drivers of such desperation: (1) when a firm's organic growth is low, paying handsomely for acquisitions may be one of the few options for growth, and (2) when a firm becomes dependent on acquisitions for continuing growth, it is vulnerable to overpaying for acquisitions. Although pressures to grow via acquisition can be intense, we also test whether the benefits of acquisition experience—from both acquirers and their advisors—help to prevent overpayment caused by desperation. We test these ideas in a sample of firms in the banking industry between 1994 and 2005. Consistent with this theory of desperation, our results showed that firms desperate for growth are more likely to pay high acquisition premiums. Our findings on the moderating role of acquisition experience showed that advisors' acquisition experience is more helpful than acquirers' own acquisition experience in preventing desperate acquirers from overpaying for a target.