Killer Acquisitions

TLDR

The paper argues that incumbents may acquire innovative firms solely to shut down their projects and preempt future competition. The authors define “killer acquisitions” and model how such deals eliminate competing innovations. Pharmaceutical data show that acquired drug projects overlapping the acquirer’s portfolio are less likely to be developed, especially when the acquirer has market power, with 5.3–7.4 % of acquisitions identified as killer acquisitions and these deals clustering just below antitrust scrutiny thresholds.

Abstract

This paper argues that incumbent firms may acquire innovative targets solely to discontinue the target’s innovation projects and preempt future competition. We call such acquisitions “killer acquisitions.” We develop a model illustrating this phenomenon. Using pharmaceutical industry data, we show that acquired drug projects are less likely to be developed when they overlap with the acquirer’s existing product portfolio, especially when the acquirer’s market power is large because of weak competition or distant patent expiration. Conservative estimates indicate that 5.3%–7.4% of acquisitions in our sample are killer acquisitions. These acquisitions disproportionately occur just below thresholds for antitrust scrutiny.