The impact of a conglomerate merger on its vendors and rivals – a case study of Google's acquisition of Motorola

ABSTRACT

This study explores the valuation effects of the conglomerate merger on an acquiring firm and its stakeholders. We examine Google's acquisition of Motorola and the impact that it had on Google's vendors and rivals. The empirical results suggest that the announcement of this deal led to positive market reaction among Android's vendors, primarily due to Google's ability to use Motorola's extensive patent portfolio to help protect Android's vendors from a potential patent infringement war in the future. Our results also find that when the Open Handset Alliance members obtain help from Motorola's patents or get new technology, an increase in shareholder wealth among Android's vendors and a decrease in shareholder wealth among Android's rivals are likely to occur.

KEYWORDS:

• Conglomerate merger
• stakeholders
• vendors
• rivals
• Google
• Motorola

JEL CLASSIFICATION:

• G10
• G11
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Junmao Chiu is currently working as an Assistant Professor, College of Management, Yuan Ze University, Taiwan. He holds a PhD in Finance from National Chiao Tung University, Taiwan. His papers have been published in journals such as Journal of Banking and Finance, Journal of Futures Markets, and Review of Pacific Basin Financial Market and Policies.

Huimin Chung is currently working as a Professor, Department of Information Management and Finance, National Chiao Tung University, Taiwan. He holds a PhD in Economics from Michigan State University, USA. His papers have been published in journals such as Journal of Banking and Finance, Journal of Corporate Finance, Journal of Empirical Finance, Journal of Futures Markets, Journal of Financial Services Research, Journal of Business, Finance & Accounting, and Corporate Governance: An International Review.

Yi-Ning Yang is currently working as a Researcher, Cathay Century Insurance Company, Taiwan. She holds a Master in Finance from National Chiao Tung University, Taiwan.

ORCID

Junmao Chiu http://orcid.org/0000-0001-6814-1086

Notes

1 The OHA was established on 6 November 2007, led by Google with 47 members including mobile handset makers, application developers, and some mobile carriers and chip makers. It is a group of technology and mobile companies who have come together to accelerate innovation in mobile technology and offer consumers a richer, less expensive, and better mobile experience. This group developed Android together, the first complete, open, and free mobile platform.

2 Prior studies have discussed the foreclosure effect from the portfolio power based on predatory pricing (Hill 1985).

3 The basic principle in the smartphone industry is that the smartphone combines many technologies that are mostly patented from different industries. Those companies who contribute in technology development to establish standards create intellectual property, for which others then need to compensate.

4 In Google's official blog, Larry Page, CEO, said: ‘Our acquisition of Motorola will increase competition by strengthening Google's patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.'

5 See Johnston (1984).

6 This study calculates the national currency return. According to Solnik (1993), Ang and Bekaert (2007), and Hjalmarsson (2010), the national currency return is approximately equal to the currency-hedged return for investors from any country due to interest rate parity theory. The interest rate parity indicates that the forward premium equals the difference in risk-free interest rates. Solnik also points out that working with national currency returns removes the need to develop a risk premium model for exchange rates, allowing us to focus on time-varying expected returns in equity markets.

7 This method is similar to the intervention analysis used in Box and Tiao (1975), Scholes and Williams (1977), Larcker, Gordon, and Pinches (1980), Saunders and Smirlock (1987), Bhargava and Fraser (1998), and Akhigbe, Martin, and Whyte (2005).

8 Refer Table 2 with the detailed company list for the major and the other manufacturers in the OHA.