Want To Be Acquired? Advertise

Companies that do more advertising attract more potential buyers and higher prices

Based on the research of Laura Starks

When data storage company Data Domain went on the market May 20, 2009, its stock was trading at $17.91. That day, NetApp offered to acquire the company for $25 a share. A bidding war ensued.

When the dust settled, rival EMC Corp. had won. It paid $33.50 per share, giving Data Domain’s shareholders an 87% premium.

How did Data Domain land such a sweet deal? Research by Laura Starks, professor of finance at Texas McCombs, found it tripled advertising spending during the fiscal year before the takeover.

This is a common phenomenon, Starks says, but previous research on how advertising affects mergers and acquisitions has focused more on the acquirers than the acquired.

“We find that managers of firms who are interested in being taken over will often dramatically increase their advertising,” says Starks, who also is the George Kozmetsky Centennial Distinguished University Chair.

With co-authors Eliezer Fich of Drexel University and Anh Tran of City University of London, Starks analyzed 7,827 bids made between 1986 and 2016 for U.S. public companies — including offers that didn’t pan out.

The researchers found that, on average, companies that boosted their advertising before a takeover attempt received higher premiums than ones that did not. The results imply that for an additional $1.7 million spent on advertising, a target company saw:

• A $10.7 million higher sale price.
• A $35.9 million windfall for its shareholders.
• A 2.6 percentage point increase in the likelihood the deal would be completed.

More advertising also increased the likelihood that a company would attract multiple offers, as happened with Data Domain.

Even when acquisitions didn’t go through, targeted companies saw a permanent 1% boost in their market capitalizations — the total stock market value of their outstanding shares.

Why was this the case? A big advertising push draws attention, Starks says, not only from potential customers and investors, but also from potential suitors. A bigger profile, in turn, gives a target company greater negotiating power.

The researchers did not examine the quality of the ad campaigns or the exact mechanisms that raised awareness. But, Starks says, “our intuition is that the increased advertising lowers the search costs for firms interested in making acquisitions.”

As evidence, she notes that Google searches increased for companies that did additional advertising. More queries were associated with a 2% increase in the takeover premium for the companies.

Starks says the practical implications are obvious: Businesses looking to be acquired should consider increasing their advertising.

“The research suggests that business owners who want to attract investors — especially those that are interested in being acquired — should consider how advertising can extend beyond raising customer awareness,” she says. “It can increase investor awareness.”

“Target Firm Advertising and Firm Value” is published in Management Science.

Story by Kiah Collier