Face-to-face interactions and the returns to acquisitions: Evidence from smartphone geolocational data

Research Summary
We examine the effect of face-to-face interactions between acquirers and targets before the acquisition announcements on acquisition returns. We argue that frequent interactions increase the target management's trust in the acquirer and benefit the acquirer by mitigating competition in the bidding process. For a sample of U.S. domestic acquisitions, we use smartphone geolocational data to measure the movement of people between merging companies in the months before the announcement. We find that with more frequent interactions, acquirers earn higher stock market returns at the announcement and targets receive fewer later bids from other bidders. Moreover, more frequent interactions are associated with lower returns to public targets vis-à-vis their acquirers. The effect of interactions is weaker when shareholder-manager agency problems in the target are less severe.

Managerial Summary
Previous research shows that while acquisitions can create synergistic gains, the presence of potentially competing bidders forces acquirers to pay a high price for their targets, which makes acquisitions generally unprofitable for acquirers. We provide evidence suggesting that frequent social interactions between the acquirer's and the target's management in the pre-acquisition phase increase the target management's trust in the acquirer, making it more willing to cede control to the acquirer and less eager to seek alternative bidders. By mitigating competition in the bidding process, social interactions make acquisitions more profitable for acquirers vis-à-vis targets. Social interactions are less effective when the target's management owns a larger share of the target or is better monitored by shareholders (e.g., in companies with concentrated ownership or private companies).