A Unidirectional Measure of Industry Relatedness and its Application to Acquisitions Framework. (September 2018)

Author(s)

Elena Cefis , Damiana Rigamonti ,

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Volume 7 - September 2018 (09)

Abstract

This paper proposes an index to measure the industry relatedness between an origin firm and a target firm. It is an operational instrument able to determine the direction of flows in relationships among an origin firm and a target firm belonging to industrial sectors or macro-sectors (regardless of their definition), where the directionality of these flows matters, such as acquisitions, collaborations, alliances. It can be used in empirical analyses at the firm level in order to capture industry relatedness as an independent variable or as a weight factor. The index is based on the observed co-occurrences and accounts of the direction of the dyad origin-target in the relationship of interest. As such, it moves a step forward from the measures purely based on the Standard Industrial Classification (SIC) or related classifications. As an application of our measure, we construct the index on 36,375 acquisition deals, the whole Dutch domestic acquisition market over the time span 1980-2005, with companies active in more than 200 industries at the 3-digit level. We study the flows of acquisitions among the macro-sectors defined by Eurostat according to the level of technology/ knowledge embedded. Our analysis shows that regardless of the considerable average level of relatedness inside each macro-sector, industries characterized by a high level of technology/knowledge intensity show a wider acquisition strategy when compared to low-tech industries. Also, companies operating in the financial sector proved to be less industry related in their target search

Keywords

industry relatedness; acquisitions; firm’s diversification; firms' alliances
JEL classification: G34; L60; L80

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