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Learning by Doing in Mergers and Acquisitions

In his classic 1962 paper, “The Economic Implications of Learning by Doing,” Nobel laureate Kenneth J. Arrow argued that firms can gain proficiency through the repetition of activity. Since then, learning by doing, or LBD, has been widely studied across business and economics disciplines. Researchers have come to realize that firms can obtain significant cumulative experience and achieve efficiency in operations, production, and innovations using LBD (e.g., Irwin and Klenow, 1994; Jovanovic and Nyarko, 1996; Beck and Wu, 2006).

In a new study, we revisit the LBD hypothesis in the context of mergers and acquisitions (M&A). We argue that firms can benefit from an LBD approach when making M&A decisions. A 2019 McKinsey report shows that firms that follow a practice of doing small and frequent M&A outperform firms that rely on episodic, big transactions. Since 2010, for example, the company cumuA.O. Smith has gradually transformed from a traditional automotive parts manufacturer to a major player in the water treatment and renewable energy industry. It made a series of acquisitions in the past few years, and each deal was moderate in size. In a 2019 Harvard Business Review article, A.O. Smith was listed among the Top 20 Global Companies Leading Strategic Transformations. In contrast, Microsoft’s massive bid in the smartphone industry to acquire Nokia at a $7.2 billion price tag did not pay off.

We hypothesize that an LBD-based M&A practice allows a firm to develop internal expertise in M&A and learn from experience. By repeatedly making acquisitions, firms improve their information gathering, summarizing, and valuation process, and develop generalized procedures for future acquisitions. As a result, deal performance should improve, and experienced acquirers are expected to deliver higher returns to their shareholders than inexperienced acquirers.

Furthermore, M&A synergy may be created through two mechanisms. On one hand, LBD enables a firm to gain knowledge in the target firm’s industry. Specific knowledge of the target industry can give the acquirer a better understanding of potential targets’ competitive advantages, allowing the acquirer to select a better-matched target. Moreover, the acquirer may achieve greater synergy by using its expertise in the post-merger integrating and operating stage. We label this mechanism the “synergy creation” mechanism. On the other hand, there could be an alternative “synergy capture” mechanism. Expertise developed during previous deal negotiations can enable an experienced acquirer to approach a potential target with better bidding and bargaining strategies, allowing the acquirer to retain a larger portion of the synergy gains. The acquirer can also take advantage of industry-specific experience in the negotiation process, because industry expertise can help the acquirer conduct due diligence on the target, assess the target’s outside options, and estimate the target’s true value.

To test the above hypotheses, we examine the relation between firms’ prior acquisition experience and subsequent acquisition performance using a comprehensive dataset. We use the complete acquisition history, including both small and large deals, for a sample of U.S. firms between 1994 and 2019. Our sample consists of 20,663 acquisitions made by 4,536 unique firms. There are 8,532 unique acquirer–target industry pairs in our sample. By observing a firm’s complete history of M&A, we are able to examine the effect of acquisition experience on the firm’s comprehensive learning process. Utilizing this dataset, we can not only distinguish between different types of experience (general or industry-specific), but also pinpoint the timing of each experience in the acquisition sequence.

We show that firms benefit significantly by adopting the LBD practice in M&A. First, we find that prior acquisition experience is positively related to subsequent acquirer Cumulative Abnormal Returns (CARs) among diversifying acquisitions. CARs are a common measure of shareholder wealth creation in M&A. If the acquirer has prior acquisition experience in the target industry, its CAR is higher by 0.72 percent, which for an average acquirer, translates into an additional $2.07 million gain by its shareholders. This effect is more pronounced when the target industry shows higher uncertainty. This finding highlights the value creation effect of the LBD approach. In addition, we find no outperformance among diversifying acquisitions with prior cross-industry experience, nor outperformance among horizontal acquisitions. This evidence suggests that knowledge and experience specific to the target industry, not acquisition skills in general, matter for subsequent acquisition performance. Second, we find that the declining trend of CARs, as documented by other researchers, only exists in horizontal acquisitions. For diversifying acquisitions, prior industry-specific experience does not damage acquirer CARs and can even generate higher CARs, consistent with the LBD hypothesis. Third, we find that the “synergy creation” mechanism is the dominant mechanism for outperformance. For diversifying acquisitions, the acquirer’s experience is positively associated with the combined CARs but unrelated to the synergy split between the acquirer and the target. It suggests that acquirers are able to use the industry-specific expertise developed from experience to find better targets and operate the combined entities more efficiently.

Our study reveals that an LBD approach can play a significant and positive role in firms’ M&A. We show that relevant experience is most important for diversifying acquisitions in an industry with higher uncertainty, and that prior experience helps acquirers identify targets with higher synergy potentials. The study provides insights into when and how experience is valuable to acquirers and should be of practical relevance to both firms and investors.


Anthony, S. D., Trotter, A., & Schwartz, E. I. (2019). The Top 20 Business Transformations of the Last Decade. Harvard Business Review.

Arrow, K. J. (1962). The Economic Implications of Learning by Doing. Review of Economic Studies, 29(3), 155-173.

Beck, P. J., & Wu, M. G. (2006). Learning by Doing and Audit Quality. Contemporary Accounting Research, 23(1), 1-30.

Jovanovic, B., & Nyarko, Y. (1996). Learning by Doing and the Choice of Technology. Econometrica, 64(6), 1299-1310.

Irwin, D. A., & Klenow, P. J. (1994). Learning-by-Doing Spillovers in the Semiconductor Industry. Journal of Political Economy, 102(6), 1200-1227.

Rudnicki, J., Siegel, K., & West, A. (2019). How Lots of Small M&A Deals Add Up to Big Value. McKinsey & Company.

This post comes to us from Chen Cai at Lehigh University’s College of Business, Huimin Li at the University of New Hampshire’s Peter T. Paul College of Business and Economics, and Haigang Zhou at Cleveland State University’s Monte Ahuja College of Business Administration. It is based on their recent paper, “Learning-by-doing: the experience effect in mergers and acquisitions,” available here.

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