No. 14. Importance of Customer Assets in Federal Mergers and Acquisitions

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Center Affiliate Faculty Members Ju-Yeon Lee and Brett Josephson and Shuai Yan’s, “Importance of Customer Asset in Federal Mergers and Acquisitions,” examines the impact of M&A strategy on company value in the government contracting community. Federal contractors often turn to mergers and acquisitions (M&As) to fuel growth. However, the performance implications of federal M&A’s are unclear, due to its unique regulatory environment. Leveraging in-depth interviews and secondary data of more than 400 federal M&As over 17 years, we uncover a critical, yet previously unexplored, driver of acquisition performance: the role of customer assets. Firms use two M&A strategies to grow their customer assets: customer penetration (i.e., acquiring a target with overlapping customers) and customer expansion (i.e., acquiring a target with customers new to the acquirer). Our empirical findings show that investors react positively to customer expansion but not as favorable to customer penetration, as financial markets appear to prioritize access to new revenue sources over improving efficiencies.

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