Value Creation in Technology M&A: A Vector Autoregression Analysis of Internet and Application Software Transactions During the Dot-com Bubble and 2009-2014

Abstract

This paper compares the Dot-com bubble (1997-2000) to the current technology market (2009-2014) by focusing on technology M&A in the Internet Software and Services and Application Software divisions, in order to assess the existence of a second Internet bubble. Due to recent media news and the rise in popularity of billion dollar-valuated startups, this thesis intends to investigate whether current market prices are heavily inflated and reaching dot-com levels. In order to do so, this research will seek to identify the economic and financial metrics that most influence value creation throughout the two time periods. This thesis will analyze 31 transactions from 1997-2000, which shall serve as the basis and standard of inflated prices, and 32 from 2009-2014. Each transaction’s close price and associated economic and financial data will be included in the vector autoregression (VAR) analysis and subsequent tests—impulse response functions (IRFs), forecast error variance decompositions (FEVDs), and Granger causality. In the end, the results concluded that the most significant drivers of value creation were exchange rates, GDP, assets, and revenue for the 1997-2000 period, and unemployment rates, GDP, previous transaction values, assets, and market cap for the 2000-2014 period. It was determined that there are enough differences between the two transaction value trends to claim that the market does not find itself in a second technological bubble.