M&A and Its Effect on R&D Spending
Hey guys, I'm working on a senior thesis that is due in -2 days... needless to say I'm a little desperate, it has to be 30 pages long and I'm an Economics major.
My question is, I'm trying to find a correlation between M&A activity and R&D spending. Does it go up after a company has undergone a merger? In order to normalize the R&D expenditures, I'm using a ratio of R&D/Total Assets, because of course if a company acquires another company than R&D spending may go up. I'm wondering if there are any better metrics to isolate R&D? Other than just dividing it by Assets, maybe dividing it by Enterprise Value? And how would equity play a role, considering some mergers were mostly stock swaps?
Another aside/indirect question: In terms of industry, I honed in on tech firms in the US and set the dials back to 1993. Any thoughts on areas I should hone in on where R&D has a higher percentage of the budget?
Any thoughts in general would be appreciate, assuming a basic knowledge of Economics and a little bit of Finance.
Would expect R&D to decrease post-merger. Synergies are often derived from reduction in operating expenses. Depends on the industry, but this at least includes SG&A and R&D. If anything, there would be a cut to the non-core R&D expenses of the target and combined R&D would decrease. In general, would not expect an increase in R&D, but again maybe this could depend on the industry. Rather than using metrics you could consider looking at R&D margin comparing the acquiror's R&D as % of sales pre and post merger.
@MD8, so far my findings have confirmed what you said. R&D actually increases up to T=0, which is the year of the merger, and then decreases in the following 2 years.
I also noticed what you said afterwards about SG&A, because a lot of times on the Income Statement I'll see R&D sort of lumped in with SG&A...but doesn't R&D have some usefulness as a potential future cash flow? A simple google search of SG&A provides this quick definition: http://www.investopedia.com/terms/s/sga.asp and it makes it seem like reducing SG&A is just simple cost-cutting, which is great to reduce but I feel like minimizing R&D would not fall under that umbrella...
The industry is tech, so IT, Cloud, Phone companies, Biotech, Software, some healthcare technology (IE Biotech)... Examples would include Bristol Meyers, CA Inc, Cisco (so that cloud shit) The industry is actually pretty general, it's not tech like you would think in a banking group, it's pretty diverse.
With regards to the last part, can you elaborate on sales? So like should I try R&D/ Revenue? Or R&D/ EBITDA? I feel like tech companies aren't really the classic cash producers that most DCF's try to encapsulate with EBITDA. Not sure tho
R&D is not part of SG&A. Both are operating expenses and both can be cut to reduce costs post-merger. Yes, cutting SG&A often means laying off employees (think CFO, sales force, etc.) For the last part, I would stick with R&D / sales which is the typical measurement for looking at R&D costs relative to the top line (margin should be shrinking in the outer years).
So just net sales? Not gross profit or considering COGS or anything?
Healthcare companies are reducing R&D budget for a while just as an industry. Should watch out for that impact.
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