When and how previous experience affects the stock market reaction to business combinations

In this paper, we analyse to what extent previous experience of the firms affects the investors’ valuation of business combinations. We analyse two types of business combinations as alternative means to gain access to external strategic resources: strategic alliances and acquisitions. We point out that the previous experience of the companies in the management of business combinations will positively affect the abnormal returns of these operations. However, if the business combination supposes a diversification of the company, experience affects the investors’ valuation of acquisitions and alliances in a different fashion. An empirical study of the investors’ valuation of business combinations carried out by European telecom firms between 1990 and 2001 has confirmed these hypotheses.