Earn-Out Application in Technology-Centred M&A Deals

Earn-Out is a contingent consideration frequently used by acquirers in mergers and acquisitions (M&A) to counter uncertainties and risks caused by information asymmetry. Previous research found that Earn-Out was more frequently used in deals acquiring intangible-asset-intensive targets, where information asymmetry is a more pronounced problem. The general inference that intangible assets increase Earn-Out application is based on the belief that intangible assets are an important source of information asymmetry; yet, thanks to their disclosure requirement, patents, though being a type of intangible asset, seem to be able to provide information and reduce such problem. This paper singles out patents from the general notion of intangible assets, takes a differentiated examination of the dynamic between patent-holding status of the targets and the odds of Earn-Out application, through logistic regression model. The preliminary results show that, in general, both the number of patents a target holds and the number of patents in a target’s country are negatively associated with the odds of Earn-Out application; and in certain types of deals where information asymmetry might be a main concern of the acquirers’, the magnitude of the association is greater. The results support the assumptions that there is an overlap of function between patents and Earn-Out in terms of mitigation of risks induced by information asymmetry, and that there exists an informational function of patents which may lead to reduced application of Earn-Out mechanism.