Using Software Stacks to Explain Complementarities: The Case of Mergers and Acquisitions in the Software Industry

The existence of product complementarities is especially relevant in network-type industries, such as information technology and communications, where systems of complementary components made by different manufacturers have to be assembled. Relying on the characteristics of software markets, this paper investigates how complementarity creates value in M&As between software companies. We empirically validate the software "stack". In a sample of Mergers and Acquisitions, in which either the acquirer or the target is a software firm, we find an inverse curvilinear relationship between abnormal returns and the distance between acquirers and targets in various layers of the stack.