Valuing Innovation: Evidence from Cisco's Acquisitions

We estimate the value of innovative assets using the value paid for private, innovative targets. Since young, private firms are the primary drivers of mold-breaking innovation, we focus on such firms. We adopt a novel approach that uses the price paid for young, private targets together with unique data hand-collected from Google Patents. We minimize systematic biases by comparing across deals undertaken within the same year by the serial acquirer Cisco Systems, whose processes for acquisitions are quite fine-tuned. We find that the value of a portfolio of innovative assets increases with the intellectual property rights, the expertise underlying the assets, and the human capital of the employees working with these assets. Finally, consistent with intangible assets having a value that is context-specific, we find that the value of the target’s innovative assets increases when the assets are more relevant to the acquirer.