The government has cautioned firms against major takeovers, warning that as few as one in six acquisitions may prove a success.

A Department of Trade and Industry report has urged UK firms to embrace in-house innovation as the motor for growth, rather than takeovers which can often flounder on unforeseen difficulties.

Share underperformance after a major acquisition is significantly more likely than out performance

Brian Harding, Warwick Business School

Two thirds of major takeovers by UK firms are followed by share underperformance, research by Warwick Business School fellow Brian Harding has revealed.

The findings have been mirrored by surveys in the US, while a report by consultants KPMG found only one in six firms completing a cross-border takeover saw their share price rise by more than average over the next year.

"Share underperformance after a major acquisition is significantly more likely than out performance," Mr Harding said in an introduction to Monday's report.

Common interests

"Companies which spend heavily on research and development and new plant outperform, on average, those which undertake large acquisitions."

Yet executives favoured takeover because of factors such as "the prospect of enhanced rewards and security thought to be associated with a larger and expanding company".

World's top R&D spenders

1: Ford 2: General Motors 3: Siemens 4: Daimler Chrysler 5: Pfizer 6: IBM 7: Ericsson 8: Microsoft 9: Motorola 10: Matsushita Electric

Mr Harding also identified a "tacit coincidence of interests" in takeovers, with directors gaining prestige and salary, investment bankers earning fees, and shareholders in the firm bought gaining a premium on their stock.

Reasons given for takeover disappointment including overpaying for the target company, and overestimating the level of costs that could be saved by merging operations.

The report's author, Mike Tubbs, told BBC News Online: "Savings are often smaller, and take longer to arrive.

"And directors can spend far longer than they had anticipated bringing the companies together."

Yet UK firms in, for instance, engineering sectors were up to five times more likely to undertake takeovers than their rivals in the US, which tops the international research and development league.

Top performers

Almost half the top 600 firms in the research and development league were US, with Japan, with 132 companies represented, in second place.

UK R&D league

1: GlaxoSmithkline 2: AstraZeneca 3: BAe Systems 4: Unilever 5: Marconi 6: BT 7: Rolls Royce 8: Reuters 9: Shell 10: BP

The UK's representation of 36 firms in the top 600 compared with 40 for Germany and 31 for France.

UK pharmaceutical firms proved particularly strong investors in both research and development and upgrading plant equipment.

GlaxoSmithkline's research spending of �2.7bn last year put it 12th in the global league, led by Ford, which spent �5.1bn.

UK aerospace and defence firms were also above average spenders.

Research laggards

But the country's electronics firms were identified as particularly poor investors, spending half as much on research and development, relative to sales, as the global average.

Mr Tubbs urged executives at electronics firms to follow the example of Sir David McMurtry, chairman at Renishaw, who has credited innovation as offering "the best prospects of underlying growth in turbulent markets".

"You want to be able to go to your customers, when markets do improve, with all these exciting things you can spend your money on," Mr Tubbs said.