Merger and Acquistion

Since 2001, when Alan Greenspan lowered the interest rate, Merger & Acquisition increased significantly compared to last decade. The main reason is the borrowing cost is very low which makes Corporate America to achieve high Return on Equity. At the same time, Leverage Buyout also increased; there are many companies than before which become private by LBO. It makes sense because raising capital was very easy.

There are many reasons for a Company to go for M&A. Here are the few:

1. To increase the Revenue: When they see there is not much growth left with the existing product line, for a company, it makes sense to buy company that adds the revenue and profit to show the growth. It shows value to the investors and Wall Street.
2. To gain the competitive edge: Companies often does not have the products and services that are different than competitors. They want to distinguish from their competitors by adding more offering on the shelf.
3. To eliminate the competitors: Competitors are tough; sometimes it makes sense to buy the competitor rather than competing against them.
4. To increase the market share: Market share are very important for a company to show the credibility. They use the new customer base to up-sell and cross sells other products.
5. Market Cap and Cash on hand: Some companies have lot of cash on their balance sheet and what to show more growth. It makes sense to utilize those cash to find the companies whose market cap is lower than other company.
6. Brand: Company often lacking the brand; even though they have better products than Branded Company, it is very difficult to create the brand. So the buy the company to take that brand. Often times they have to pay the premium to do that.
7. To increase the footprint into the other market: Some company focus on a region for their products and they want to increase their footprint to other market such as other countries.
   

Oracle has acquired nearly 50 companies in last 4 years. Lately they acquired BEA System for all of the above reason. Pfizer acquired Pharmacia for adding more products. P&G got Gillette for Brand. Cisco has acquired more than 100 companies so far to show the growth. eBay acquired European company iBazar to enter in European Market. Symantec acquired Veritas to enter in corporate market. There are many more examples to list here.

Most recently, Microsoft attempted to buy Yahoo because they want their brand and nothing else. Microsoft has everything what Yahoo has to offer, but the users do not recognize Microsoft. However, the user do recognizes Microsoft in the desktop platform but not in the internet platform. So Microsoft is struggling to get into the internet platform. They realize this too late and that is the reason they have to pay the premium.

In technology sector, if company does not have new products and services that competitor has to offer or they do not increase their footprint to other market then the future of that company is not good. Many companies in the technology sector could not survive because of this.

For an investor this is something not to ignore.