Tech acquisitions and innovation
An excellent piece in a recent BusinessWeek ("Too Much Cash, Too Little Innovation", 7/18/05) tracks the recent rise in tech company acquisitions. The key factor is that the big tech companies are flush with cash, many of them sitting on billions in reserve.
The problem is what to do with cash. One solution is paying dividends, something which announces that a company is no longer a growth company. Then there is spending on innovation, something that some bigger companies are seeing smaller paybacks from. And then there are mergers and acquisitions. According to the BusinessWeek article:
Companies have more latitude to spend on deals when they can make the case that consolidation will lead to stronger profits in the future, despite evidence that merger results often fall short. That's one reason tech M&A rose 20% last year, to $60 billion, according to Thomson Financial. The total is on track to rise 10% more this year.
The other reason for the mergers and acquisitions is a decreasing return from research and development. While some companies in high growth areas are still spending major money on R & D, those in more mature industries see less growth out of innovation.
As the article puts it:
The deals are clumped in a handful of sectors. In markets where growth has slowed sharply, consolidation is one of the few paths to boosting profits. That's true in traditional wire-line telecom-one reason Verizon Communications is buying MCI, while SBC Communications is acquiring AT&T. Ifs also true in corporate software, where Ellison is leading the merger wave. Oracle acquired rival PeopleSoft for $10.3 billion, all in cash, in January, and Ellison says he's considering more deals.
Among the upcoming targets predicted in the article are cell phone company T-Mobile, Research in Motion (the maker of the Blackberry), customer management software developer Siebel, and business analysis software maker Hyperion.
In any case, the article notes that we may be reaching a slowdown in tech innovation, at least in many sectors. Firms like Microsoft, Oracle, and Dell are becoming more like Procter & Gamble and McDonalds than like the startups they once were.
