Let’s confer with the effect of merger and acquisition on venture capitals in the high-tech markets. The uncertain nature of technological innovation and a potential misunderstanding of the complexities of high tech operations can lead to much speculation about the true worth of high tech firms. This valuation uncertainty is expected to heighten the information sensitivity of investors in high tech industries. Investors in industry-related firms are highly sensitive to merger announcements involving high-tech targets and that the industry responses are even stronger in takeovers with high information impact factors. Growth is important because companies create shareholder value through profitable growth. Yet there is powerful evidence that once a company’s core business has matured, the pursuit of new platforms for growth entails daunting risk. Roughly, one company in ten is able to sustain the kind of growth that translates into an above-average increase in shareholder returns over more than a few years. Too often, the very attempt to grow causes the entire corporation to crash. Even expanding firms face a variant of the growth imperative.
No matter how fast the growth treadmill is going, it is not fast enough. The reason: Investors have an annoying tendency to discount into the present value of a company’s stock price whatever rate of growth they foresee the company achieving. Thus, even if a company’s core business is growing vigorously, the only way its managers can deliver a rate of return to shareholders in the future that exceeds the risk-adjusted market average is to grow faster than shareholders expect. Changes in stock prices are driven not by simply the direction of growth, but largely by unexpected changes in the rate of change in a company’s earnings and cash flows. A company must deliver the rate of growth that the market is projecting just to keep its stock price from falling. It must exceed the consensus forecast rate of growth in order to boost its share price. This is a heavy, omnipresent burden on every executive who is sensitive to enhancing shareholder value. In most cases companies fall in a trap by following this behavior and strategy without considering the other parameters related to merger and acquisition.
A relative case is AT&T. In the space of a little over ten years, AT&T had wasted about $50 billion and destroyed even more in shareholder value, all in the hope of creating shareholder value through growth. The first AT&T attempt arose from a widely shared view that computer systems and telephone networks were going to converge. In 1991, AT&T acquires NCR, at the time the world’s fifth-largest computer maker, for $7.4 billion. AT&T lost another $2 billion trying to make the acquisition work. AT&T finally abandoned this growth vision in 1996, selling NCR for $3.4 billion. In 1994, the company bought McCaw Cellular, at the time the largest national wireless carrier in the United States, for $11.6 billion, eventually spending $15 billion in total on its own wireless business. When Wall Street analysts subsequently complained that they were unable to properly value the combined higher-growth wireless business within the lower-growth wireline company, AT&T decided to create a separately traded stock for the wireless business in 2000. This valued the business at $10.6 billion, about two-thirds of the investment AT&T had made in the venture. In 1998, it embarked upon a strategy to enter and reinvent the local telephony business with broadband technology. Acquiring TCI and MediaOne for a combined price of $112 billion made AT&T Broadband the largest cable operator in the United States. Then, more quickly than anyone could have foreseen, the difficulties in implementation and integration proved insurmountable. In 2000, AT&T agreed to sell its cable assets to Comcast for $72 billion.
We could cite many cases of companies’ similar attempts to create new-growth platforms after the core business had matured. They follow an all-too-similar pattern. When the core business approaches maturity and investors demand new growth, executives develop seemingly sensible strategies to generate it. Merger and acquisition has many benefits but the most important is wise evaluation for the decision and the clear strategy and motive behind such attempt. Going through the process just and only for the sake of growth cause failure in many cases, other parameters as increasing competency, fostering innovation capabilities, capitalizing on market share and increasing efficiency and decreasing costs must be included among other to increase the success probability of mergers and acquisitions.