Acquisitions and Technology Value Revision

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This intriguing pattern is not limited to specific market status, such as merger waves or tech booms. !!It happens consistently, no matter what's going on in the market. And it's not related to just some unique innovation or market structure of certain technology-intensive industries. Why does this happen? Several theories shed light on this phenomenon. One story is based on the "acquisition-probability hypothesis." This theory suggests that when a company announces it's buying another, it heightens the likelihood of firms possessing similar technology becoming acquisition targets. Such a signal indicates increased acquisition interests and makes other tech companies more attractive to bidders, causing their stock prices to increase. The credibility of such a signal is reinforced by the fact that the current bidder has undertaken due diligence and committed financial resources to their belief. Another story, building on the "enhanced-investment hypothesis," suggests that, when an acquisition signals the value of certain technology, other companies tend to invest more in such technology. This increased investment activities are perceived positively by the investors, prompting them to buy the stocks of similar technology companies. A third yet less substantiated story is that the combined firms and their technological peers benefit from reduced competition after the merger. Fewer players in the technology field reduce competitive pressures. However, the evidence shows that this scenario is unlikely, which helps to alleviate the regulatory bodies’ concerns.

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