Why Are Companies Acquiring Instead of Hiring?

Merger and acquisition fever is back -- at least that's the claim of some analysts in light of the news that Hewlett Packard has decided to outbid Dell for network device maker 3PAR. This is just one of several deals we've heard about lately. British banking giant HSBC is also considering buying South Africa-based Nedbank. If M&A really is heating up, then this might frustrate some, who would prefer companies spend money hiring new workers instead of making pricey acquisitions. What are they thinking?

One thing we know is that big companies have an awful lot of cash on-hand. Yet, they aren't using it to hire many new employees and reduce the painfully high unemployment rate. That's mostly due to uncertainty. Right now, companies aren't feeling much demand. As a result, they aren't sure if the recovery will endure and consumers will soon return. So they don't feel the need to bring on many new workers at this time: their current staffs suffice.

So why engage in mergers or acquisitions? Because that's a longer-term investment and companies' market values are still relatively low. Since they've got all this money saved up, they might as well spend it on a good buy that will enhance their long-term growth. That's a very different sort of investment than hiring.

The uncertainty firms face is more short-term in nature. Firms generally assume that a few years down the road things will be better than they are now. But they're not so sure about a few quarters from now. Most companies don't need to hire that far in advance to capture renewed demand, so they don't want to bring on new workers as long as that short-term uncertainty persists. But in a few years, once a merger or acquisition is fully integrated, then they'll be in a great position to capitalize on a healthier economy.

Of course, acquisitions could still be a stupid idea right now -- if we do endure a double-dip. Another recession would likely involve another fall in the stock market, which would easily reduce the value of most target firms even further. But then, if you're looking for protection from falling valuations, it won't come until broad consensus is reached that the economy is in the midst of an enduring recovery. By then, however, the stock market and firm values would likely already be higher, since stocks tend to lead the rest of the economy. So some companies are deciding to take the risk on an acquisition now, rather than wait. And after all, they're probably just dying to spend some of that cash they've accumulated.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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