Record-breaking tech acquisitions matter to investors — here’s why

Record-breaking tech acquisitions matter to investors — here’s why

Big Tech has made big acquisitions.

Sure, this has been happening for years, but we’re seeing companies like Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), and Nvidia (NVDA) double down on acquisitions, which is when a company buys its share, reducing the total number of shares. These types of share repurchases are controversial because they often reflect positively on earnings per share (EPS) and, consequently, on the company’s stock value.

Critics fear that buyouts, which are often financed by debt, contribute to financial fragility in markets, although some studies have suggested that the system-wide effects of buyouts are finite. Meanwhile, backers will say buyouts are a way to reinvest in their companies, putting extra cash to work. Even President Biden has taken note, imposing a new takeover tax just this year. While there is limited agreement on what the long-term effects of acquisitions are, how they affect the economy as a whole, and what should be done, two things is Clear.

First, buyouts are incredibly common at this point. In 2021, S&P 500 companies bought back a record $882 billion in stock.

Second, Big Tech is a big fan of acquisitions. Technology companies account for about 35% of quarterly buyback spending, the largest share of any industry, according to investment research firm VerityData.

We are talking about the second quarter of this year. Below, for the second quarter, you’ll see Nvidia’s $3.1 billion acquisition, which was the largest on record, as was Amazon’s $3.3 billion acquisition.

Meta’s acquisition in Q2 came in at $5.1 billion — a comparatively small number when factored into the previous four quarters of $7.1 billion, $14.4 billion, $19.2 billion and $9.4 billion.

Then, of course, there’s Apple, which posted the largest buyback of any company in any sector in the second quarter of 2022 and has been steadily repurchasing roughly $21 billion in shares.

“Apple has spent more on acquisitions than any US company — probably any company in the world — during our record period, from 2004 to today,” said VerityData Director of Research Ben Silverman.

Investors tend to like acquisitions at first glance, as they are seen as EPS-boosting and shareholder value-enhancing.

But as tech companies continue to repurchase shares at a rapid pace, investors should remember that not all buybacks are created equal, Silverman said. These kinds of share buybacks can absolutely facilitate the stability and long-term growth of a stock — if they’re part of a long-term capital spending plan. Opportunistic buyouts in response to stock volatility, on the other hand, can not only look bad, but are often not enough to stop the bleeding while pointing to deep problems within the company.

“Buybacks are not enough to support the market or even an individual stock,” Silverman said. “But [this week’s market volatility] is an example of a buying opportunity for companies if management truly believes that their company’s stock is inherently undervalued.”

So what should investors look out for, and what do we know about who’s getting it right?

First, honesty on the part of management is key, Silverman said. Investors should pay attention to how and whether management talks about acquisitions in earnings calls and public appearances. Apple, for example, has a direct relationship with its acquisitions at its highest levels and has repurchased stock repurchases consistently. However, if a company is quietly buying back its shares, then you should be more skeptical.

“If management doesn’t talk about acquisitions on earnings calls or at investor conferences, that’s a possible sign that they don’t see acquisitions as an important part of their capital allocation strategy,” said Silverman, who has studied buyouts for nearly two decades.

It is also not the announcement that counts, but the execution.

“Repurchase authorization announcements generate a lot of headlines that lead to short-term gains for stocks, but retail investors should focus on actual buyback execution,” he said.

The logos of the tech giants Amazon, Apple, Facebook and Google.  REUTERS/File photos.

The logos of the tech giants Amazon, Apple, Facebook and Google. REUTERS/File photos.

Going case by case

To tell whether Big Tech acquisitions are smart — that is, whether they serve a company’s long-term prospects — we have to look at them on a case-by-case basis. There have been some famously bad cases in technology over the last 20 years. For example, Silverman described legacy tech giant IBM (IBM) as “the poster child for bad acquisitions.”

“The company’s overall strategy was closely tied to acquisitions in the wake of the Great Recession and proved to be a disastrous use of cash over the next several years, providing shareholders with a negative return,” he said.

IBM shares were at all-time highs in 2012 and 2013 and have been steadily declining since then.

Meanwhile, there are companies like Nvidia, which bought back its own stock consistently for nearly a decade and a half, between 2004 and 2018. The results speak for themselves in Nvidia’s case. In that time, the company’s stock has risen 60X, proving management’s claims in the mid-2000s that its stock was deeply undervalued.

On January 1, 2004, Nvidia was trading at $1.85 per share. As of January 1, 2018, the stock was trading at $61.45 per foot. Shares of Nvidia opened at $127.42 on Friday.

Then, of course, there are cases where the jury is still out. For example, Facebook owner Meta Platforms ( META ) bought $44.8 billion worth of stock at $330.55 in 2021. Since then, the company’s shares have fallen sharply and opened Friday at $148.05 a share. The company’s “aggressive” stance on acquisitions “deserves scrutiny,” Silverman said.

Allie Garfinkle is a senior technology reporter at Yahoo Finance. Follow her on Twitter at @agarfinks.

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