IBM to Acquire Netsol: An Economic Analysis

IBM to Acquire NetSol: An Economic Analysis

Classical economic theory would support recent news of IBM's acquisition of NetSol as a complementary agent in its journey toward servicing global customers. In the article IBM to Acquire NetSol the author discusses the recent acquisition of Bangladore-based company Network Solutions (NetSol for short) by IBM corporation. NetSol offers infrastructure services to corporations around the world. The company NetSol currently employees more than 1,400 people and services multiple major clients including Cisco, Microsoft, Oracle and more, with revenues quite stable during the 2004 through 2005 fiscal year. The company was expecting growth exceeding 25% in the upcoming fiscal year.

Why the decision to acquire NetSol? IBM is taking advantage of multiple economic principles to expand and strengthen its ability to service multiple enterprises. The acquisition will enable the IBM to service multiple in-market businesses by providing infrastructure capabilities; examples of these services include on-demand computing and data-centered service (Economic Times, 2005). The move shows that IBM recognizes the importance of infrastructure to economic activity on a macro and global level.

Acquisition of this small company will enable consolidation of domestic services and enable IBM to leverage its ability to build a "world class infrastructure" (Economic Times, 2005). As a merged entity both organization can offer clients IBM's expertise to clients and solutions as well as IBM's strong technology experience (Economic Times, 2005). The move will also allow IBM to expand its customer base and brand name in India.

Multiple economic theories support this decision including absolute advantage theory developed from Adam Smith, suggesting that nations may benefit by exporting gods for which they posses absolute advantage of and import others for which other nations may posses expertise (Economy Professor, 2005). In this case goods are not traded by knowledge is shared and utilized by both through the acquisition. IBM benefits by taking advantage of NetSol's superiority related to infrastructure services, and NetSol benefits by trading knowledge and sharing in IBM's technological and economic expertise.

Harrison, Hitt & Ireland (2001) present a contrary viewpoint, noting that many times acquisitions fail because they don't produce the financial benefits expected of companies or those desired for the firm being acquired. Typically the acquired firm in this case NetSol will early above average returns but shareholders tend to earn minimal returns (Harrison, Hitt & Ireland, 2001).

Other studies suggest that acquired firms often demonstrate performance problems after acquisition, failing to earn returns necessary to meet annual capital cost requirements (Harrison, Hitt & Ireland, 2001). Still others show that many acquisitions are later sold at prices equitable to a loss on an investment (Harrison, Hitt & Ireland, 2001).

However, there are multiple principles IBM can adopt to prevent failure and ensure economic stability from the acquisition Typically firms succeed when they use acquisition to introduce newer products and supplement their current innovations (Harrison, Hitt & Ireland, 2001). This is what IBM has done, and is in fact working to integrate the two systems to facilitate innovation and meet customer demands to help reaffirm a classical economy. IBM has also taken measures to ensure they have effectively analyzed their target market and firm prior to acquisition to avoid any mistakes when integrating the firm and their technology; this should reduce any problems associated with the acquisition and reduce the likelihood of poor performance.

"Due diligence" will be necessary to ensure the success of both companies (Harrison, Hitt & Ireland 8). IBM can also maintain economic stability by ensuring that the resources available within NetSol are mutually supportive or complementary, hence increasing the probability of market equilibrium and ensuring the businesses are operating in markets that will feed off of one another and thus facilitate on another's success (Harrison, Hitt & Ireland, 2001; Spiro, 1998).

Innovation is also key to success for IBM and their plans to acquire NetSol. Multiple economic theorists have supported mergers and acquisitions provided they help stimulate and facilitate an organizations ability to remain innovative and offer innovative products on the market; the ability to maintain innovation is crucial to acquisition strategy (Hayward & Hambrick, 1997). Classical economic theory suggests that acquisition would result in shareholders benefits and wealth, however real life exploration of mergers and acquisitions often suggest the opposite is true (Hayward & Hambrick, 1997).