Valuable Valuations

16 November 2007

Earlier this week IBM announced the $5 billion acquisition of Cognos Inc.Money_house

In eight short months the three largest pure-play business intelligence software vendors in the world have been acquired.  Not surprisingly, all three transactions included a reasonable premium.

A common term used in the world of the equity markets is “acquisition premium”.  It’s a term associated with the percentage, over and above the existing share price, that a company offers for another company.  Many times, an acquisition premium spills over to companies who are peers of the acquired company.  It these cases an acquisition premium becomes “built in” to another companies share price.  This generally happens because the market believes that if one company within a sector gets acquired, other companies in the sector of similar size and stature will also get taken out.

Example:
When Oracle bought Peoplesoft, Cognos’ share price went up.
When Oracle bought Siebel, Cognos’ share price went up.
When Oracle bought Hyperion, Cognos’ share price went up.
When SAP bought Business Objects – guess what? Cognos’ share price went up.

Speculation is definitely a driver in the equity markets, and it always will be.

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