A revealing analysis by CFO Publishing examined the impact on value (measured by share price) of making acquisitions versus funding research and development in the medical device arena. The study looked at “…the 30 largest U.S. medical device companies in terms of their current market capitalization that were publicly traded from 2002 through 2011, and examined this relationship during two separate periods, 2002 through 2006 and 2007 through 2011.”
The findings revealed that companies gained more value from investment in R&D than from acquisition and, moreover, that the period from 2007 to 2011, when capital markets were squeezed, resulted in a bigger gap between lost value from acquisitions and gained value from R&D investment.
Shareholder value evidenced by share price is a fussy variable that does not always lend itself to logical analysis (see “irrational exuberance”), but in general this pessimistic response on the part of the market to acquisition versus R&D investment seems to reflect the market’s view that buying bricks and mortar does not equate with the value gained in creating intellectual capital. And, in a recessionary market, when funds are more dear, the need for careful spending on growth is viewed even more critically.