SAP, Market Expansion, and the Eradication of Value?

The Wall Street Journal had a story on Wednesday about SAP placing strategic bets on "simplified and cheaper business software aimed at small and midsize companies." The story went on to discuss how the company's move into Web-based software was a "product of necessity." That is no surprise to anyone who has watched the high-tech market for longer than three or four years. Actually, I remember writing about this trend some years ago.

SAP's reason is an encapsulation of a problem facing all businesses. No matter how large markets are, they ultimately remain finite in size. Enterprise software companies have come up against this with significant force, because high tech is a sector in which investors get drunk on the prospects of growth.

You can only grow so far, and eventually you have to wonder whether settling for solid profitable operation over the years should be enough. Companies often try to cheat the limits through acquisition, but I've wondered whether this isn't largely a form of business delusion. More and more acquisitions turn into more and more sales, and more earnings, but do the returns per dollar of stock invested really improve? Say that you own shares of companies A and B, both of roughly equal size, and then A buys B. You'll get a bit of a premium on the B shares, but what happens after? A's price goes down some, and eventually recovers. So you've gone from two companies with earnings to one company with earnings, and yet you don't get anything close to the combination of the stock prices. If you've been getting a dividend, it's probably not going to rise precipitously. The acquiring company will claim that the purchase is necessary to stay competitive, but the chances of the results not providing the expected financial returns is, from the research I've seen, upwards of at least 70 percent. Could you reasonably say that the entire M&A game is often a mechanism to remove shareholder value?