Facebook and Google have also found ways to enhance their brands by buying firms that offer technology and talent that fills a void. This trend has also been alive and well in the pharmaceutical and biotech sectors, where new discoveries and medical breakthroughs have driven firms like Pfizer and Merck to buy smaller firms. The expectation is that these purchases will often enhance the stock price of one, or both, companies.
Low interest rates, which make borrowing easier for corporations, and the need to grow a company through acquisition, are both driving forces behind the use of cash to buy other firms.
If analysts and investors see value in the purchase, they will reward the stock price.
Buying Back Stock
Stock buybacks have been the route taken by many companies who have found the extra cash in their balance sheets. The strategy helps investors in the company's stock as well. In 2013, companies listed on the Standard and Poor's 500 Index bought back $500 billion of their own shares.
Apple is a good example of this trend. Two major investors in the firm have urged it on to continue the practice. As a result, Apple began buying back $130 billion of its own shares beginning in 2012. The buy-backs often give the company's stock a boost. This impacts the market's performance and the stocks share price. Alternatively, when a company invests in its processes or infrastructure, the stock price is rewarded just as much as a buy-back.
These things have all helped contribute to the steep climb in the markets in the past three years. When extra cash is available or when the cost of borrowing is an acceptable risk, companies have found a way to enhance their value to investors.