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...

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…