Strategic Investing

• Companies are always looking for new areas to expand into. Starting a new line of business is more expensive and risky than buying an established business. Company A may buy a large stake in company B and become a strategic investor -- provide long-term financing in exchange for a substantial ownership stake that will give it access to Company B's books and finances, allow it to have a say in management decisions and provide an opportunity to better evaluate future prospects before deciding on the next steps. Company A may eventually decide not to pursue the acquisition and sell its stake, or to proceed and buy out company B's remaining shares and integrate the new business into its own operations.
  
  

Keeping Fingers in Many Pies

• Many large technology companies use the same approach to new emerging technologies. Instead of developing every new technology in-house, they may invest in multiple startup companies to keep track of new developments and provide support or direction as needed. If a startup fails, a big technology company can simply write it off; if a new technology shows promise, the big owner has total control over the next steps: it can buy the technology from the startup and further develop it in-house, buy the startup and make it into a subsidiary, or sell the startup's stock in an initial public offering (IPO) and cash in its profit.
  
  

Not All Moves Are Wise or Successful

• Not all company purchases of other companies' stock are successful. Buying stock in another company may be a sign of desperation or arrogance. A company whose sales are falling may be anxious to find another line of business to save itself, but the move may turn out to be a poor match or poorly executed. Another company may be too arrogant from its success and buy a larger competitor with its inflated stock just "because it can." Such stock purchases usually fare poorly in the long run.
  
  

Stock Buyback

• A company may occasionally buy back its own stock on the open market. Investors usually like such a move because it shows the company's confidence in its own stock. if it sees its own stock as the best way to deploy corporate cash, it is good enough for the investors. A stock buyback often helps support or even advance the stock price. The bought-back stock becomes treasury stock; it can be reissued but is not counted on the company balance sheet or in financial reporting.