Growth by Acquisition

[ENP]

A lot of smaller companies that grow it's revenues, profits and earnings by 20% or more seem to have one thing in common.

Rather than organic growth of their own business, most of the growth seems to be from buying other businesses and undertaking lots of acquisitions of other companies in their same industry.

Is this a hidden goldmine to invest in these sort of companies or is it something you stay well clear of?

 

[Ves]

That depends - how are the acqusitions being funded? Equity, debt, cashflow? What returns are is the company getting on these acquisitions? Are they diluting return on invested capital?

There is no point making an acquisition to gain 20% revenue or profit, if you have tripled your debt or equity to do it in the first place.

 

[springhill]

RFL have recently acquired COIN from Macquarie. They will go from a position of being roughly $17m cash to roughly $8m debt. RFL have chosen not to fund this by share allocation. I am sure they could quite easily raise the $8m via this method but have chosen not to. Also revenues from sales are expected to be up this FY.
Here we may see a business that grows organically and also by acquisition.
RFL must see the value in COIN. 2 directors have purchased 1 million share lots in the last week or so. They must see the value in it.
Some shareholders sold stock on the news. They don't see the value in it.
I, personally, am comfortable in the position they are in. So are others that are buying.

In short. Each to their own.

 

[McLovin]

My experience with growth by acquisition is that it does very little for shareholders and is more about empire building for management. If all you are doing is buying earnings at the market price then management is really not doing anything that an individual shareholder can't, but their remuneration will be based upon this larger revenue/profit number. A great company can earn 40-50% on every dollar it reinvests back into its business, it's virtually impossible to buy that sort of return.

I'm not saying there aren't times when it doesn't make sense to acquire a company (I reckon DLX has gotten Alesco for a bargain at the bottom of the cycle) but I'm very wary of using acquisitions as a growth strategy.

 

[skc]

A lot of smaller companies that grow it's revenues, profits and earnings by 20% or more seem to have one thing in common.

Rather than organic growth of their own business, most of the growth seems to be from buying other businesses and undertaking lots of acquisitions of other companies in their same industry.

Is this a hidden goldmine to invest in these sort of companies or is it something you stay well clear of?

Focus on EPS rather than total revenue or profits and get a better sense of how the company may actually be growing. For micro cap companies it sometimes make sense to make acquisition to grow as you can better leverage the fixed costs like corporate fees and board renumeration.

There are plenty of disasters stories on companies growing by acquisition... ABC, HST, PGA, PPX etc.

You also have success stories like CPU, QBE and WES.

The jury appears to be still out on others like GXL, CAJ.