Acq-ward (Part 2)

So when are acquisitions justified?

We’ve all seen the compulsive, serial acquirer. Sometimes they’re justified—like when they’re in a disaggregated, fragmented industry with small, inefficient players. By rolling these up, the acquirer can offer better prices to customers, a simpler outlet for suppliers, and a growing revenue stream, earnings yield, and stock price. Such Borg-like M&A machines plow through an industry saying, “You will all be assimilated.”

But more often than not serial acquirers are serial value-destroyers, who need to be stopped before they kill again. In these cases the CEO gets rich, the acquired company cashes out, and stockholders get—nothing, or worse

But there are acquisitions that make sense. They’re the small bolt-on or tuck-in variety that adds new technology, or a new product, or a new service to the mother-ship. In these cases defections and culture aren’t an issue, since the parent is purchasing the boutique specifically for its people and products. In these cases, value is created as a strong offering gets distributed more widely.

But such an approach is a lot of work, and can’t be analyzed on the golf course between rounds. Maybe that’s why it’s so rare.

Douglas R. Tengdin, CFA

Chief Investment Officer

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