What’s everyone’s thoughts? I can think it’s pretty safe to say everyone prefers organic growth all else equal. But, how do you evaluate a company that is growing by acquisition? Is it industry specific? Red flag? I think JPM’s acquisition of WaMu and Bear Stearns were briliant but those transactions were driven more by immediacy more so than anything else. I’m not an M&A guy so I don’t really know how to interpret synergies and all that.
You should look at how RoA/RoE evolves over time. Or ideally CFO/Assets. If it is stable or growing, that’s a good sign.
what palantir says and how EPS grows…ultimately, your EPS is what counts…CFO will have a lot of lumpy items that might distort the figures in the short term…
I don’t do so much micro stuff, but I’d think that it also depends on the stage of company growth. Mature companies simply need to grow by acquisitions more. This has the advantage of eliminating competition and potentially acquiring customers for cheap, which can help both turnover and profit margins if done properly. The key here is not to overpay for the control premium, and that EPS growth needs to exceed the (post-merger) cost of capital.
For young companies, acquiring a key technology or patent might make sense to justify an acquisition, but generally you’d want organic growth in small companies to show that they are filling their niche and moving beyond it.
We all agree that a good manager may not be good at everything the company does, but he may be good at assigning people to the right tasks, motivating them, or any other number of things.
I believe, similarly, a company makes mergers and acquisitions in the same manor. If it’s cheaper to produce externally than internally, then they should outsource it… or acquire it, or merge.
It could also be more efficient to cherry pick the winners, than to fund R&D itself. I’m not sure mergers and acquisitions are good measure of the quality of growth.
How relevant is it? what do the pros think?
what if they need to acquire a competitor, technology, or ready-to-sell groundbreaker in order to fill “their niche and moving beyond it”… its tough to say that making a merger or acquisition excludes a company from “filling their niche and moving beyond it”
I don’t mean to sounds rude. I’m new here and just genuinely curious about the answer to the question. You have a shitload of AF points.
Bchadwick alluded to this earlier, but the key is that the growth by acquisition should be value-creating in the long-term, and the expected risk-adjusted returns of this should exceed the cost of capital for the company. Where people have different opinions on whether a particular acquisition is good or bad depends on how likely and believable the company’s value-creation (i.e. contribution to bottom line) really is. Even if the acquisition is done to fill a gap or help a company gain a foothold into a new market opportunity, shareholders have to believe that growth through acquisitions will eventually create net present shareholder value.
Speaking more practically, there are a number of companies out there that are service-oriented or human capital-intensive. You guys can probably think of some – let’s take defense contractors, for example. There’s a lot of M&A in this space simply because assets of prime value are the people themselves, who possess security clearances, expertise, intellectual capital, and so forth. Growth by acquisition is often necessary to expand in these industries because you can’t just manufacture a human being, but if the acquirer ends up overpaying for this headcount or earnings margins end up deteriorating over time, then cash flow generation will deteriorate and this activity could be value-destructive. In this instance, while growth by acquisition is necessary, the stunting of organic growth should eventually be punished by investors.