Is growth through acquisitions a red flag when looking at a company?

If a company contributes their growth mainly to various acquisitions made in the last decade (and a huge recent merger deal as well), is this a red flag in and of itself? Do you prefer to invest in companies with more organic growth models?

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Comments (9)

Nov 23, 2021 - 9:33am

Yes and no. Lots of acquisitions may be a sign of something shady going on but not always. Acquisitions always create a lot of noise and distract from the bread and butter business lines and performance, so shitty management teams will sometimes use them to obfuscate what's really going on.

Nov 23, 2021 - 10:34am

I have trouble thinking about that too - I think as long as the company generates good return on capital deployed in M&A, it's okay. 

However, could someone comment on how to pitch a roll-up story? Do you assume management will continue to do M&A in the base case? 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

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Nov 23, 2021 - 11:56am

I typically do assume so. But depends on management feedback on M&A pipeline, track record in terms of consistency and size of deals. You find that with alot of these M&A growers/consolidators by bolt ons - sellside and consensus already bakes in growth by M&A also. If you're looking at forecasting a >$10b type of deal though, it just seems too difficult to forecast in your base case. Too many variables like what price they're going to pay, whether cash or stock deal, impact on leverage. Of course historical track record helps. But last thing you want is to hope management is going to buy a company cheap with its excess cash but ends up overpaying using all its cash and doing an equity raise to fund it. There are dumb companies out there. 

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Nov 23, 2021 - 12:00pm

That's great. Thank you. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

Nov 25, 2021 - 6:10pm

I'm always cautious, not only because acquisitions take away management focus from the core legacy business, but also because these companies always make up some synergy number to justify the deal and that synergy is always difficult to verify so you just have to trust management.

Sometimes it's a good deal both on paper and strategically, but those are few and far between.

Nov 25, 2021 - 9:18pm

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