value
Beware Serial Acquirers
The rule
A company that grows by buying other companies again and again is like a shop that keeps borrowing to buy more shops. Trust the shop that just sells more of its own goods each year.
Where it flips
Not every purchase is bad. Some careful firms buy a business once in a while, at a fair price, and it helps. So do not judge one deal. Judge the pattern. Be wary of frequent, loan-fed, empire-building deals, not the rare sensible one.
Some companies grow their sales fast by buying one business after another. They do not grow by selling more of their own product. This can hide trouble. Buying firms can cover up weak work, cost too much, and pile up loans. It also makes the accounts hard to read. A company that simply sells more of its own goods, year after year, is usually healthier and more honest. So when the growth comes mostly from a buying spree, look much harder before you trust it.
A worked example
Haridya looks at two firms. Both grow 20% a year. One bought six companies using borrowed money. The other just sold more of its own product. She trusts the second one. Later she watches the first firm stumble under its heavy loans. [illustrative]
How to spot it
- ·growth leaning on buying company after company
- ·loans and paid-up goodwill rising from all the deals
- ·prefers to grow by selling more of its own product
Pulak Prasad · What I Learned About Investing from Darwin