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How to approach acquisition fueled companies


LC
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One thing I have always had trouble with is valuing, or even having some mental models to draw upon when valuing, companies which are essentially fueled by acquisitions. Platform specialty products, Colfax, Valeant are some popular names right now but there are others of various size in different industries which exist and get lots of love from Wall Street. And through history, how many failures were there for every Teledyne? What was the distinguishing factor(s)? Obviously a great CEO but that is difficult to know ex-ante.

 

How exactly does one look at these companies in terms of valuation? The hardest part in my opinion is due to lack of information on acquired companies pre vs. post acquisition. That causes difficulty in analysis. Also many of these companies use the model of acquiring these companies and changing the management and operating controls at these companies to "create value". What exactly that value is...this is usually only vaguely alluded to by management and not really detailed, making it harder to form an opinion on the true worth of their actions/system. It is rarely as simple as slashing unneeded expenses (although that is always the lowest hanging fruit it seems). With Valeant that seems to be the model but with other of these roll-up companies it may not be.

 

The models I can think of are:

-cutting redundant headcount to create more operating leverage.

-leveraging sales channels, either to cross-sell current customers or expand regionally.

-utilizing excess manuf. capacity and reducing fixed costs.

-more "hazy" things such as leveraging R&D talent, patents, manuf. techniques etc. on larger scale. this seems difficult to measure.

 

 

Any other random thoughts/references/information/examples is greatly appreciated. Thank you.

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Falling asleep...  Sorry if I'm not answering/misunderstanding your question.

 

Treat acquisitions like capex, especially if acquisitions seem to be regular in nature.  Then figure out the return on that capex like you would on any other capex.  For this it helps to separate out MCX vs. expansion capex (in theory, the acquisitions in this discussion).  MCX is best estimated by knowing the industry, but it can be second best estimated by looking at the historic sales/capital ratio.

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another thing to think about - what are management's incentives? 

 

when looking at acquisitive companies and/or roll ups i always want to see a management team that owns a bunch of stock.  that way you know they are worried about share price, not just empire/ego building.

 

growth is great, but only if it is profitable growth.

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Looking forward to this thread. Highly acquisitive companies are one of those things that immediately go into my "too hard" pile. Every time I try to really understand one I get lost in the accounting and give up  :-[

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I have avoided these names as well.

 

I try to see if I can easily tell if the acquisition was smart or not. For MKL, BRK, LMCA, and Fiat, I was able to answer "Yes, they are good at acquiring and allocating capital." LUK has been a little tougher for me and its size is smaller accordingly. The roll ups like TDG, CFX, VRX, etc. are much harder imo

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I believe Munger said that corporate acquisitions on average would be lousy.  Very often I am stunned when CEO's pay 25x earnings rather than buy back stock at 15x.  It is irrational.  They don't care about increasing per share value. 

 

Tyco was a highly acquisitive company paying top dollar for deals.  The list of rollups that failed is very long. 

 

On the other hand distributor acquisitions often work quite well.  Not as people dependent and benefits to scale.

 

Other aspects are more intangible.  Deal CEO's do not focus on organic growth.  Typically the more deals the worse the relative organic growth.  Also imagine a company that is built through acquisition vs built organically.  Which is probably safer and why all else equal?

 

 

 

 

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Enterprise is a nice model. They buy small mom and pop companies and add capacity and let them work the year around instead of like 8 months. They give the owners some incentive and buy them for a nice price. What they bring to these small companies is basicly a scale advantage and access to cheap financing and industry connections.

 

You also need to look at what industry they are in, and what kind of skills they can bring to the acquisition. For example, youtube must have been an insane bargain for google even with no earnings.

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Public companies acquiring private companies can work very well.

 

Private company multiples are usually much lower.

 

;)

yesss i wonder why that is? Owners just want out at some point and accept a much lower multiple. Probably because it is harder to find buyers at that level, so less demand? When you read about some of Buffett's acquisitions, wasn't See's a private business? That was such a bargain for buffett. 

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When looking at these companies I also look at the track record of management and how much skin they have in the game. Example is Bradley Jacobs with XPO Logistics, when he started to roll with that thing an investor only needed to look at his track record in acquisitions and consolidating other industries (United Rentals and Waste Management). That would lead you to believe he should do ok in acquiring and consolidating the trucking logistics business. Then see how much of his own capital is in there and how his teams bonus structure is; if they have a huge chunk tied to the share price being X is Y number of years you know they are going to work hard to build shareholder value until Y number of years; and hopefully that keeps rolling forward. This type of bonus structure will also limit the chance of your equity being destroyed with acquisitions via shares. Also, if they are acquiring businesses, are the previous owners keeping some skin in the game. Its typically the previous owners/staff that have the relationships with the customers and you want them to hang around and maintain those relationships.

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