I do agree that some companies are better than others at acquiring and subsequently assimilating their acquisitions. If the management is opportunistic and they know the business they can make acquisitions which are accretive to the shareholders. But acquisitions of this kind are exceptions rather than the rule.
ABB, the Swiss conglomerate, has been testing my patience for a while now. They have been acquiring businesses left and right since I bought them (Mergers and Acquisitions).
[ Enlarge Image ]
Some of the acquisitions don't even appear on this list (see Dynamotive, Ring motor business of Alstom, Newron System). It is hard to judge the acquisitions because most of the time the price they paid is not known and it is also difficult to get the balance sheets of the companies they acquire.
Nevertheless, I am willing to bet that most of these acquisitions are going to destroy shareholder value. There are a couple of reasons for this extreme viewpoint.
If you are averaging one acquisition a month, how careful are you going to be ?
Is ABB giving itself enough time to assimilate the acquisitions i.e., simplify the corporate structure, realise the synergies, make sure that the employees of the new company understand how business is done at ABB etc. (see Joe Hogan leaves behind $10 bn worth of acquisitions to integrate)
The CEO of Alstom, Patrick Kron, in hindsight observes the following while describing one of the reasons as to why in 2003 Alstom found itself at the verge of bankruptcy and was later rescued by the French government.
The company had grown very quickly, doubling its size in three years as a result of sustained external growth. As is often the case in these situations, the companies Alstom had purchased had been integrated into Alstom without any attempt to achieve industrial optimisation. The increase in size had been accompanied by a decrease in activity and a deficiency in the monitoring systems. We suffered heavy, repeated losses in implementing some of these onerous projects and our results were well below our expectations and the forecasts of the financial markets. It was at this time that I discovered something I had not been taught at school, namely that the difference between a profit and a loss is not just a question of a plus or a minus sign, but that profits have a limit (otherwise known as the turnover) whereas losses do not !
Is ABB paying reasonable prices for its acquisitions ? Here is an investopedia article discussing the Baldor acquisition. See also my gurufocus article [Baldor, Newave].
ABB is paying $63.50 in cash for each Baldor share, a 41% premium to Monday's closing price and a total deal value of $4.2 billion. That is quite an impressive end to a recovery run in Baldor's stock that began back in March 2009 at a price below $11 a share. In fact, Baldor's shares had risen about 55% year-to-date, so ABB is certainly not stepping in and buying an asset that has been ignored by the Wall Street. Moreover, at about 14 times trailing EBITDA, ABB certainly does not seem to be underpaying for this company.
Following are the relevant figures comparing ABB’s current balance sheet with the one on Dec 31, 2010.
|Items (in $mn)||Jun 30, 2013||Dec 31, 2010|
The equity has more or less remained constant over the period. Most of the acquisitions have added to the goodwill of the company. ABB has also gone from a net cash position of $4 bn to a net debt of $5 bn ! That is a change of $9 bn in the coffers of the company.
ABB’s CEO Joe Hogan has resigned for personal reasons and has been replaced by the head of Discrete Automation and Motion division Ulrich Spiesshofer [src]. I am hoping that he will concentrate more on integrating the acquisitions rather than going on his own spree. I will closely follow the situation as it might be time to say goodbye to ABB.
About the author:I started investing in December 2009
and my first stock CreditSuisse (CS) tanked to almost half its
value. This nudged me to start learning about investing from the ground
up. I am a long term value investor and am planning to generate sustainable amount of money from investment income by the time I am 40 years old i.e., 2025.