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Lessons for Investors

Investment strategies based upon acquisitions may sometimes generate high returns, but they come with risks. If you invest in acquisitive companies, hoping to ride growth in revenues and earnings to higher stock prices, you should consider screening for the following characteristics in acquisitive firms:

  • Start with acquirers who stay focused and disciplined. Acquisitive firms that attempt to stay within their core businesses or play to their key strengths when making acquisitions should be considered better candidates for your portfolio. These firms will also need to maintain that discipline even in the face of pressure from the outside.

  • Be sure they don't overpay for target firms. The key determinant of whether you as an investor gain from acquisitions is the acquisition price. An acquisitive firm that does a good job of valuing synergy and control should then follow up by ensuring that it gets at least a share of these perceived benefits for its stockholders. Acquisitive firms that enter into bidding wars intent to win at any cost usually do, but their stockholders pay the price.

  • Be sure they prudently fund their acquisitions. Acquisitive firms that fund acquisitions without pushing their debt ratios above acceptable levels or viewing their own stock as free currency are likely to be better investments in the long term.

  • Avoid accounting complexity. Acquisitive firms that try to present the most information they can about acquisitions and that do not play accounting games are much better investments in the long term.


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