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Conclusion

Acquisitions make the news for obvious reasons. They cause stock prices to move dramatically, and it is not surprising that investors are attracted to companies involved in acquisitions. Some investors are drawn to acquiring firms, attracted by the rapid growth in earnings and revenues posted by these firms. If there is a lesson to be learned from history, it is that serial acquirers generally do not make good investments. All too often, they overpay for target firms, expand into businesses they do not understand and overreach by borrowing too much to fund their growth. While they are often able to cover their weaknesses in their financial statements, their problems ultimately catch up with them.

The largest payoff in acquisitions is to those who hold stock in target firms at the time the acquisitions are announced. To earn these returns, though, you have to buy these firms before they become acquisition targets; buying shares after an acquisition is announced is a risky strategy with limited returns. Looking at the typical target firms in past acquisitions, you can develop a set of screens for identifying potential target firms in future acquisitions. They tend to be poorly managed, have low insider ownership and earn poor returns both for their stockholders and on projects.


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