Be wary of growth by acquisition

Article Excerpt

Growth by acquisition is risky. Newly purchased companies may develop unforeseen problems. Acquisitions in unrelated areas is especially risky. That’s because the acquiring firm’s managers then have to divide their attention among a number of unfamiliar companies and industries. Growth by acquisition is also inherently riskier than internal growth, since it carries an above-average chance of unpleasant surprises. That’s because a buyer of something rarely knows as much about it as the seller. If you make enough acquisitions, you are bound to buy something with hidden problems. Of course, a series of small acquisitions from different sellers is safer than big acquisitions, because the mistakes tend to be smaller. But those acquisitions still tend to push up debt, which leaves the company vulnerable to failure if it can’t meet the payments. It also loads the balance sheet with goodwill—an intangible asset with value that can drop overnight if it turns out the company made a bad acquisition. acquisition…

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