Aggressive Acquisitions Could Hamper Future Growth
Harriet is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors might purchase stock in a company that is “going green” not only because they want to support environmentally friendly practices but also because they view these practices as being an indication of all around sound management.
But does that mean they should be attracted to Google (NASDAQ: GOOG), Waste Management (NYSE: WM) or Unilever (NYSE: UL) which have all been lauded for showing concerns about their environment? Not necessarily, because each of these three companies have displayed a pattern of aggressive acquisitions, transactions which might ultimately add to their bottom lines but seem to be embroiling them in debt at this point.
During February Waste Management executives announced it was acquiring Greenstar, a fellow Houston-based business, and estimated that once this purchase was completed their company would have the capacity to handle approximately 15 million tons of recyclable materials annually. The initial price for this purchase was $129 million with an additional $40 million coming due if Greenstar, satisfies certain performance goals
Then, earlier this summer Waste Management acquired two Williston, North Dakota-based companies Summit Energy Services and Liquid Logistics. Waste Management will eventually be handling maintenance and tank cleaning, drill cuttings solidification and disposal related to drilling projects these firms undertake.
Waste Management’s environmental protection efforts – employing single-stream recycling and utilizing technologies that turn waste into energy - have gained it recognition. But its debt/ equity ratio which stands at over 143 is troubling, well above the figure that might be considered optimum. At least some of that debt comes from the company’s aggressive acquisitions.
And Waste Management’s aggressiveness might not necessarily be benefiting this company’s bottom line any time soon. Its PEG ratio (P/E ratio/ annual EPS growth) estimated over the next five years is posted at 6.36, an indication it might be overpriced for the foreseeable future.
Unliver owns diverse brands including Ben & Jerry's, Dove, Suave, Hellmann's, and tons of other household names. And behind the scenes it has been going green by establishing performance goals for reducing waste and greenhouse gasses while it simultaneously boosts nutrition.
But as is the case with Waste Managmenet, its debt/ equity might be too high for comfort: 119.45. Uniliver’s indebtedness might be attributed to the large number of acquisitions it is undertaken, with these transactions being valued at $149.44 million during alone 2012.
And Unilever has not only been purchasing companies at a fast clip, it has also been building factories in developing companies. This company grabbed headlines earlier this year when it announced plans to invest $65 million investment in an Asian aerosol deodorant manufacturing facility. It previously made public its intentions to build facilities in Thailand at a cost of $92 million and in South Africa at a cost of $98 million.
And while that degree of aggressiveness on all levels might eventually produce great results at least one fundamental – Unilever’s price/book ratio of 6.84 – indicates it might currently be overvalued.
By some accountings, Google deserves public recognition for being environmentally friendly. at least as of this point, however, it has garnered more attention for acquiring companies at the rate of one a week since 2010, with its most notable purchases being Motorola Mobile. But has this aggressiveness necessarily improved its future prospects or might it simply turn Google into an unmanageable sum of too many parts?
A 10-Q report scripted by Google itself during 2009 seems to strike a cautionary note for the future. It indicates that while the company had formerly made small acquisitions its ability to handle larger acquisitions might prove extremely challenge because of the difficulties involved in, among other things, merging the cultures of divergent firms. But Google’s PEG ratio of 1.41, while hardly spectacular, is low enough to hint at continued growth.
A Foolish Conclusion
Investors might interpret the fact Waste Management, Unilever, Google are “going green” as being a reason to purchase them. But each of these three of these firms has been on its own version of a buying spree. Their acquisitions might result in great future profits, but then again they might not. In today’s fast changing world, it might be virtually impossible to know what the public will be purchasing in the coming years. And that is the case whether you are talking about sandwich spreads (Unilever) or about high tech applications (Google).
Another consideration: When companies expand into developing countries, something Uniliver has been doing a great deal of lately, a myriad of challenges might await them. Investors, particularly those who make safety a major consideration, might not necessarily want to bring those types of complications into their portfolios.
Harriet Tramer Tramer has no position in any stocks mentioned. The Motley Fool recommends Google, Unilever, and Waste Management. The Motley Fool owns shares of Google and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!