Serial Acquirers Can Be Good Investments
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tech Crunch recently noted that 2,277 private technology companies were acquired in 2012 for almost $50 billion dollars. Those are big numbers. What's more interesting, however, is who is doing the buying. Google (NASDAQ: GOOG) and Facebook (FB) were highlighted as the most active buyers, which goes to show that innovative companies often bring in ideas and talent from the outside. Technology, though, isn't the only industry to watch when looking for serial acquirers.
Growing a business can happen in one of two ways, organically or via mergers and acquisitions. At a certain point, however, growing from the inside becomes increasingly difficult. So, effectively buying good ideas and smart people becomes a more compelling option. This is particularly true in fields where cutting edge technology is required to remain competitive.
Not all deals, however, work out well. Most of the 2,000 plus private companies referenced above probably weren't big enough to cause Google or Facebook indigestion if things went wrong (Facebook's $1 billion purchase of Instagram being a notable exception because of the massive price tag). That said, some companies use this approach to try to tie up giant entities in the hope of making better companies or saving money.
That didn't work out very well for Time Warner (TWX) and AOL (AOL), when the two tried to bring together an ailing tech giant and a massive content creator. From management style clashes to an almost total lack of synergies between the two companies, the pair found they had bitten off more than they could chew. The problems eventually led to the relatively quick break up of that merger.
A merger between Sears and Target, together known as Sears Holdings (SHLD), has been a similar disappointment. This merger, however, brought together two ailing companies in the hope of making a healthy one. That rarely works out well.
So there are clearly risks with big transactions. However, some companies do a better job than others on the acquisition front. Here are some to watch:
Google's biggest asset is its cash hoard and entrepreneurial style. The company is always trying new things and on the lookout for cutting edge technology. Not only does it have the money to buy up the companies it wants, it also has the money to be wrong so long as a few of its deals pan out well. In this regard, it is very similar to Microsoft (MSFT). So expect Google to keep throwing “pasta on the wall” in the hope of a few strands sticking. It is an important competitive edge over others that may not be able to risk the capital on even a small purchase.
IAC Interactive (NASDAQ:IACI) is at the opposite side of the spectrum from Google. It isn't as large and takes more of a sharp shooter approach to its purchases. The company's goal is to monetize the traffic across its various web sites. Generally speaking it goes after two types of companies, early stage enterprises that management believes it can nurture and struggling companies that it believes can be brought back to health. The recent purchase of Tutor.com is a good example of the former, where IAC plans to increase that company's exposure to earn more money. Ask.com and About.com are examples of the latter, where IAC is working to reinvent older web brands. Either way, the company has done a good job so far of keeping growth strong. A recent dividend initiation might also interest income investors.
Johnson & Johnson
Looking outside of tech, Johnson & Johnson (NYSE:JNJ) is another company that has a long history of acquisition success. In fact, this healthcare giant has changed its stripes many times over, most recently using acquisitions to bolster its presence in the pharmaceutical and medical device markets. It also has the size to take on big transactions without too much worry. That said, it isn't just looking for big fish, and often buys smaller entities, too. For example, the company's purchase of the Aveeno line was a classic JNJ move. It took a relatively small and obscure consumer brand and ramped it up so that it is now a major brand. Not too many companies can do that as well as Dow-30 member Johnson & Johnson.
Amgen (NASDAQ:AMGN) is another serial acquirer in the healthcare space that's worth watching. The company is the largest biotech company around. That industry, however, is filled with tiny companies with novel compounds that could, maybe, turn into blockbuster drugs. With its size and name, Amgen has the wherewithal to search through and pick up the companies that it thinks own the best drug candidates. Moreover, its biotech expertise gives it a bit of a leg up on the large pharmaceutical companies, which are also generally acquisitive, that are coming to biotech from a different angle.
Kinder Morgan (NYSE:KMP) is a limited partnership focused on midstream oil and gas assets. This entire industry relies on acquisitions to grow. Kinder, however, is one of the big boys and has the financial strength to take on large purchases with relative ease. For example, it just agreed to drop $3.2 billion (in a stock transaction) for Copano Energy (CPNO). Another giant to watch in the space is Enterprise Products Partners (EPD). Limited partnerships are structured differently than most, which is good and bad. On the plus side, they pass through large amounts of tax advantaged income, on the negative side they can materially complicate taxes. That said, they have been solid performers in recent years.
American Midstream Partners
On the opposite side of the limited partnership spectrum, and much higher risk, is American Midstream Partners, a tiny partnership where small transactions can contribute meaningfully to growth. In fact, transactions that Kinder and Enterprise wouldn't even bother with would be a big deal for American Midstream. In that, however, there are notable risks if a deal is problematic. Although, for aggressive investors, it might be worth the risk in an industry known for wheeling and dealing.
B&G Foods is similar in some ways to the consumer arm of Johnson & Johnson in that B&G likes to buy old, neglected brands. The company, which is pretty small, buys unloved brands and then lavishes some attention on the brands and, more often than not, brings them back to life. Cream of Wheat is a good example. Kraft (KRFT) had virtually forgotten about this old-school breakfast product and it was slowly dying. Once in B&G's stable, however, the brand has been an important growth engine, with new variants of the product created by B&G leading the way.
Buying and Selling
Mergers and acquisitions are hard work and some companies just do a better job than others. That ranges from the selection to the execution of deals. It's worth having a few companies in your portfolio that are good at using acquisitions to grow.
Reuben Gregg Brewer
Reuben Gregg Brewer has positions in Kinder Morgan, Enterprise Products Partners, and American Midstream Partners. The Motley Fool recommends Enterprise Products Partners L.P., Facebook, Google, and Johnson & Johnson. The Motley Fool owns shares of Facebook, Google, Johnson & Johnson, and Microsoft. 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.