Quite some time ago I looked at John Wiley & Sons (JWA) and saw that it was a serial acquirer.
Difficulties in Analysing Serial Acquirers
It can be difficult to value a serial acquirer because of the unpredictability of the financials moving forward, it is hard to predict what kind of future acquisitions would be made, how the business dynamics will change, whether each integration will be successful, how to ascertain the true ROIC for each operating segment of the business, and how the capital structure of the company will change (e.g. most acquisitions by serial acquirers is done using their stock and that will increase their shares outstanding, which needs to be taken into account when determining the share value because the increase in the size of the business is offset by the dilution in shares).
There may be some exceptions though such as the business that Mohnish Pabrai wrote about in Dhandho Investor about a cemetery business consistently swallowing small mum and pop outfits across a country. In that situation, the acquisitions may be predictable, the management clearly had experience in successfully integrating such outfits and it is ok to calculate an overall ROIC because the acquired businesses are in the exact same line.
Some key questions you should ask yourself are:
- How large is each acquisition typically? rolling up small similar outfits or large distinct businesses?
- Does the management have experience successfully integrating such acquisitions?
- Are the acquisitions done using cash or stock?
- What expectation is embedded in the stock price? is dilution and a ceasing in acquisitions captured in the price?
A typical problem with serial acquirers is that investors embed into the stock price an expectation for the company to be growing at a high growth rate that was previously fueled by acquisitions, and did not take into account the dilution factor of the acquisition or the fact that the company would stop its acquisition binge. You can see how this can happen when investors just see that the historical growth rate was 30% and simply think that P/E should be 30, without considering how that historical growth rate was achieved in the first place.
In such a situation, the company is “strongly encouraged” to keep on growing at the high historical growth rates through larger and larger acquisitions. With larger and larger acquisitions, it becomes harder to integrate. Finally this comes to an end when there are no more large-sized targets and the stock promptly crumbles. Without the high stock price as the currency, the acquisition spree has to end.
Identifying Serial Acquirers
The best way to identify serial acquirers is to read the 10Ks over the past 10 years. There are some fee-based subscription services that allow you to see a history of all M&A transactions involving a company. Another way some websites wrote about is to calculate the ratio of goodwill to total assets. Those with high ratios (e.g. above 10%) typically indicates that acquisitions were involved in its growth.