Successful Growth By Acquisition

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Successful growth by acquisition makes a company grow much faster than it otherwise would. Increased revenue, higher margins, and yes, sustained high dividend growth! A look at companies that thrive using this strategy.

The strategy is simple: to speed up company growth, build up cash, and buy other companies. Get rid of some competition and increase market share, expand in complementary products and markets, and benefit from the resources and expertise of the acquired companies, and the synergies that are possible with such acquisitions. Some companies integrate vertically, meaning they expand by acquiring companies in their supply chain that are upstream (suppliers of materials, manufacturers) or downstream (distributors or retailers).

Of course, growth by acquisition is also fraught with risks including paying too much or taking on too much debt, regulatory hurdles, and integration difficulties. For more on the pros and cons, see Joys and Jitters of Growth by Acquisition.

Let’s have a peek at some success stories in the world of growth by acquisition.
 

Alimentation Couche-Tard: Practically Flawless

You probably already know I’m a big fan of Alimentation Couche-Tard (ATD.TO) (ANCTF). It’s practically flawless in its growth by acquisition strategy. From the early days when it was buying competitors in Québec, like La Maisonnée and Provi-Soir, to large acquisitions, including Circle K in the U.S. and TotalEnergies in Europe, Alimentation Couche-Tard never strayed from its successful formula:

  • Go in the field to study the target company, not focus only on financial statements from afar
  • Never overpay for an acquisition
  • Never hesitate to walk away and say No to a deal that doesn’t make sense anymore, as they did for Speedway gas stations and convenience stores in the U.S. and the Carrefour chain in France.

I don’t know that this company has ever failed in successfully integrating its acquisitions. Combined with carefully crafted organic growth, this strategy has supercharged Alimentation Couche-Tard’s growth. This is reflected in the progression of its revenue and earnings per share (EPS), shown below for the last 20 years.

Graphs showing Alimentation Couche-Tard's revenue and EPS progression over last 20 years

Successful acquisitions fueking ATD.TO’s growth
 

Broadcom: Expand Product Portfolio and Customer Base

Another success story is Avago’s acquisition of Broadcom in 2016 (AVGO). This acquisition combined the strengths of each company; Avago’s expertise in analog and optoelectronic components complemented Broadcom’s prowess in wireless communication technologies. This synergy enabled the new Broadcom Inc. (that kept Avago’s ticker symbol AVGO) to offer integrated solutions that combined connectivity, analog, and optical components. Such solutions cater to the increasing demand for converged technologies in the semiconductor industry.

It became one of the largest semiconductor companies globally, enjoying enhanced competitive advantages, a broader customer base, and increased bargaining power with suppliers. The combined company also benefited from increased research and development capabilities.

As we see in the graphs below, Broadcom enjoyed a revenue bump following the acquisition in 2016 and hasn’t looked back! Its earnings per share (EPS) dipped for a bit after the acquisition, possibly due to the challenges of integrating a new company, but recovered nicely. The acquisition also helped push the stock price up and ensure continued dividend growth.

Graphs of Broadcom's stock proce, revenue, EPS and dividend payments for the last 10 years

2016 acquisition paved the way to sustained growth
 

Constellation Software: Expert Small Companies Buyer

Constellation Software (CNSWF) has a unique business model in that it targets very small companies and makes acquisitions every week! With a market cap over $60B, Constellation Software buys small software companies that generate from $5M and $10M in revenue. One advantage of this is that companies that small fly under the radar of most venture capital firms, making it easier for CSU.TO to buy them.

CSU.TO targets companies that dominate niche markets across the world. It has unique expertise and reputation for improving profitability of these small companies by making its top-notch resources to them, while keeping the management of acquired companies in place. Today, CSU has hundreds of companies under its six business segments. It continues to increase its revenues, EPS, and cash from operations year after year.

Graphs showing 10 year evolution of Constellation Software's revenue and earning per share (EPS)

Constant growth trend

Graph showing evolution of Constellation Software's cash from operations

Acquisitions making a cash generation machine
 

In Closing

We’ve looked at growth by acquisition stories that have a good ending. Not all acquisitions go that well, some are nightmares. For example, Alphabet Inc., Google’s parent company’s purchase of Motorola Mobility for $12.5B in 2012 was a rollercoaster. While it brought patents and hardware expertise, it eventually led to selling Motorola to Lenovo for a fraction of the original price due to integration difficulties. Another example is CVS Health’s, which experienced many difficulties in digesting its acquisitions of Aetna and Oaktree Health.

Also, past successes don’t mean that the companies will be successful with future acquisitions. However, companies with a good track record have developed skills and expertise that makes it more likely they will succeed. I’d be a lot less worried about Alimentation Couche-Tard’s next acquisition than CVS Health’s.


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