Beware of oversized acquisitions (especially if its the market trend)

Implications:

Many factors contribute to market adjustments; inflation, FX rates, economic news. But in this case, specific items are pointed out that could be the cause of the correction. Investors are skeptical of acquisitions where the acquirer is smaller than the acquiree. When several such acquisitions take place, the market will sit-up and take notice. This article attempts to explain why this occurs, but fails to go deep into the potential pitfalls of oversized acquisitions.

 

Analysis: Anytime a company acquires another, investors need to take a hard look at the valuation and the means the acquiree is paying for the acquisition. This holds true with small companies acquiring larger companies. When debt is the primary vehicle, the balance sheet is brought into question as to whether this is a healthy financial structure. Again, this is true no matter the size of the acquisition.

The primary reason for the uncertainty is the smaller company’s ability to digest the larger company. Integration processes must be carefully planned out in any acquisition. This is magnified in oversized acquisitions because any degree of failure could cause detrimental harm to the acquiree. There’s a matter of IT systems, retaining key employees, company culture, smooth integration of financial statements, educating sales forces of the new product lines, overcoming the fear of job security that all play key roles in the success of an acquisition. Smaller acquirees have a greater hurdle to overcome in the integration process.  Growth is good, whether through organic growth or through acquired growth.  You shouldn’t, however, try to swallow the elephant in one bite.