Growth by Acquisition on ASX

[born2invest]

I'm looking into several companies that are simply a holding company and go around buying smaller firms and bundling them all into an umbrella type firm reducing costs, etc.

- 1300 Smiles
- Greencross
- Austbrokers
- Tox Free Solutions
- G8 Education

etc, etc.

These businesses have lots of growth, generally retain their returns on assets/equity and keep debt levels under control.

Is there a downside by growth by acquisition? I'm wondering what happens when they run out of good quality smaller firms to buy. Growth would stop or fall and what else has the business got left to grow?

Anyone invest in businesses like these on the NZX or ASX? Which one?

[mark100]

ABC Learning is an example where it didn't work. As a long term holder of Austbrokers I can say if you get the strategy right it can pay off

[steve fleming]

They are simply arbitraging the difference in public and private company valuation multiples. GEM buys childcare centres at 4/5x EBIT, and those earnings are worth 10 or 12x under GEMs ownership.

Equity funded acquisitions of simple to run businesses are usually low risk, but plenty of debt funded roll-up plays have ended in tears:

Hastie group
Allomak
Blue Freeway
Photon Group
Comquest

[Huang Chung]

GEM seem to be highly successful in their strategy.

Reckon care is needed when largely dissimilar businesses are accumulated, or the acquisitions stretch capabilities across different countries and time zones. Cardno comes to mind, but I'd have to say they've been very successful integrating their diverse acquisition to date.

For my money, I generally prefer well managed organic growth (SNL being a prime example) but growth tends to be somewhat slower than can be achieved through acquisition.

[born2invest]

ABC Learning is an example where it didn't work. As a long term holder of Austbrokers I can say if you get the strategy right it can pay off

What is the "right" strategy then?

[mark100]

It's not that hard, find the ones that are showing increasing EPS whilst maintaining ROE and keeping Debt/Equity ratios under control. No different to the criteria I look at for any other type of company. AUB fits this bill perfectly although it's now a market darling and the PE ratio has blown out

[blackcap]

MTU have done very well... going from 40 cents in 2006 to about $6 now. Still looking to grow by acquisition by issuing a mix of equity and debt. Growing EPS along the way. Do not know how much more room to grow but a happy holder.