Growth vs. Acquisitions
About a year ago, on October 24, 2010 to be
exact, I reported on the results of a strategy that I first devised in
It involves differentiating between stocks
that are growing by selling more products (organic growers) versus those
that depend on acquisitions (serial acquirers) to maintain growth.
My original premise was that the organic
growers were better bets than those growing by acquisition. My rationale
was that as serial acquirers grow, they must continuously find bigger
acquisition targets to maintain the same percentage growth rate.
Eventually, the numbers get too big and growth slows.
Tracking the returns of my portfolios showed
that I was right, but with a twist. Although the organic growers generated
returns roughly double the serial acquirers, both groups outperformed the
Last week, that pattern continued when I
tabulated the returns of the portfolios that I described in my October
2010 column. From October 22, 2010 through October 24, 2011, my portfolio
of nine organic growers averaged a 35 percent return compared to 19
percent for the serial acquirers and six percent for S&P 500 index.
To summarize my earlier results, in one
instance, I tracked the returns of a list of 16 organic growers and 16
serial acquirers compiled as of December 31, 2008 and tracked through
September 30, 2010. During that period, the S&P 500 gained 26 percent, and
the organic growers returned 79 percent compared to 44 percent for the
serial acquirers. Another time, I tabulated the returns of a list compiled
in March 2009 through October 2010. There, the organic growers returned
116 percent vs. 56 percent for the serial acquirers and 44 percent for the
I’m not sure why the serial acquirers,
although underperforming the organic growers, still beat the overall
market. Nevertheless, buoyed by those results, I’m going to show you how
you determine whether your stocks are organic growers, serial acquirers,
or neither, and then give you current lists of stocks in both categories.
Acquisitions Leave a Trail
When a firm acquires another company, it typically pays more than the
target firm’s accounting book value. When that happens, the acquirer adds
the difference to either the goodwill or intangibles lines on its balance
sheet. In fact, acquisitions are the only way that numbers get added to
those categories. Both would be zero if a company has never made any
You can find out if a firm is an active
acquirer by looking at the goodwill and/or intangibles numbers on its
balance sheet. But, many firms that aren’t using acquisitions to fuel
growth have made a few strategic buys over the years. So you have to
compare the numbers to something that reflects company size. I’ve found
that ‘total assets’ does the job. It’s listed close to goodwill and
intangibles on the balance sheet, so you can do your analysis quickly.
Simply compare the total of goodwill plus
intangibles to total assets. I call the result the “acquisitions ratio.”
The higher the ratio, the more acquisitive the firm.
Apple vs. Kraft Foods
You can find the needed information on many financial sites. I’ll describe
the process using Yahoo Finance (finance.yahoo.com),
starting with Apple (ticker symbol AAPL).
First get a
and then select Balance Sheet in the Financials section. Finally, select
Data so that you’re using the most recent information. Yahoo lists
goodwill and intangibles (intangible assets) below long-term investments
section, and total assets at the bottom of that section. Always use the
most recent information, which was the September 24, 2011 report for
Apple. Yahoo listed $896 million for goodwill, 3,536 million for
intangibles, and $116,371 million for total assets. Thus, the acquisition
ratio for Apple is 4% ($4,432 divided by
Next, do the same thing for packaged food
products maker Kraft Foods (KFT).
Looking at the September 30, 2011 figures, Yahoo listed $37,592 million
for goodwill, $25,416 million for intangibles, and $95,832 million for
total assets. Doing the math, Kraft’s acquisition ratio was 66%.
The numbers tell us that Apple is growing
mainly by developing new products while Kraft is relying mostly on
acquisitions to fuel growth.
I consider that ratios of five percent or
lower signal organic growers and ratios above 15 percent define serial
acquirers. However, those numbers are arbitrary and I wouldn’t argue if
you used different rules.
I can’t list every stock, so here are the acquisition ratios for a
sampling of familiar firms.
Laboratories (ABT) 45%
• Adobe Systems
• Amazon.com (AMZN)
• AT&T (T) 48%
• Bed Bath &
Beyond (BBBY) 0%
Mexican Grill (CMG) 0%
• Coach (COH) 0%
• Comcast (CMCSA)
• Conoco Philips
• Deere & Company
Financial Services (DFS) 1%
• Fossil (FOSL)
Company (HPQ) 0%
• Intuit (INTU)
Networks (JNPR) 42%
• Kohl's (KSS) 0%
• Kraft Foods
• NIKE (NKE) 5%
• Nordstrom (JWN)
• PepsiCo (PEP)
• Pfizer (PFE)
• Procter &
Gamble Company (PG) 64%
• Safeway (SWY)
• SanDisk (SNDK)
• Symantec (SYMC)
• Target (TGT) 0%
• Visa (V) 66%
• Walt Disney (DIS)
Simply qualifying as an organic grower
doesn’t mean that you’ll make money owning a stock. There are many other
factors that affect a stock’s outlook. Do your due diligence. The more
you know about your stocks, the better your results.