To a large degree, jumbo-sized acquisitions are simply a response to the pressure CEOs feel to deliver above-average growth in revenue and earnings — a pressure that is more easily relieved via deal-making than through the arduous task of developing strategies that might rev up internal growth. This pressure is particularly acute when a company feels it has lost ground to a larger rival.
But while an uninspired or impatient CEO may have a penchant for a big acquisition, investors should be highly skeptical of any growth strategy that relies on aggregation. Peer-beating growth, when achieved organically and free of accounting trickery, is an undeniable testament to the quality of a company’s underlying strategy and the competence of its management… Aggregation via acquisition carries with it no such implicit warranty. A company that expands via acquisition grows not because it’s good (although it may be), but because its investment bankers are good. Sometimes the strategy is sound…more often, it is not.
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