On this site, we have been pretty wary of companies that use cash to fund acquisitions…cash that could have otherwise been returned to shareholders. We’ve highlighted a few companies that, while they look cheap, have squandered more on bad acquisitions than they have earned over the last decade, which doesn’t bode well for current shareholders unless the company has changed how it allocates capital. But that doesn’t mean all acquisitions are bad. When management makes smart decisions when it comes to acquiring other companies, shareholder value is enhanced.
Consider Dorel (DIIB), a designer and manufacturer of bicycles and various juvenile products. When we last looked at this company, its sales were suffering due to the fact that retailers were reducing inventories (2008 Q4). Nevertheless, the company remained profitable. Some of its competitors had not been able to maintain profits, however, and some of them found themselves overleveraged. Dorel has taken advantage of the situation, as it has purchased the assets of companies that have gone bankrupt.
The best acquisitions are not those made in overheated economies through massive bidding wars comprising several suitors; rather, they are made when nobody has the money to buy and when the target is in dire need of immediate financial assistance. These acquisitions position Dorel to continue to grow even if the economy does not.
In previous articles, we’ve discussed some ways of detecting whether a company’s acquisitions have been squandering cash. Acquisitions made on good terms for the buyer, however, can lead to awesome profit opportunities. Companies with strong balance sheets that are able to take advantage of the current economic situation position themselves to be the leaders of tomorrow.
Disclosure: Author has a long position in shares of DIIB
