The Thoughtful Investor
When Does an Acquisition Work Out & When It Doesn't?
This section focuses on the specific reasons why companies buy other companies. The discussion uses real-world examples to explain the criteria that allow some acquisitions to benefit some companies while harming others.
For example:- Bharti Airtel moved to Africa after its domestic business started showing signs of saturation and the acquisition of the african telecom company Zain for $10.7 billion was made to extend its faltering growth. Bharti tried to rebrand, increase penetration, expand market share but the profitability of the newly acquired company didn’t justify the acquisition amount.
The author uses another example of an acquisition, when Emami acquired Zandu Pharma with the intention to increase the reach of Zandu through Emami’s distribution network, which proved to be a successful acquisition for Emami.
Acquisitions generally indicate that a company is entering a period of slow growth. The ROCE is diluted because cash held in investments does not form part of the capital employed, whereas cash used in an acquisition does. As a result, if a company has a lower ROCE than the current one, the ratio will fall.
Is Your Company Taking Up Market Share?
This section provides a detailed argument for sticking with companies that gain market share from competitors, as well as methods for understanding and evaluating this. The discussion expands on the environment in which it is easy for a company to steal market share from a competitor.
If your company has a revenue growth more than the competitor and the rate at which the market is expanding then your company is eating up market shares of competitors.
But keep probability in mind: If growth comes at the expense of equity dilution, it's not a good sign. When a new competitor raises product awareness, the leader is always the first to gain market share. An unorganised sector suffers from a lack of operational efficiencies, financial support, and is typically composed of family businesses that do not wish to expand.