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3 companies making major acquisitions: Is it too late to buy?

Good acquisitions can be a boon for investors – just ask shareholders in G8 Education Ltd (ASX: GEM). But you can bet investors in Rio Tinto Limited (ASX: RIO) during the Alcan era will tell you a different story!

Done well, an acquisition can expand a company’s footprint and/or broaden its range of products, improving its earnings, attracting more customers, growing its economic moat and even generating further opportunities for business development.

Done poorly, and it can be a huge time and energy sink, distracting management, irritating the shareholders, and resulting in less earnings for everybody.

Capitol Health Ltd. (ASX: CAJ) is full steam ahead with its recent $30 million acquisition spree in Sydney, which came on top of the Imaging @ Olympic Park purchase back in January. Management even hinted at further expansions to come, stating: “We will look to add further clinics to the network on selective basis utilising the existing debt headroom we have.”

Aggressive use of debt for acquisitions makes sense in the current low interest rate environment, but Capitol shareholders will want to be wary of the company’s ability to pay back debt – particularly if government health reforms lead to a slowdown in the number of diagnostic screenings conducted.

However, with a cash balance several times the size of its total liabilities, Capitol Health continues to look like a strong buy after its recent acquisition.

M2 Group Ltd (ASX: MTU) has outbid competitor TPG Telecom Ltd (ASX:TPM) by coming up with a larger offer for iiNet Limited  (ASX:IIN).

TPG’s takeover offer and the iiNet board’s previous acceptance of such has been an item of contention with many TPG shareholders feeling that the bid materially undervalued their company.

M2 Group’s bid is only 6% larger but it is a sign that iiNet shareholders could get the premium they’re asking for.

It remains to be seen if M2 will actually end up with iiNet as TPG may decide to raise its offer, but if it does the substantial synergies and cost savings to be achieved will turn M2 into a buy.

I would be cautious about buying M2 shares right now however, as they have risen on the back of the telecom takeover frenzy which provides a downside risk if M2 can’t successfully make the deal.

Finally Freelancer Ltd (ASX: FLN) continues its recent buying spree with the acquisition of Californian e-commerce business Escrow.com.

Better than Freelancer’s two most recent acquisitions, the Escrow.com purchase looks like great news for shareholders, delivering as it does a profit-making company for a reasonable price. Freelancer will pay US$7.5 million for a business with US$1.2 million in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), equating to a modest multiple of 6.25x EBITDA.

It looks as though things are finally coming together for Freelancer as its business is now cash-flow positive, and FLN shares could make a good speculative buy for the more risk-tolerant investor.

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Motley Fool contributor Sean O'Neill owns shares in G8 Education and Rio Tinto. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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