When it comes to favourable sectors of the market to invest in, one of the stand-outs is arguably the health care sector. With favourable demographics, government subsidies and defensive streams of earnings there is plenty to like about many of the companies operating in this space.
Interestingly, some of the largest health care stocks have utilised a growth by acquisition strategy.
Sonic Healthcare Limited (ASX: SHL) for example has undertaken numerous acquisitions since its listing on the ASX in 1987. As a result, the company carries billions of dollars in goodwill on its balance sheet.
Proving that investors should rightly approach companies that are serial acquirers with caution, the performance of Sonic's share price over the past decade is uninspiring. The stock has gained just 20% which means it has outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by around 1%!
It will perhaps be surprising to many readers to learn that the share price performance of Primary Health Care Limited (ASX: PRY) over the past decade has been even worse than Sonic. Primary's share price has fallen a whopping 63% in the last 10 years which means shareholders have done substantially worse than the index.
Primary is also engaged in providing pathology and diagnostic services which should offer similar potential economies of scale to Sonic. It is also engaged in the provision of General Practice services through its operation of medical centres. With a market capitalisation of $2 billion and $2.8 billion of goodwill on its books, the market doesn't appear to be rewarding Primary for its growth by acquisition strategy.
In contrast to the above two companies, Ramsay Health Care Limited (ASX: RHC) has grown from humble beginnings in 1964 into a global hospital group operating 120 hospitals and day surgeries across Australia, UK, France, Indonesia and Malaysia.
Unlike Sonic and Primary, Ramsay has had outstanding success with its growth by acquisition strategy with its share price increasing 560% over the past 10 years in recognition of its success.
A growth by acquisition strategy is most dangerous when management teams fail in their duty to allocate capital with maximum efficiency. Done well, growth by acquisition can create significant shareholder value, however capital allocated poorly can destroy vast amounts of shareholder wealth.
