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Big expansion plans can turn into big losses for shareholders

Businesses have two main options to grow for growth. They can either grow organically with their existing businesses, or acquire new ones to rapidly increase its size.

Every single acquisition is different for each business.

Bolt-on acquisitions can work very well for a business if the target complements the current setup. For example, Gentrack Group Ltd (ASX: GTK) has done an excellent job of expanding its offering to airport customers by acquiring more of the services an airport could want. Paragon Care Ltd (ASX: PGC) is also going down this road of expanding its offering to clients.

Other businesses are utilising a roll-up strategy to expand its geographical reach quickly. National Veterinary Care Ltd (ASX: NVL), Propel Funeral Partners Ltd (ASX: PFP) and G8 Education Ltd (ASX: GEM) are all doing this with varied success.

However, big acquisitions can be very destructive to shareholder value if they go wrong. Just look at the takeover of Homebase and subsequent retreat in the UK by Wesfarmers Ltd (ASX: WES) – the final toll will be well north of $1 billion.

Wesfarmers should have looked at what happened to the Masters attempt by Woolworths Limited (ASX: WOW). That was also a huge bonfire of cash. It is a dangerous game to try to take on a dominant incumbent.

Other big cash burns have been National Australia Bank Ltd’s (ASX: NAB) foray into UK & USA banking, Slater & Gordon Limited’s (ASX: SGH) attempted big expansion into the UK and Insurance Australia Group Ltd’s (ASX: IAG) UK operations. The UK apparently isn’t a great place to expand to.

Recently some companies have been making big acquisition moves. I’m sure Reliance Worldwide Corporation Ltd (ASX: RWC) and Reece Ltd (ASX: REH) shareholders are hoping that their large acquisitions turn into the few successful international expansion moves.

Foolish takeaway

There’s nothing inherently wrong with making an acquisition. But, the bigger it is the more likely it can go wrong. Shareholders should be cautious of their shares if that business is making a big move – hopefully management have done excellent due diligence and are paying a good price.

One company that has done an excellent job of managing its acquisitions has been this top stock which is just expanding into Asia.

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Motley Fool contributor Tristan Harrison owns shares of NATVETCARE FPO, Paragon Care Limited, Propel Funeral Partners Ltd, and Slater & Gordon Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited, National Australia Bank Limited, and NATVETCARE FPO. The Motley Fool Australia has recommended GENTRACK FPO NZ and Paragon Care Limited. 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 Scott Phillips.

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