Bill Nygren of Oakmark Funds is out with their semi annual letter (quarter ending March 31st 2013). Bill Nygren has a short interesting answer to a question many value investors ask. How can investors tell an acquisition will be accretive or a waste of money? Below is a brief excerpt on that point followed by the full letter in scribd:
Our biggest share repurchasers retired a lot more than 3% of their shares. Northrop Grumman reduced its shares by 13%, DirecTV by 14%, and our largest repurchaser, Kohl’s, reduced its share base by 18%. For these companies, the share repurchase was almost as meaningful as a large acquisition. But unlike an acquisition, they didn’t have to pay a control premium, didn’t face integration hurdles, and won’t be surprised after they get to know the businesses. They each acquired the business they already know best.
Though we are often skeptical of the economics of large acquisitions, small add-on acquisitions often boost business value. In 2011, 40 of our 56 companies, just over 70%, were net acquirers of businesses (meaning the cost of their acquisitions exceeded any proceeds from divestitures). In most of these cases, the acquirer was able to pay what looked like a high multiple of current earnings, but that multiple will soon decrease substantially due to improved economies of scale. When a management believes that it is acquiring a business at a larger discount to value than its own stock sells at, we are happy to see our capital spent on acquisitions.
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