Tuesday, April 10, 2012

More thoughts on the growth fetish

I recall a quote from investor Peter Lynch saying (if memory serves) that he didn't like it when companies invested his money, meaning that if a company he owned stock in was sitting on piles of cash he would prefer for it to send him his share of the money as a dividend (or use it for a stock buy-back) rather than spend it acquiring new companies.

I don't have the passage in front of me but I think it's safe to say that Lynch would consider exemptions for expansion and vertical integration. Acquisitions in those categories have to be examined on a case-by-case basis. I doubt, for instance, Lynch would have objected to Tyson picking up pork producers after it achieved dominance in the chicken market.

Instead, we're talking about something like a tobacco company acquiring a cookie manufacturer -- different markets, different vendors, different everything. There are a lot off these acquisitions that don't make a great deal of sense to the casual observer (how did Starwood hotels end up with ITT Tech?). Obviously, the people who made these decision had access to information not available to the general public and there are undoubtedly cases where these decisions would have made more sense had the casual observer been thoroughly briefed. Still, given sheer number of odd-looking acquisitions, I have to suspect that at least some of them are attempts to cash in on the growth fetish.

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