In the quest for growth, certain companies seek to acquire rivals as a primary driver to build
market share. Management teams justify their motives by promising shareholders they will be able to integrate new purchases to the corporate fold easily, cut costs and move on to the next target efficiently.
The problem is, making acquisitions often doesn't always benefit shareholders if it's a company's only avenue for growth. The market is filled with examples of companies that eventually stretched into larger and riskier acquisitions. Insurance firm Conseco (NYSE: CNO), for instance, acquired rival insurers with reckless abandon throughout the 1990s, but was brought to ruin after it purchased mobile home lender GreenTree Financial for $6 billion in a deal that proved to be unsustainable. In December 2002, Conseco filed for Chapter 11 bankruptcy.
International Business Machines (NYSE: IBM) also spent the 1990s acquiring a wide array of computer hardware, software and consulting rivals such as Sequent Computer Systems, Lotus Notes and a consulting arm of accountant PriceWaterhouseCoopers. But IBM's fate was different. It eventually realized hardware was not the only way to prosper. By focusing on its software and consulting businesses, it could grow profits more effectively. The rest is history. IBM has seen its stock double in the past decade, while the stock market has been flat during the same period.
I see a similar situation playing out in wine and spirits firm Constellation Brands (NYSE: STZ).Like IBM, the company spent the 1990s furiously acquiring rival firms to build market share and sales. In 1993, for example, it acquired Chicago-based spirits importer Barton Brands. This was followed by numerous winery purchases, including Paul Masson, Almaden, Gallo and Simi. The serial buyouts continued and peaked around the time Constellation snapped up Robert Mondavi Winery for $1 billion in 2004.