Sonic Healthcare (ASX: SHL) recently announced the acquisition of German laboratory business Labco S.A. Labco, which has five laboratories in the west and southwest of the country and annual revenues of €53 million was purchased by Sonic for €76 million.
For Sonic, with a market capitalisation of $6.4 billion and substantial operations in Germany already, the acquisition is very much a bolt-on/tuck-in type of acquisition. Management is forecasting the Labco acquisition to be immediately earnings accretive and importantly "accretive to Sonic's return on invested capital once synergies have been achieved."
Sonic has undertaken numerous acquisitions since its listing on the ASX in 1987. As a result the company carries $3.6 billion in goodwill on its balance sheet. While investors should rightly approach companies that are serial acquirers with caution, certain businesses and industries have a history of being more successful at a growth by acquisition strategy than others.
As the chart below shows, Sonic's share price is up nearly 143% in the past decade having significantly outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which has achieved a 62.6% return. A major factor in this performance is the economies of scale Sonic has been able to create by growing its network of pathology services.
Likewise, Ramsay Health Care (ASX: RHC) has grown from its beginnings in 1964 into a global hospital group operating 120 hospitals and day surgeries across Australia, UK, France, Indonesia and Malaysia. As the chart shows, Ramsay has had outstanding success with this growth strategy. It has created significant shareholder value and seen the share price increase by 737% over the last 10 years. Of note, despite substantial overseas acquisitions and a $7.3 billion market capitalisation, Ramsay carries less than $1 billion in goodwill on its balance sheet. It appears synergies and efficiencies can be gained in the hospital sector too, although in Ramsay's case there has been less reliance on acquisitions.
Interestingly, Primary Health Care (ASX: PRY) has not had the same success at providing shareholder returns despite a number of similarities to Sonic and Ramsay. Primary's share price is up just 8% in the past decade, 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 as Sonic, and also in the provision on general practice services through its operation of medical centres. With a market capitalisation of $2.5 billion and $3.2 billion of goodwill, the market doesn't appear to be rewarding Primary for its growth by acquisition strategy.
Source: Google Finance
Foolish takeaway
A growth by acquisition strategy is most dangerous for shareholders if the management team is not a clever allocator of capital. Done well, growth by acquisition can create significant shareholder value; capital allocated poorly can destroy vast amounts of shareholder value.
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Motley Fool contributor Tim McArthur owns shares in Primary Health Care.
