What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Serial acquirer

Serial acquirers are management teams who are stalking other companies in hopes of catching them at a weak moment and buying them up.

Expanded Definition

Like serial killers, a serial acquirer can be death to a company -- and your portfolio. There are many euphemisms for the justification of continuous acquisitions: "rolling up" an industry; "empire building;" diversification; etc. Peter Lynch probably said it best, though, when he turned the phrase "diworseification."

How can you tell if you own or are looking at a serial acquirer? You could read through the financial statements as companies spell out recent acquisitions they've made. But an easier way is to simply look at the balance sheet for a line item labeled "goodwill" or "intangibles."

When a company buys another, it pays for all the acquired company's machinery, plants, and other various hard assets. But it also pays for things that are hard to put a price on, such as brand recognition. If Home Depot (NYSE: HD) wanted to buy Coca-Cola (NYSE: KO), it would be able to put a price tag on all the machinery that went into making the bottle of soda, but it would also be paying a lot for having one of the most recognized brand names in the world. That's the "intangible" related to the sale, and it shows up on the balance sheet under "goodwill." Simply put, goodwill is the difference between the amount paid for a company and its book value.

Another quick way to tell if your company is growing through acquisitions or via organic growth, that is, from internally generated sales, check its goodwill-to-assets ratio. You won't find it on any financial website, but you can find all the information you'll need there. Simply divide a company's goodwill (found on the balance sheet) by its total assets (also found on the balance sheet). If your company has a ratio greater than 10%, then it's at least partially funding its growth through acquisitions.

While not everything in the intangibles line will be acquisitions most of it probably will be. Also, be leery of a company that makes an acquisition that is quite large in terms of sales or market capitalization. If the acquisition, or a series of acquisitions, is at least 25% as large as the acquiring company's original size, take a hard look at your investment. It's tough to swallow that much company and your portfolio will likely end up with a good case of indigestion as a result.

Recent Mentions on Fool.com

Advertisement