Two good examples are Avon Rubber (AVON) and Imperial Brands (IMB) - or Imperial Tobacco as it was called until February. Avon Rubber is battling a cyclical low in milk prices, which is reducing demand for its products, as cash-strapped farmers hold on to its liners and tubing products for longer before renewing their equipment. But this softer market was offset by the acquisition of specialist components business InterPuls in 2015, which kept the top line growing in the first half. The purchase means the group can now offer a complete range of milking products from vacuum pumps to milk meters. But the InterPuls range is more capital-intensive for farmers, making the business even more cyclical than Avon's traditional products, so those running the division will be concerned that hopes of a rally in the global milk price seem to have faded. Investors will get a closer look once the effect of the acquisition falls out of the figures.
From cows to ciggies, then. The struggle for sales volumes at Imperial Tobacco received a fillip from the completion last June of its acquisition of a range of US brands - including Winston, Maverick and Kool - that had to be sold as part of Reynolds American's acquisition of competitor Lorillard. Mega deals move slowly and the purchase agreement for these brands was first announced almost a year earlier, but the result could not have come soon enough.
Including the US brands, Imperial Brands sold 134bn 'stick equivalents', its preferred measure of volume, during the six months to the end of March 2016, down 3 per cent compared with the prior comparable period. But strip out the acquired business and volumes were down 9 per cent at 125bn stick equivalents. As we covered at the time, conflict in Iraq and Syria made a dent in organic sales and net revenues, which were up from £2.95bn to £3.4bn, but come out as £2.93bn if you ignore the acquired brands.
Analysts at Barclays argue it would be "harsh" to dwell on this volume challenge, given Imperial Brands bosses are explicitly focused on profitable growth. Indeed, part of the volumes fall came from a decision to avoid lower-margin sales in Turkey and Ukraine. But a fall in its UK market share clearly wasn't in the plan, so much hope will be placed on the US and growth markets to pick up the baton. Short of decent margin or e-cigarette growth, volumes cannot be ignored for long.
The benefits of an acquisition, just like the difficulties, can take a while to work through. One of the classic defensive acquisitions of recent times was Aviva's (AV.) purchase of Friends Life Group. As we wrote at the time of the deal in late 2014, concerns were raised about the organic growth prospects of the combined entity once the synergy benefits had come through. The union is still in its honeymoon period, with those synergies ahead of schedule and the latter providing a lorry-load of cash for the combined group.
The early signs appear to be good: in the life insurance division, the value of new business grew by 14 per cent on a constant currency basis, excluding Friends Life and 24 per cent with the business factored in. But the critics could be forgiven for thinking how far this growth can go given the structural challenges facing the retirement income market: close attention will need to be paid to the pattern of bulk annuity and workplace pension sales as the marriage matures. As for all these deals, I suspect readers are more concerned with the implication for the longer-term strategy than with the shorter-term benefit to the financials.
