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Should investors avoid acquisitive companies?

Acquisitions are often good for sellers, but can be terrible for buyers. Not all acquisitions are bad for shareholders, but you need to be able to spot a good acquisition from a bad one
Should investors avoid acquisitive companies?

Are acquisitions good or bad for shareholders? It is a fact of the business world that companies will buy other companies. Investment bankers love acquisitions because they can make a lot of money from them. Shareholders of a company being acquired often like them too. The main area of doubt is whether acquisitions are good for the shareholders of the acquiring company. Here, the evidence is mixed. As with a lot of things in investing the answer depends on the circumstances. I take a look at the world of acquisitions and highlight the danger signs to look out for and what makes for a good acquisition.

Last week, I wrote about how you can spot signs of trouble brewing at a company before its share price falls heavily. One of the warning signs is related to companies that make acquisitions. Not all acquisitions cause trouble, but unfortunately many of them do. Sometimes the problems come from one big acquisition. In other cases, it can be from a series of acquisitions.

The problems encountered by companies making acquisitions range from profit warnings to bankruptcy and have led to them getting a bad name among investors. Yet not all acquisitions are bad. There are a selection of UK-quoted companies that have become very good at buying companies, integrating them into their existing businesses and making them work well for their shareholders. We shall see some examples of them later on.

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