In the world of investing, few things make an investor’s skin crawl like acquisitions. You’ve probably seen it before: a large lumbering company (like, say, Microsoft Corporation (NASDAQ:MSFT)) makes a huge acquisition and the stock price immediately goes down. There’s a reason for that: in investing, acquisitions are viewed as the plague.
But it’s not always so simple. Believe it or not there are a few companies that make acquisitions seamlessly. As long as a company remembers to stick with acquisitions that fit their long-term business strategy, an acquisition can work out quite nicely for everyone.
The happiest acquisitions on earth
Disney World has long been said to be the happiest place on earth, but The Walt Disney Company (NYSE:DIS) is so much more than just parks these days. The company’s earnings are expected to go from $3.07 to $4.55 in two short years, a tremendous jump for a company of this size. And while Disney is known for its iconic mouse ears, today much of its money is made through successful acquisitions it has made, like ABC and ESPN. Other winning additions to the Disney brand have been the Marvel Universe and Pixar, which were “best of breed” brands in their own right and fit the The Walt Disney Company (NYSE:DIS) family well.
Due to their successful acquisitions, it’s somewhat difficult to compare The Walt Disney Company (NYSE:DIS) to any formidable competitor. You can’t really compare Disney to other amusement park purveyors like Cedar Fair, L.P. (NYSE:FUN) because Disney gets a ton of it’s revenues from ESPN (40%) and ABC (8%). Likewise, The Walt Disney Company (NYSE:DIS)’s network revenues are less risky than CBS Corporation (NYSE:CBS)‘ because they’re diversified with the parks. A business portfolio is no different than yours, diversification makes revenues more consistent and less risky.
With most of The Walt Disney Company (NYSE:DIS)’s brands firing on all cylinders and big blockbusters like “The Lone Ranger” coming up, I could see Disney easily hitting its earnings projections over the next two years.
The illusion of choice
What gives The Coca-Cola Company (NYSE:KO) its industry-leading brand moat that Warren Buffett is so fond of? Is it the legion of followers that the Original Coca-Cola Classic enjoys? Perhaps it’s the great marketing, world-wide distribution center, or even the polar bears?
One things for sure, it’s not the worrisome declining U.S. soda sales that the cola industry has seen in recent years. In fact the only thing that has saved The Coca-Cola Company (NYSE:KO) from declining cola figures are the acquisitions that it’s made.
It may surprise you that many “healthy” drink brands like Vitamin Water, Smart Water, and Odwalla are now a part of the Coca-Cola family. These brands fit into a long-term brand strategy that I like to call the “illusion of choice,” which is what makes them smart acquisitions.
In the past Coke would do this with brands like Sprite. A customer would get sick of cola and they’d think they were purchasing product from a competitor by choosing Sprite. What our hypothetical customer was likely unaware of is that they’re filling The Coca-Cola Company (NYSE:KO)’s coffers because Coke owns Sprite.
Only now the “choices” that customers are making are more conscience, they’re very aggressively choosing healthier brands. So rather than try to fight the tide, Coca-Cola bought the tide–starting with its acquisition of Odwalla in 2001, and later Vitamin Water–and the illusion of choice has roared on. This “illusion” is part of what separates The Coca-Cola Company (NYSE:KO) from competitor, and fellow successful acquirer, PepsiCo, Inc. (NYSE:PEP). Pepsi’s acquisitions have led to amazing revenue diversification; in fact, a majority of Pepsi’s revenues (60%) come from Frito Lay and Quaker.
But a few things separate Coca-Cola from the rest of the pack. While PepsiCo, Inc. (NYSE:PEP) is an outstanding acquirer and a strong company, The Coca-Cola Company (NYSE:KO) is acquiring more healthy beverage brands that the market is seeking as an alternative to cola. But the most important differentiator is that Coca-Cola’s acquisitions are all beverage companies. Not only does this help operationally–to streamline distribution channels–but it also helps The Coca-Cola Company (NYSE:KO) steal more “new” customers from competitors. Today, 70% of Coke’s revenues come from non Coke brand beverages. These beverages would typically be pulling market share away from the traditional Coke brand, and that’s the difference–they’re not an “add-on” product like Frito’s are to Pepsi.
Buying this market share has lead Coca-Cola to double-digit revenue, earnings, and dividend growth over the past five years. Think about that–all three categories have grown in excess of 10% for five consecutive years. What a business model!
Make a smart acquisition…buy these stocks
It’s long been said that “no news is good news,” and I think that applies to good acquisitions as well. It’s the disasters like the Time Warner/AOL merger that make headlines. Success is not a sexy story, but acquisitions can work.
The overriding theme of successful acquisitions is the company being acquired must be significantly smaller than the acquirer and fit the acquirers over-arching business plan. That’s certainly the case with the acquisitions we’ve discussed. So consider both The Coca-Cola Company (NYSE:KO) and The Walt Disney Company (NYSE:DIS) for your portfolio, and let’s hope that they make another acquisition soon!
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO), PepsiCo, and The Walt Disney Company (NYSE:DIS). The Motley Fool owns shares of PepsiCo, Inc. (NYSE:PEP) and Walt Disney.
The article Make a Smart Acquisition and Buy these 2 Stocks originally appeared on Fool.com.
Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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