expendituresofafirmthereforeneedtoincludeacquisitions.
Sincefirms seldommakeacquisitions everyyearand each
acquisition has a different price tag, the point about
normalizingcapitalexpendituresappliesevenmorestrongly
to thisitem. Thecapitalexpenditureprojections fora firm
thatmakesanacquisitioncosting$100millionapproximately
once every five years should therefore include about $20
million, adjusted for inflation, every year.
Shouldwedistinguishbetweenacquisitionsfundedwithcash
versusthosefundedwithstock?Wedonotbelieveso.While
theremaybenocashspentbyafirminthelattercase,the
firmisincreasingthenumberofsharesoutstanding.Infact,
onewaytothinkaboutstock-fundedacquisitionsisthatthe
firmhasskippedastepinthefundingprocess.Itcouldhave
issuedthestocktothepublicandusedthecashtomakethe
acquisitions.Anotherwayofthinkingaboutthisissueisthata
firmthatusesstocktofundacquisitionsyearafteryearandis
expectedtocontinuetodosointhefuturewillincreasethe
numberofsharesoutstanding. This,in turn,willdilute the
value per share to existing stockholders.
Incorporating acquisitions intonetcapitalexpenditures and
valuecanbedifficultandespeciallysoforfirmsthatdolarge
acquisitions infrequently. Predicting whether there will be
acquisitions, howmuchthey willcost, and what theywill
deliverintermsofhighergrowthcanbeclosetoimpossible.
Ifwechoosenottoconsideracquisitionswhenvaluingafirm,
we have to remain internally consistent. The portion of
growththatisduetoacquisitionsshouldnotbeconsideredin
thevaluation. Acommon mistake that is madein valuing
companies that have posted impressive historic growth
numbersfromanacquisition-basedstrategyistoextrapolate