Three small caps punching above their weight in M&A

There are generally considered to be two ways in which companies can grow their earnings. The first, and most common for businesses both large and small, is organic growth – whereby a company expands its existing, or “internal”, operations via increasing sales, breaking into new markets or launching new products for example.

Inorganic, or acquisitive growth is the opposite, and sees a company look to deliver growth via the purchase of another business and adding it to its own.

While often considered to be one of the more exciting and potentially lucrative sides of equity investing, acquisitions don’t always go as planned. In fact, finance academics have long been critical of the M&A arena, with study after study finding that the majority of deals fail to deliver as expected.

A 2011 paper by the Harvard Business Review, which reviewed a number of studies in the area, suggested that the failure rate for mergers and acquisitions stands at the surprisingly high figure of between 70% and 90%.


Deals can fail for a number of reasons.

For example, a high powered CEO looking to build up their empire (and their salary) might go on an acquisition spree without regard to whether the companies being bought are a good strategic fit.

Sometimes, the merging of two companies can look like a good idea on paper, but the practicalities of integrating them often turn out to be more difficult than thought, especially in people-driven businesses with clashing corporate cultures.

Many times the failure comes down to the simple reason of the wrong price being paid for what is being bought – ITV agreeing to buy Friends Reunited for up to £175 million in 2005 then selling it for £25 million four years later is a perfect example.

Despite many disasters, acquisitions, if they are done correctly, can offer the opportunity for growth and value creation. Here follows three small cap companies which have announced acquisitions recently which I believe look like being positive for shareholders….

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