Management always makes their acquisitions sound good. They probably do believe those acquisitions will add value or be accretive. If not, they wouldnât be making the acquisitions at all.
However, reality is harsh sometimes, as weâll see with the Maxar Technologiesâs (TSX: MAXR)(NYSE: MAXR) acquisition.
Maxar was formerly known as MacDonald Dettwiler and Associates (MDA). It rebranded itself as Maxar after it completed the purchase of DigitalGlobe for US$2.4 billion (CAD$3.1 billion) in October 2017.
The estimated benefits of the acquisition
When MDA announced that itâd acquire DigitalGlobe in late February 2017, it believed the combined company would offer enhanced, value-added services to global commercial and government customers. Additionally, it thought it would expand market access, increase scale, and diversify revenue and customer base.
More concretely, MDA expected the transaction to be accretive to operating earnings per share in 2018 and anticipated it to deliver $75-150 million in run-rate Synergies by 2019.
The actual âvalue creationâ
Fast forward to today from February 2017, the stock has lost close to 90% of its value.
MAXR data by YCharts. The price action of TSX:MAXR from February 24, 2017, to today.
It turned out the operating earnings per share werenât accretive but are expected to decline for 2018. Moreover, theyâre expected to decline even more this year after Maxar lost one of its satellites.
Furthermore, Maxar took on a lot of debt to acquire DigitalGlobe. Its long-term debt at the end of 2016 was about US$602 million. At the end of 2017, it was US$3.02 billion. At the end of September 2018, it was US$3.17 billion. So, the long-term debt is not showing any signs of declining.
Maxarâs debt-to-equity ratio is on the high side at 1.8. S&P has given Maxar a credit rating of BB-, which is not investment grade. The interest rate paid by companies with poor credit ratings is much higher than companies with good credit ratings. So, itâs costly for Maxar to pay high interests on its debt.
Instead of value creation, Maxar had massive value destruction. And itâs the shareholders who lose money.
Lesson learned
Management can make acquisitions sound wonderful. In most cases, the relevant stock might pop in the short term due to the good news of an acquisition that is supposed to generate additional value. If the merger is executed poorly or if the acquisition isnât as good as initially thought, usually within a year, the stock will underperform. In Maxarâs case, it was a huge loss.
So, next time a company acquires another, take a step back and just watch from the sidelines for six months to a year after the acquisition completes to avoid losing money. After all, the goal of investing is to generate returns with the bottom line of capital preservation.
