I find that comparing and contrasting companies can be a very useful exercise, particularly for two decent energy companies like AltaGas (TSX:ALA) and Algonquin Power and Utilities (TSX:AQN)(NYSE:AQN). These companies are slightly different in terms of their operations and long-term growth prospects, but are similar in the sense that both companies have chosen to engage in acquisitions as a core strategy to provide earnings growth.
Companies that choose to grow via acquisition have always interested me, from the former Valeant (now Bausch Health Companies) to Warren Buffett’s Berkshire Hathaway, there are a range of acquisition methodologies and strategies that can be employed. Perhaps Valeant/Bausch and Berkshire Hathaway are the most extreme examples of either extremely destructive acquisition strategies which destroyed shareholder value, and extremely valuable acquisition methodologies which have enriched investors over time. Here’s my take on where these two companies sit on the spectrum.
I continue to be bullish on Algonquin in large part because I believe the company’s acquisition strategy creates meaningful shareholder value in the way of synergies between the companies which are clearly carefully picked by Algonquin’s management team.
Algonquin has a proven track record of successful acquisitions, which is supported by data in the form of rising return on equity (ROE) and return on invested capital (ROIC) metrics over time. Companies that are swallowed up by Algonquin do better, improving the value proposition for investors who often moan when they hear a company in their portfolio is making an acquisition. By the way, I would like to reassert my belief that ROE and ROIC are really the only two metrics that matter when assessing acquisitions, but I know that some analysts choose other metrics. To each their own.
I would put AltaGas in the list of companies that destroy shareholder value (i.e., on the Valeant end of the spectrum), though I know some of the issues the company had with its acquisition of WGL in recent years were not necessarily its fault.
I’m going to focus on WGL, because this has been the centerpiece acquisition many analysts believed AltaGas needed to do to diversify outside of Canada and gain more exposure in the United States. The deal was massive, and with the amount of debt AltaGas took on to fund this deal, it didn’t really make sense to me at the time. The timing of the debt also caused problems for investors as regulatory delays cost AltaGas big in terms of carrying costs for this project. AltaGas was forced to sell several valuable non-core assets to pay down some of this debt, including hydro assets I really liked, which furthered shareholder value destruction in my books.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Tom Gardner owns shares of Bausch Health Companies. The Motley Fool owns shares of and recommends Bausch Health Companies and Berkshire Hathaway (B shares). The Motley Fool recommends ALTAGAS LTD and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.