Growing Rich - Arabictrader.com

KIRK KAZANJIAN
ing shares, repaying debt, or giving cash back to shareholders in the
form of a dividend. The more cash they invest at the top end of the
list, the more they’ll increase the company’s private market value over
time. Putting excess cash back into the business is the cheapest way
to create value. If you enhance the crown jewel, or the original business,
unless something goes terribly wrong, you’re bound to increase
the value of your company.”
You can get a lot of this information through reading the financial
statements in a company’s annual report and SEC filings. Unfortunately,
if the people doing the books don’t have integrity, the numbers
can’t always be trusted. This is what happened with Cendant, a highflying
stock through much of the mid-1990s. Once word came out
that the company was accused of cooking the books in mid-1998,
the stock got creamed and had a hard time climbing back up. Incidents
like this, fortunately, are very rare in corporate America today.
Acquisitions, on the other hand, are more tricky. “They’re like
trading baseball players,” Yacktman maintains. “If done synergistically
and at the right price, there’s no question it can do wonders for a
company. But you have to look at it as a 20- to 30-year investment.
On the other hand, if you don’t get those two crucial elements just
right, it can be a disaster. Quaker Oats is a good example. In 1983,
the company bought Stokley-Van Camp. Since then, Quaker has sold
off enough of the assets it acquired to get all of its money back and
then some. What’s more, it still has one product left from that acquisition
- Gatorade. Today, Gatorade alone is worth some $3 billion
dollars. It was a fabulous acquisition. Why? It was synergistic, it fit
right in with the company’s other businesses, and it was acquired at
a good price.
“Now fast-forward to 1995 when Quaker Oats bought the beverage
company Snapple right at the peak of its popularity,” he continues.
“In this case, it did the exact reverse of the Stokley-Van Camp purchase.
Quaker Oats overpaid for Snapple, bought it right when the
business was beginning to peak, and got a product that wasn’t nearly
as synergistic as Gatorade. The two pieces obviously didn’t fit together
as well and it was far too costly. The management team didn’t do its
due diligence work properly in advance.” To show you how bad this
deal was, Quaker Oats paid $1.7 billion for Snapple and wound up
selling it to Triarc two years later for just $300 million. Quaker Oats
CEO William Smithburg ultimately wound up resigning over the fiasco.
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