If you think commercial lenders lend to companies only on the basis that those companies don't destroy shareholder value when deploying the borrowed funds, then you are somewhat naive.
Banks who lend money do so with one, and only one, criterion in mind, and that is are sure they will get back their principal plus interest.
Other than that overriding consideration, they don't give two hoots to what happens to the money they have lent out.
And in this case, the effective $140m that RMD will have to borrow (the company has $660m of bet cash, remember) equates to less than 6 months of Free Cash Flow. Even under the extremely hypothetical case of RMD writing off the entire value of this acquisition the day after they have bought it, this will make not one jot of difference to the security of the borrowings in the eyes of RMD's commercial lenders.
"Second and most importantly I have worked in one of the large MNC corporate (US$ 20bn) as their corporate planning head and tons of time we have thrown management ideas (JVs, M&As etc) into the bin due to n number of reasons and we were always respected for our hard decisions by our chairman...."
Yes, but RMD is not really a large MNC corporate in my view; it is a business where the founder is still intimately involved in the business, along with his son, them being chairman and CEO, respectively.
Of the remaining 6 directors, only one has been on the board for a period of less than a decade. This is not what I would call the world's most independent board of directors.
Believe me, this is a business where family influence runs deep.
And to date, over the past two-and-a-half decades, the Farrell factor has served shareholders impeccably well. Because the strategic focus has been on growing the core business in a laser-like fashion. I have been fortunate enough to have benefited from being a shareholder for over a decade with the business under Peter Farrell's stewardship.
But not his stewardship as a strategic acquirer of other un-related (or even tangentially-related), businesses, but as a builder of Intellectual Property by organic means to maintain industry leadership.
I back him to the hilt to continue doing the latter, but the former is something that I have no assurances he will be successful... based on precedent, the odds are stacked against him.
"Also few successful examples is Sonic Healthcare, APA etc on ASX who have implemented this strategy very well...."
The exceptions do not constitute the norm, I'm afraid. Besides, in the sample of two companies you have mentioned, the acquisitions they made were in the exact same core business that they conduct.
And even then, even when they do stick closely to their knitting, they have erred: SHL's acquisition foray into the US, which after many years is still not earning its cost of capital, and nor is their Imaging business which has been an acquisition roll-up story.
And for every company you show me that is a proven successful acquirer of other businesses (and there are a few of them), I'll roll out 20 that have unequivocally destroyed shareholder value in the process.
Don't be mistaken in thinking that company executives have a monopoly on unique and far-seeing, all-knowing insights.
They are quite fallible, not unlike you and me.
And like all of us, they put their pants on one leg at a time, and are subject to errors of judgment, emotional predilections and cognitive biases.
The default thinking that company managers are smart and know what they are doing, is dangerous and has often been proven to be wrong.
As it has grown on an uninterrupted trajectory for the past 20 years, this company still has oodles and oodles of organic growth opportunities ahead of it right as it is.
There is absolutely no need for RMD to pursue acquisitive growth.
Acquisitions have been shown many times over to be risky.
RMD Price at posting:
$7.95 Sentiment: Hold Disclosure: Held
(20min delay)
