A company life map - the rise and fall of a hot stock

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10. The acquisition trail

In 1997-1998 Country Bumpkin begins its buying spree in earnest. Its formula is simple:

• It acquires privately-owned garden stores on a low multiple (average 4 times post-tax profits)
• It pays for them in one of two ways with cash or with its own shares
• It rebrands and upgrades the stores, centralises administration, and looks for increases in both turnover and profitability.

Country Bumpkin's acquisition strategy is popular with investors. Why?

• The company is acquiring earnings cheaply

  CB's share price during late 1997 is in the 120p to 180p range. This puts it on a P/E of about 16. Or, put another way, every penny of post-tax profit it makes is valued by the stockmarket at 16p.

  When it buys private businesses on a multiple of 4 times earnings, it is paying just 4p for every penny of profit that they make.

  So it is buying something for 4p which, once absorbed into its business, is being valued by the market at 16p.

• It is extracting benefits from its acquisitions

  As soon as it brings a new businesses under its wing, CB puts it through the mill. Its financial management, stock control, marketing and staffing is made to conform to the CB model, reducing costs and improving margins. Lacklustre businesses suddenly start to make profits.

By mid 1998, Country Bumpkin's figures are:

Shares in issue: 14 million Current share price: 300p Market Capitalisation: £42m Net assets: £18m Net asset value per share: 128p

Turnover: £18m Profits before tax: £3m Profits after tax (net earnings): £2.01m

Earnings per share (eps): 14.3p Price/Earnings ratio (P/E): 20.9

Your 1,000 shares, bought for £1,000, are now worth £3,000. They have tripled in value in the last three years.

1. Country Bumpkin - the early days 2. The decision to go public 3. AIM flotation by a placing of new shares 4. AIM flotation by an offer for sale 5. AIM flotation by tender offer 6. AIM flotation by introduction 7. First day of public trading on AIM 8. A growth strategy 9. End of lock-in period 10. The acquisition trail 11. Rights issue 12. Scrip issue 13. Preliminary results announced 14. Full results announced 15. Rumours of a deal - clarifying announcement 16. Takeover of rival - cash and shares deal 17. Convertible loan stock 18. Preparation for the main market 19. Admission to the main market 20. Move into FTSE 250 21. Share split 22. Share buyback 23. Director sells shares 24. New York-led collapse of tech stocks 25. Suspension of shares 26. Hostile bid for Country Bumpkin 27. Liquidation