Companies can grow in several different ways.
Some, such as nitrile glove maker Top Glove Corporation Berhad (SGX: BVA), grow organically by increasing their manufacturing capacity.
Other companies rely on acquisitions as a means to grow.
Acquisitions may add on a new product or service line to the company’s portfolio, allow it to penetrate a new region, or bring an influx of new customers that the company can serve.
Some businesses employ a mix of both methods to try to achieve higher revenue and net profit.
Fair warning, though.
Growth is not always assured in the case of acquisitions.
Investors need to assess each purchase to understand the rationale for it and how it will benefit the acquirer.
Here are three companies that recently conducted acquisitions.
DBS is one of Singapore’s three largest banks and offers a comprehensive range of banking and investment solutions.
The lender had reported a record profit before allowances for 2020 despite weak economic conditions.
But the group is not slowing down.
Last week, it announced an agreement to purchase a 13% stake in Shenzhen Rural Commercial Bank (SZRCB) for around S$1.1 billion.
This acquisition is in line with the bank’s intention to grow in the Greater Bay Area of China.
Upon completion, DBS will end up as the largest shareholder in SZRCB.
The transaction will immediately add to the bank’s net profit and return on equity.
SZRCB has 210 branches in Shenzhen along with 2,100 self-service terminals.
The Chinese bank has over five million retail customers in its database along with more than 170,000 corporate clients.
This acquisition will be funded using DBS’ internal resources and is subject to approval from the China Securities Regulatory Commission.
This announcement comes hot on the heels of DBS’ acquisition of Lakshmi Vilas Bank in India back in November 2020.
Both acquisitions demonstrate the lender’s commitment to growing its customer franchise and penetrating further into different parts of Asia.
AEM offers intelligent system test and handling solutions to semiconductor and electronic companies.
In particular, the group serves the advanced computing, 5G and artificial intelligence sectors that have been largely unaffected by this crisis.
AEM made a final S$1.15 per share offer for the shares of CEI Limited (SGX: AVV).
Shareholders of CEI are allowed to choose from three options, one an all-cash consideration and the other two involving a mix of cash and shares of AEM.
As a brief background, CEI is a contract manufacturer for printed circuit board assemblies, box build and equipment manufacturing.
AEM’s rationale for the acquisition is to enhance its service and product offering as CEI will allow it to vertically integrate across the entire supply chain.
The group will also increase its customer base and allow it to cross-sell other products and services.
Apart from this acquisition, AEM had also acquired DB Design Group back in July 2020.
It recently also acquired a 26.59% stake in Ateco Inc, a South Korean company that designs and develops memory test handler solutions, for US$3.8 million.
UMS provides equipment manufacturing and engineering services to semiconductor companies.
It is also involved in complex electromechanical assembly and final testing devices and serves other industries such as machine tools and oil and gas.
Last week, the group announced that it had acquired 13.1% of the issued share capital of JEP Holdings Ltd (SGX: 1J4) and is making a compulsory offer to acquire the remaining shares.
The offer price for JEP’s shares was S$0.20 per share.
JEP is a provider of precision machining and engineering services serving primarily the aerospace industry.
This acquisition will allow UMS to diversify beyond its traditional semiconductor offerings and help to diversify its revenue streams.
UMS is also open to exploring business synergies with JEP to try to tap into opportunities present in new markets.
These three companies have carried out acquisitions to boost their growth prospects even as they navigate the uncertain environment caused by the pandemic.
Investors should welcome such corporate moves.
However, they should also monitor how the acquisitions have performed to ensure that management has made the right call.
After all, an acquisition may sound enticing when announced, but will have to prove its worth over time.
A secure, worry-free retirement may not be as far-fetched as you may believe. In our latest special FREE report, we cover eight stocks, consisting of a mix of blue-chips and mid-cap companies, that we believe can ride the recovery and offer investors a great mix of both growth and income. Click HERE to download the report, 8 Singapore Stocks for Your Retirement Portfolio, for FREE now!
Disclaimer: Royston Yang owns shares in DBS Group.