An article appearing in the Journal of Finance in March 1992 discussed the findings of a study that examined large acquisitions between 1971 and 1982. The authors concluded that diversification acquisitions (those outside area of expertise) were sold far more often than were those in related businesses. Perhaps this is evidence why conglomerates are rarely successful. Who knows? What I do know is that sometimes, acquisitions are game changers. Let's look at a few.

IN PICTURES: Top 7 Franchise Dangers

Fortune Brands (NYSE: FO)

Jim Beam is an integral part of the company. How it got that way is a very interesting story. In 1965, Fortune, then known as the American Tobacco Co., concluded it needed to diversify. It began buying up businesses left and right, and in March 1967 it acquired the James B. Beam Distilling Co. for $111.5 million. That was and still is a lot of money. Today, based on 3% inflation, the price tag would be $397 million.

Of course, it's worth much more. Beam's 1967 revenues were $114 million, meaning American Tobacco paid one times sales for the biggest bourbon manufacturer in the world. Thanks to its $5 billion acquisition (in concert with Pernod Ricard) of more than 20 brands in 2005, it's now the fourth-largest premium spirits company in the world. With 2009 revenues of $2.5 billion, at one times sales, its spirits business is worth at least as much. However, when you consider it paid 3.8 times sales for its big buy in 2005, and Diageo's (NYSE: DEO) current P/S ratio is 2.9, it wouldn't be crazy to suggest Beam's value is around $7.5 billion. Especially when you consider how important Beam is to its overall profitability. Without it, Fortune's a much weaker business.

Procter & Gamble (NYSE: PG)

When P&G announced it was acquiring Gillette for $54 billion in 2005, Berkshire Hathaway (NYSE: BRK.A) upped its Gillette holdings so that it would own 100 million P&G shares upon completion of the deal. Warren Buffett heartily endorsed the merger, which brought Gillette, Braun, Duracell and Oral-B into the fold. Especially important were the high margins Gillette's grooming business brought to the table.

Estimates peg the value of the Gillette and Braun brands around $45 billion. Contributing 13% of net income in 2010, its market share in razors and blades is 70% and growing. Although adding $5 billion brands to its roster was the ultimate motivation for making the deal, Gillette's addition changed the company for the better because it solidified its focus on personal care products. Although Buffett has sold 22 million shares since October 2005, the 79.1 million remaining are currently worth $4.8 billion with $605 million in unrealized profits since the merger. It's difficult to know how Gillette stock would have performed had it gone alone. What we do know is that Gillette and P&G together make a formidable team.

Chico's FAS (NYSE: CHS)

Back in September 2003, Chico's was the darling stock of retail. It could do no wrong. Then trading at $15.15 a share, after being worth only 70 cents a share five years prior, the stock was on its way to an all-time high of $49.40 in February 2006.

One reason for the stock's meteoric rise was its $93 million acquisition of the White House Black Market stores. At the time, BusinessWeek questioned whether it made sense given the average WHBM store generated a 20% profit compared to 32% for its Chico's stores. In fiscal 2004, the first full year owning WHBM, the stores contributed $142.1 million in revenue or 13.3% of overall sales. In 2007 the company hit the skids, and WHBM became a savior of sorts, generating 30% of overall revenues in 2009 on double-digit same-store sales growth. Its revenues last year, including online sales, were a record $516 million. It's definitely the major growth driver for the company, and when you consider that its WHBM stores historically sell more per square foot than Chico's, it's a deal that makes complete sense. All this from a retail brand it bought for less than one times sales back in 2003. That's a game changer.

Bottom Line

The toughest thing for investors is recognizing game-changing acquisitions. For every massive deal like Gillette where it's obvious, many more go undetected. Although the Jim Beam purchase was a large deal for the 1960s, it was just one of many that took place over a decade-long buying spree. As for White House Black Market, it wasn't a big deal back in 2003, but it has certainly turned into one. If there's a lesson to learn here, it's that the best deals usually come from the most unexpected places. Acquisitions like Gillette are rare. (When major corporate transactions have a big impact on the currency markets, you can benefit. For further reading, see Mergers & Acquisitions: An Avenue For Profitable Trades.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center