Construction services firm Carillion’s (LSE: CLLN) proposed merger with Balfour Beatty (LSE: BBY) has hit the rocks. Carillion wanted the deal to include Balfour’s Parsons Brinckerhoff business, which would bring stable profits and strong cash flow. Balfour Beatty had already put this business up for sale and said “no”.
Carillion is a well-managed business and does a good job building things for the government and then looking after them. However, it has struggled to grow its profits organically over the last five years. The company has a record of growing by buying other companies.
During the last decade, it has hoovered up rivals, such as Mowlem and Alfred McAlpine, and benefited from big cost savings by combining them with its own businesses. Without these deals, Carillion’s profits would probably have been a lot lower. Balfour Beatty would have undoubtedly given it the option to do the same again.
Yet, growing by acquisition and mergers is a difficult way to make shareholders richer and many companies fail to do so. Carillion’s shares are not much higher than they were five years ago. Until it can prove that it is capable of sustainable profits growth from its existing businesses, the market is unlikely to place a higher value on the stock.