Company in the news: Carillion

published 8 August 2014

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 withits own businesses. Without these deals, Carillion's profitswould probably have been a lot lower. Balfour Beatty wouldhave undoubtedly given it the option to do the same again.

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Yet, growing by acquisition and mergers is a difficult way tomake shareholders richer and many companies fail to do so.Carillion's shares are not much higher than they were five yearsago. Until it can prove that it is capable of sustainable profitsgrowth from its existing businesses, the market is unlikely toplace a higher value on the stock.

Verdict: avoid

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.