THE ACQUISITION AS A CAPITAL BUDGETING DECISION

Growth by acquisition has been one of the major characteristics of the industrial scene during the last decade. In the U.K. this pattern of growth was evidenced at the beginning of the decade by the emergence of the industrial holding companies of which Thomas Tilling has been the most consistently successful. The strategy of the industrial holding company, frequently selling on very high price per earnings ratios, was to take over a number of small private companies with the intention of improving previous management performance. However, central control of the industrial holding company was weak and preferred not to become too deeply involved in the new subsidiary's business. The previous owners were frequently retained to manage the business following acquisition. But when they decided to leave—having become rich men on selling their business—effective management was generally non‐existent. The resultant fall in earnings was inevitable as was the fall in stock market rating; this fall in price/earnings ratio precluded subsequent use of equity in acquisitions.