Folks, this is another major fail in financial knowledge by...

Folks, this is another major fail in financial knowledge by Business Spectator. Here's why:

Biz Spec wrote: "G8 buys childcare centres privately at a multiple of four to five times EBIT but raises equity as a public company at an average of about nine times. Essentially, existing shareholders leverage the equity market’s willingness to pay more for childcare centres."

This is erroneous for three reasons:
1. The market (i.e., new shareholders) does NOT "pay more for childcare centres" from a cap raising (i.e., 9 times vs the 4-5 times what GEM paid for them). Why not? Because those who buy the new shares are paying for a piece of the firm's ENTIRE assets, not just the assets acquired by the cap raising funds. If GEM issues, say, 10% new shares, the owners of the new shares own 10% of GEM. They do not have ownership of only the childcare centres acquired with funds form the new shares. Furthermore, cap raising usually offer new shares at a DISCOUNT to the current market value (partly to account for dilution, and partly as an incentive for current and new shareholders to buy the new shares).

2. GEM has been funding acquisitions over the past year out of cash flow and some debt, NOT cap raising. Much of the last cap raising was used for large acquisitions (Sterling, etc) more than a year ago. Also, at 4-5 time EBITDA, the acquired centres are often immediately ACCRETIVE, meaning that they start paying for themselves from the first month or so. GEM and other firms raise equity when a large deal requires more immediate cash than the accretive and cash flow can manage.

3. Trivial point, but GEM does not buy childcare centres "privately". This implies a transaction between two privately held entities (note the statement that GEM buys privately then raises equity as a public company, as if it has both private and public entities). GEM is a public company, so the acquisitions immediately become part of the publicly held company and are reported when required through market sensitive announcements or annual reports. I mention this because previous Biz Spec articles claimed that GEM (execs?) buys the centre at a low price and sells them to shareholders at a high price -- wrong!.

This Biz Spec article is the latest (fortunately less blatantly wrong) than past writing. See my post many months ago about a scandalously incompetent article in Biz Spec, some aspects of which are echoed in the current article:
http://hotcopper.com.au/threads/un-intelligent-investor-article.2465101/#.VlMWqN8rKEI

Last point: Strategy 101: firms grow mainly (but not only) by making or buying. Firms buy (acquire) when it is cheaper than making (expanding, replicating, etc). The benefits of buying over making need to consider the cost and risk of integration, as well as the opportunity and costs of making (e.g., licencing, choice location, attracting new clients, etc). Currently and for the foreseeable future, GEM can buy much cheaper than making the same thing itself.