Supply-side digital advertising specialist Magnite (NASDAQ:MGNI) recently announced a massive acquisition of rival SpotX for $1.7 billion. This purchase is the latest chapter in the company's meandering journey to where it is today. Starting as Telaria, it was acquired by Rubicon Group and then underwent a name change to what it's called currently.

Through this series of moves, the company's stock has done well for shareholders, but some investors aren't buying into its growth-by-acquisition strategy. In this video from Motley Fool Live, recorded on Feb. 5, Motley Fool contributors Brian Feroldi, Brian Stoffel, and Brian Withers discuss why they aren't fans of this approach.


Brian Feroldi: Driving Fool says, "Thoughts on the Magnite acquisition? Stock popped 25% on the news." Magnite is not one that I own. I know that a lot of Fools are bullish on it. The market seems to like the deal. My question is, this company's second mega acquisition in a year. They used to be Telaria, and then they combined with Rubicon Project and announced seems like they're combining with this SpotX to become something bigger.

So that tells me they're strategy is "acquire growth," which is not a strategy that I like, but market likes it.

Brian Stoffel: I tell you what, if their stock keeps popping 25%, they'll be able to afford all the acquisitions they want.

Feroldi: Yeah. If you're a shareholder, congrats, it's has been great over the last year. Plus, I can't tell you anything more than the market likes it. [laughs]

Brian Withers: I wanted to hit UT Jester's comment or question, "What is the downside to growth by acquisition?" That's a comment typo [Brian Feroldi] that you made. I'll just get two seconds on it, and you can follow on.

A lot of times you smash cultures and business stuff together, and there's a tremendous amount of cost to doing that, and it takes a considerable amount of time and a considerable amount of mind share of the employees who are involved. In fact, I've been involved with several of them. I've been the acquisition target. It's really disruptive to the culture from the company that's being taken over, as well as if the company who is the acquirer is not good at it, it can lead to bad outcomes, and you could potentially even lose customers if you're distracted, or lose momentum to competition.

Stoffel: Look. I always like to say the easiest way for me to think about this is, imagine you play for a baseball team, a football team, or basketball team. You've been playing with for many years, and then all of a sudden you find out you're going to be combining with someone who is your archrival, and that will be the new team. Because an acquisition usually should be someone that you are competing against, or at least in the same dealers. Those things aren't easy.

Withers: Who is going to be the running back? Who is going to be the first-string quarterback? Who is going to carry the water?

Feroldi: Who's going to be the coach?

Stoffel: Yeah, who's going to be the coach?

Feroldi: Two different coaching styles. It's a strategy that can work. There are some companies that their whole MO is growth by acquisition, and it works out really well. To me, it just amps up the risks.

I would just so much rather invest in a company that grows organically. That's me.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.