Why can't companies grow ever-larger into corporate behemoths by funding a large number of acquisitions using shares? Shares are like currency that the company can mint on its own. Surely management stands to gain (in terms of compensation and prestige) from controlling a large business empire. One reason I can think of is share dilution, but share dilution does not reduce value to existing owners if the increased equity earns at least the same amount of returns as the original equity.
For example, suppose the original company has an equity of $100 million and earns $15 million (i.e. 15% return on equity). Let's say the company decides to "dilute" the shares by issuing $900 million worth of shares. The equity is now $1 billion. If the company earns the same 15% return on equity on the new $900 million, the company will earn $150 million on equity of $1 billion. This has several advantages:
- Original owners of the $100 million equity will see no loss of value. Their ownership stake is diluted, but the value has not been diluted.
- The company has larger profits (earnings grew 10 times).
- Management can get a larger salary.
- The company becomes more prestigious because of increased size and increased profits.
Supposing that all these advantages are real, management can then repeat the process I described above to transform their company into a $10 billion company, $100 billion company, etc. However, in practice, small companies seem content on being small companies, so I think some of my reasoning above is incorrect. What is wrong with my argument above? Why don't companies issue more shares to create a corporate empire?