It was a fantastic day last Wednesday in a snow-covered Stockholm for the second Redeye Serial Acquirers conference. A total of 15 companies presented hailing from the Nordics and UK. There was a good balance of large, well-established serial acquirers with early-stage startups and everything in between. This was reflected in the variety of perspectives on all aspects of running a successful M&A operation.
As I’ll describe there are some recurring themes that underpin the business models of the most successful acquirers, including disciplined capital allocation, decentralisation, expansive niches, permanent ownership, people and culture fit. But there are also striking differences in how these principles are applied, how acquisitions are structured and what success looks like to each company.
Here are some of the main themes and discussion points from the event:
Capital Allocation
Arguably capital allocation is the most important leadership ingredient for any business. But for serial acquirers it is of paramount importance. Discipline in the M&A process is needed for long term value creation.
Discipline applies to all aspects including due diligence, business quality and acquisition pricing. On average the multiples seem fairly consistent around 4-7 times EBITDA depending on the size of company. For larger acquisitions 8 or 9 times is not unheard of although it presents more risk and pressure on the subsidiary to deliver.
Decentralization
A key theme for serial acquirers is decentralization. Johan Nordstrom, CEO of Green Landscaping, went as far to say that his company has to constantly fight the pull towards centralisation or face certain death! But what makes it harder – at least from an investors’ perspective – is that there’s no one common rule for decentralisation. It means different things to different companies.
For some, decentralization applies to all business units and functions of the organisation with a veracious pursuit of independence and entrepreneurship. For others it means autonomy at the platform level with an effective roll-up model based on a specific end market or geography.
Niche Markets
The best acquisitions tend to be companies operating in an expansive niches with a leading position in its end market. It will ideally have room for growth but otherwise the quality of the underlying business is well established with few, if any, changes required.
Many companies are focused on the best niche markets (i.e. Constellation in vertical software or Judges Scientific in scientific equipment) and David Cicurel at Judges was quick to point out they have no intention of moving into other markets. Knowledge of their domain and its underlying economic characteristics appear to have cumulative, compounding effects.
Another approach is to find the best companies within large fragmented markets. For example Bergman & Beving operates in the cyclical industrial and construction sectors however they are successfully compiling a group of product companies in niches such as specialist safety equipment for large industrial clients.
Deal Structures
Another key discussion point was the difference in deal structures. Some acquirers like Teqnion and Lifco prefer to buy 100% of the company in cash, while others like Röko and Marathon Software like to acquire 70-80% whilst keeping the founder locked in over a longer timeframe with a minority interest.
It was noteworthy that Röko’s CEO, former Lifco executive Fredrik Karlsson, highlighted that the best acquisitions at Lifco were those in which the founder retained a minority stake. He went on to state that it can help to win deals – since founders are often reluctant to completely let go – and presumably it can weed out those sellers that are looking to cash out on unfavourable terms for the acquirer.
You would have to trust in Röko’s leadership that these benefits are worth the considerable cost; its debt obligations are currently as one of the highest in the industry at 3.3 times EBITDA.
People & Culture
As with most businesses, finding and working with the right people is key to success. Relationships begin with the first interactions between the acquirer and the founder, preferably via a direct approach or referral, rather than a broker. The process of building trust can take a long time, in some case years or even decades. David Cicurel laughed when he explained how he’s hoping to onboard one founder and his company after 16 years of courtship!
For most selling founders the idea of their life’s work going to a good, secure home is more important than an extra 20 or 30% on the sale price. Sellers need to feel valued and understood, but importantly they are looking for signs that the acquiring company is following through on its promises.
Integrity and reputation is currency for the serial acquirer – not just for the business they’re acquiring today but all the other companies they’re aiming to attract in the future. One or two negative experiences from founders can do long-lasting damage.
Developing Talent
Unsurprisingly many of the leading serial acquirers have their own internal talent development programmes. One CEO proudly mentioned how more than two-thirds of new managers, appointed following the exit of the founder, were internal promotions.
This holds importance on a number of levels. Aside from the more immediate need to find a successor to current management, it helps incentivise talented employees to stick around and can give them a greater sense of purpose and a feeling that their career ambitions can be realised within the group.
And, if done well, it creates a strong feedback loop where sellers see their old employees and business thrive under the new owner, which is often the very reason they choose them in the first place. Serial acquirers that effectively develop talent have the opportunity to improve organic growth, profitability and sustainability of their business units.
Scaling M&A
Unfortunately there are few examples where a decentralized org structure and culture has persisted beyond a certain scale. As with most scale laws, there seems to be a natural threshold at which point structural change becomes inevitable. Constellation Software (currently valued at close to $50B) may have bucked the centralization trend but this the exception rather than the rule.
One aspect of CSI’s unique approach is that capital allocation has been pushed further down the organisation. If this is to be carried out successfully and without dampening returns to capital, then the existence of tight M&A guidelines and a culture of exacting standards is imperative.
Jörgen Wigh, CEO of Lagercrantz, acknowledged that as the company continues to grow – especially through international expansion – some parts of their M&A process would be decentralized. He pointed to the hire of UK CEO, Russell Stuart, as evidence of this. It will be interesting to see how this evolves.
Conclusion
In summary, the best acquirers have a proven, rigorous model for acquiring growth which manifests itself in a track record of out-performance over many years. They also tend to have large insider ownership, credible management and published performance metrics for transparency and accountability. This is a wonderful combination for any investor.
And it shows up in the numbers: high returns on invested capital, good profit margins and free cash flow for further reinvestment. A couple of good examples from the Redeye event include Judges Scientific that has seen a 100-fold increase in its share price since 2006. And Lagercrantz that has achieved a total shareholder return of more than 30% annually since 2009.
For long-term investors its important to feel confident that the business model and performance culture can persist across economic cycles and management tenures. A great illustration is Lifco which has continued its growth unabated since Fredrik Karlsson suddenly left his CEO post in 2019. Evidently those leadership development programs are worthwhile!
With such a concentration of top serial acquirers in the Nordics – clear evidence that great businesses and talent congregate together – the toughest dilemma for investors may in fact be narrowing down their shortlist.
A huge thanks to Redeye and all the speakers and participants at the event. Here’s the link to watch the presentations: https://www.redeye.se/events?tab=eventvideos
Great job!