Introduction
Investing in serial acquirers, companies that grow through acquisition rather than organic expansion, is often met with skepticism. Many investors shy away from serial acquirers due to the high failure rate of mergers and acquisitions (M&A), complexity in financial analysis, and the difficulty in predicting future acquisitions.
However, when executed effectively, an acquisition strategy can unlock significant long-term value. In this article, we explore the characteristics of successful serial acquirers, why they are often misunderstood, and how discerning investors can identify high-quality opportunities.
Understanding Serial Acquirers
Serial acquirers are businesses that reinvest their free cash flow into acquiring new businesses rather than returning cash to shareholders through dividends or buybacks. These companies often operate in industries where competitive advantages exist but organic reinvestment opportunities are limited. Rather than hoarding cash, they deploy it strategically into private market acquisitions that yield higher returns than their cost of capital.
There are four primary types of serial acquirers:
- Roll-ups: Consolidate fragmented industries, typically relying on cost synergies. These often fail due to integration challenges and overpayment for acquisitions.
- Platforms: Acquire businesses that can be integrated and grown via internal expertise, benefiting from synergies and scalability.
- Accumulators: Purchase businesses in related areas but maintain a decentralized structure, allowing acquired companies to retain operational independence.
- Holding Companies: Passive owners of a diverse portfolio of businesses with limited integration.
The most successful serial acquirers tend to be platforms and accumulators, as these models allow for entrepreneurial independence and a direct connection between management and customer interactions.
Why Serial Acquirers Are Overlooked
Despite their potential for strong returns, serial acquirers are often misunderstood for several reasons:
- Acquisition-Oriented Business Models: Many investors avoid acquisitive companies because of the historically high failure rate of M&A deals. Research indicates that two-thirds of acquisitions either fail to create value or actively destroy it.
- Complexity: Serial acquirers often operate with a decentralized structure, making their financials harder to analyze than a single-product company with a straightforward revenue model.
- Underappreciation of Future Growth: Analysts frequently fail to factor in future acquisitions when forecasting earnings, leading to an underestimation of their potential.
Attributes of Successful Serial Acquirers
Not all serial acquirers are created equal. The best ones share common traits that differentiate them from lower-quality counterparts:
1. A Disciplined Acquisition Strategy
Successful acquirers maintain rigorous investment criteria. They focus on buying businesses at reasonable valuations, often targeting small, founder-led firms that are not part of competitive auction processes. The best serial acquirers cultivate relationships with potential sellers over time, allowing for in-depth due diligence.
2. Operational Excellence and Decentralization
The most effective serial acquirers operate with a decentralized model, allowing acquired businesses to maintain independence while leveraging the parent company’s expertise. For example, Heico, a leading aerospace and defense company, attributes much of its success to decentralized decision-making and entrepreneurial autonomy within its business units.
3. Independent Capital Allocation
Top-tier acquirers treat capital allocation as a core competency. Rather than chasing growth for growth’s sake, they assess opportunities based on risk-adjusted returns and reinvest capital flexibly. Companies like Nelnet demonstrate the ability to deploy capital opportunistically without rigid adherence to growth forecasts.
High-Quality Serial Acquirers
Several companies illustrate the effectiveness of a well-executed acquisition strategy:
- Addtech (Sweden): A distributor of electromechanical components that has compounded shareholder value by focusing on high-margin acquisitions.
- Assa Abloy: A security solutions provider that integrates acquisitions into a cohesive platform to drive efficiency.
- Halma: A specialist in safety and environmental technologies, leveraging its acquisition framework to expand into new market segments.
- Danaher: An exemplar of systematic acquisitions, with a focus on leveraging the Danaher Business System for continuous operational improvement.
- Lagercrantz: A company that has successfully increased margins through a shift toward proprietary products acquired via a disciplined M&A strategy.
A Selective Approach
Investing in acquisitive companies requires a discerning approach. Broad exposure to the sector may lead to underwhelming results, but identifying businesses with strong acquisition frameworks, disciplined capital allocation, and decentralized structures can lead to outsized returns.
Investors should focus on the following factors:
- Management’s track record in acquisitions
- Transparency in capital allocation decisions
- Ability to generate returns above cost of capital
- Decentralization and entrepreneurial autonomy
- Alignment between shareholders and management
Conclusion
Serial acquirers remain an underappreciated segment of the market due to their complexity and acquisition-oriented business model. However, for investors willing to dig deeper, these companies can present compelling opportunities for long-term compounding. By focusing on high-quality platforms and accumulators with disciplined acquisition strategies and decentralized operations, investors can uncover businesses that continue to grow and thrive in ways that traditional financial analysis may overlook.
This article draws heavily from Lawrence Scott’s letter on serial acquirers