Investment Summary

Studies show how M&A has been destroying shareholder value over time. We argue that most businesses lack the expertise to make accretive acquisitions. However, some businesses specialize in making continuous acquisitions, and a few manage to create tremendous shareholder value. Sweden is an incredibly fertile hunting ground for these types of companies we classify as serial acquirers, and we aim to give you as investors the tools to make sound investment decisions in the space. Some reasons for the great performance:

Combining the benefits of being large with the benefits of being small

• Financial muscles to cope with economic downturns and prosper from scale economics while remaining agile in operations through decentralization

 

Continuous improvements

• Using benchmarking as a tool to incentivize the group companies to improve

 

Management and employees stay in place

• Having their own Academies to train future management

 

Many and small acquisitions

• The large “bet the company” deals often carry huge risks. Instead, the best serial acquirers focus on buying many good businesses that are asset-light and with high margins and a long runway at reasonable valuations
• Small companies usually draw interest from fewer potential acquirers, enabling serial acquirers to buy them at lower multiples

 

Aligned incentives

• Letting management of the acquired companies keep a part of the company (Buffett’s model has been for the previous owner to keep 20%)
• The acquired companies may buy stock in the serial acquirer or get paid in part in stock

 

Financial goals aligned with the growth ambitions

• Free up working capital, EBITA/Working Capital > 45%
• Grow EPS 15% per year
• Set minimum hurdle rate for new acquisitions, e.g., 15% IRR

Key drivers

The sector has become more crowded but there are still opportunities

Serial acquirers and investors must continuously be alert to more competition for the deals. It is clear that many copy-cats are popping up, and the risk is that acquisition multiples go up and returns diminish. On the other hand, Oddbjørn Dybvad writes in his H1 2022 letter that “in Europe alone, there are more than 23 million privately owned companies small and medium-sized businesses, with approximately 15,000 for sale each year.”

Internal sourcing is a way to stand out

Acquisition prospects are either sourced through internal research or through brokers. We believe serial acquirers who find companies through internal sourcing have a higher chance of reaching good deals. Notably, a personal relationship with the seller and providing a “permanent home” for their business often enables serial acquirers to close deals even though they are not the highest bidder.

Improving the acquired companies

The best serial acquirers have a history of continuously improving the acquired companies. We believe this is important but must be done while still running decentralized operations. The acquired companies get support on how to improve without finger pointing.

 

Why now?

While investors believe it can’t continue forever, the best serial acquirers have shown how durable the business model is. Investors must differentiate between roll-ups, acquiring companies in a specific industry, and niche acquirers who have shown the ability to buy companies across industries or sub-industries. We believe there are still plenty of opportunities.