There is a group of companies that follow a business model of serial acquisitions. The best known of these, of course, is Berkshire Hathaway. There are also names such as Constellation Software (Canada), LVMH (France), Chapters Group (Germany), Lifco (Sweden), Washington H Soul Pattinson & Co (Australia), and home-grown South African success story Bidvest Group, to name a few. These companies come in many shapes and sizes and have different investment strategies. But there are key characteristics.
These businesses generally operate a holding company (HoldCo) structure or model. The HoldCo makes all the acquisitions, and the various companies feed profits back to the HoldCo for reinvestment. The HoldCo generally buys 100% of the company or a majority stake in the underlying companies as it wants to control strategy and, crucially, cash flow. Where it buys less than 100%, there is generally a path for it to get to 100% through some earn-out provision over the next few years.
Generally, the head office team is not too involved in the day-to-day operations of the various underlying businesses. The CEOs of these businesses are left to run and grow their businesses, albeit within some constraints around pricing, margins and return on capital metrics set by the HoldCo. The HoldCo will get involved if a company is underperforming or needs some specific help and guidance that the HoldCo can provide but, for the most part, it is a very decentralised model.
These serial acquirers are generally long-term owners of companies. They are not following the typical private equity (PE) model, where the PE fund will need to exit the business in five to seven years at the sunset date of the PE fund. Instead, they look to own good companies for a long time. That is not to say they never sell. They will sell if a really attractive offer comes along or a business acquisition doesn’t work out, which can happen. However, selling an underlying business is the exception rather than the rule, with overall portfolio turnover being extremely low.
This is a long game rather than a short one, all acquirers must work on relationships and their reputation
As this is a long game rather than a short one, all acquirers must work on relationships and their reputation within the market. Most of the time, the acquired businesses are private and probably owned by the founder or a long-standing family business. The company is their “baby”, and they want to know that their employees, their brand and the company they built are being placed in good hands.
If the serial acquirer has a poor reputation for running an acquired business post-acquisition, owners will look elsewhere to make a deal. The serial acquirer must also pay fair prices and not be considered a shark in the market, otherwise sellers will try to avoid them at all costs. This is one of the reasons Warren Buffett is so fastidious about Berkshire’s reputation. His reputation for fair prices and good stewardship post-acquisition is actually a competitive advantage. Selling a business to Berkshire Hathaway is almost a badge of honour these days.
The HoldCo doesn’t necessarily engage in significant company-changing acquisitions. It builds up the capital base and size of the business over the long term. Acquisitions tend to be bolt-on and smaller in nature, helping to avoid one disastrous acquisition sinking the whole ship. New acquisitions come with lower integration risk, though cost synergies achieved after acquisition may be low.
Capital discipline is a key tenet of this model. The HoldCo team needs to be skilled at structuring deals, know a fair price, and understand the group’s return on capital and the financial metrics and operations of the acquired business. The HoldCo team cannot conduct deals for the sake of doing deals. At the very least, deals must be value-neutral to the current portfolio if not enhancing it somehow.
Serial acquirers avoid highly cyclical businesses with low pricing power and no discernible moat or brand equity. That’s why you don’t see many mining companies in the portfolios of serial acquirers, for example. The business acquired tends to be a price maker, with control over pricing strategy and the ability to raise prices. The business can weather the ebbs and flows of the business cycle as its products and/or services are unavoidable to some degree. They have a moat around the business, such as being the market leader by product, service or geography. They have brand names that people know and trust, which creates repeat business.
Serial acquirers look for businesses that can deliver sustainable cash flows back to the HoldCo for further reinvestment or distribution to HoldCo investors themselves. Thus, you don’t see serial acquirers buying unprofitable start-ups burning cash, because they are investing in growth and scaling up the business. The name of the game for serial acquirers is the long track record of profitability and free cash flows.
Serial acquirers are fascinating businesses, and if you think of your stock portfolio as a HoldCo, they can provide investors with excellent insights on managing a portfolio of stocks.
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