In the world of investing, serial acquirers stand out as unique players with a knack for strategically purchasing smaller businesses to drive growth and enhance shareholder value. In this article, you’ll discover what makes serial acquirers successful, the differences between specialist and generalist acquirers, and the key qualities to look for in these companies. We’ll also delve into how to value these companies, the benefits of investing in them, and the potential risks and red flags to watch out for. By the end, you’ll have a clearer understanding of how serial acquirers operate and what to consider when evaluating them for your investment portfolio.

Serial acquirers, also known as acquisition-driven compounders, strategically purchase small, profitable businesses, often family-owned, to foster growth and enhance shareholder value. These businesses generally have strong cash flows with limited opportunities for further investment. Once part of the larger company, they continue to generate substantial cash, enabling the parent company to reinvest and achieve higher returns over time. These companies maintain lean central management and operate with a decentralized structure, allowing acquired businesses to retain their customer relationships and day-to-day decision-making, thus preserving their entrepreneurial spirit. The main role of the corporate headquarters is focused on financial oversight and capital allocation.

Serial acquirers can seem complicated at first. It might look like a good idea to merge these businesses together to save costs and boost sales. However, the most successful ones keep their purchased companies independent and decentralized, allowing them to operate on their own and maintain their unique business cultures.

In simple terms, when looking at serial acquirers, it helps to think of them as either specialists focused on one area or generalists that cover many areas.

The Specialists

In the specialist category, companies often focus on specific industry areas and typically try to integrate their acquisitions closely, aiming to cut costs and achieve larger scales. However, these companies tend to buy other companies too quickly, push for aggressive growth, and use a lot of debt. This rapid pace is often a response to the limited growth opportunities in their specific markets.

For example, Green Landscaping Group specializes in creating sustainable and safe outdoor environments and infrastructure. Their services include landscaping, maintenance, and snow removal, aimed at improving outdoor spaces for communities.

Specialists that operate globally, make decisions locally, and focus on understanding their customers are preferred, especially those in large, diverse markets. These companies look for synergies but do not force them. Companies that grow through their own earnings, rather than relying heavily on financial strategies, are also favored. These qualities can help avoid some of the common problems seen with specialists who focus too narrowly.

The Generalists

The generalist category in business allows for more flexibility. These companies often focus on multiple industry areas, which may have recurring characteristics or be completely unrelated. This approach broadens their potential for growth and allows them to build expertise like specialists. From the outside, it may look like they specialize in certain niches, but they are not confined to any specific sector and continuously adapt by learning from one industry and applying insights to another.

For example, companies like Lifco segment their operations into categories like “System Solutions,” which serves as a catch-all for varied businesses not fitting into their other specific categories like Dental and Demolition & Tools. This flexible segmentation helps them manage diverse operations without strict boundaries, focusing more on finding and investing in promising businesses that offer strong returns.

These companies often share best practices across their networks, improving aspects like pricing and working capital management, which supports organic growth—an important factor for overall success. They emphasize value pricing strategies over traditional cost-plus models and encourage testing and innovation within a safe framework, boosting confidence and maintaining an entrepreneurial spirit.

However, the level of decentralization varies among companies. Some practice a decentralized approach at a broader platform level while still extracting synergies specific to each platform, adapting to the unique dynamics of each business unit. Successful companies typically allow decisions to originate from the ground up rather than imposing them from the top down.

This dynamic approach to growth shows that while companies may start focused on a single niche, they can evolve into generalists over time, continually adjusting and expanding into new, profitable areas based on learned experiences and market demands.

1. Decentralized structure

Successful serial acquirers often maintain lean central management and operate with a decentralized structure. This allows the acquired businesses to retain their customer relationships and day-to-day decision-making, preserving their entrepreneurial spirit. The main role of the corporate headquarters is focused on financial oversight and capital allocation.

 

2. Preferred buyer reputation

Instead of offering the highest price, serial acquirers establish themselves as preferred buyers by cultivating a reputation for trust and stability over decades. This approach is particularly attractive to sellers who are often family-owned niche companies looking for a permanent home that respects their legacy and culture.

 

3. Understanding seller needs

Successful acquisition strategies involve understanding the unique needs of sellers, such as a desire for a smooth process and assurances about the future of their company. This often takes precedence over the sheer monetary value of the offer.

 

4. Local knowledge and relationships

Serial acquirers leverage local teams to identify and secure valuable acquisitions, especially in markets with many small and medium-sized enterprises (SMEs). Local knowledge and relationships are critical in these efforts.

 

5. Financial discipline and alignment of incentives

These acquirers are disciplined in their financial offers, focusing on sharing visions and creating aligned incentive structures with the companies they acquire. This discipline helps to outshine larger, less disciplined bids by emphasizing the continuity of the company’s ethos and the well-being of its employees.

 

6. Avoiding competitive bidding wars

Instead of engaging in competitive bidding wars, successful serial acquirers secure deals through established relationships and early engagements, sometimes cultivated over years.

 

7. Diversification and risk reduction

Serial acquirers exemplify the value of diversification. By spreading investments across various areas, they protect themselves against significant downturns, similar to how a tree with widespread roots maintains stability.

 

8. Long-term growth and returns

Investing in acquisition-driven compounders offers long-term growth opportunities and high returns on capital. These companies maintain discipline in securing deals at favorable multiples, ensuring sustained high returns on capital and creating substantial value for long-term shareholders.

 

By focusing on these aspects, serial acquirers can achieve durable growth and maintain a competitive edge in the market.

Investing in great businesses for the long term often involves holding stocks that might appear expensive in the short term but are actually undervalued over time due to compounding earnings. The emphasis is on long-term reinvestment opportunities rather than short-term multiples.

The right price-to-earnings (P/E) ratio for a stock depends on the company’s ability to reinvest profits and its return on equity (ROE). Companies that reinvest a significant portion of their profits at a high ROE are often undervalued by the market if they sustain this performance.

Great investment opportunities lie in companies that might slow down after a few years but continue to grow steadily for a long time. These companies might seem pricey initially but are attractive for long-term investors if they exceed growth expectations.

Paying a premium for exceptional companies is often worth it. High-quality businesses with durable growth and high returns on capital tend to be undervalued by the market, even at high valuations.

Larger companies that grow through acquisitions have seen increased valuations because they reinvest more, grow faster, and achieve better returns. High EBITA margins help in tough times and support growth, but business predictability and other factors also play a role.

Value is created when returns on capital exceed the cost of capital. Growth is highly valuable when returns on capital are high, so CEOs should focus on finding growth opportunities rather than just increasing profitability.

In summary, invest in companies with enduring competitive advantages and steady growth, hold onto them even at high valuations, and look for those with strong reinvestment opportunities and high returns on capital.