TIP713: Why Serial Acquirers Outperform w/ Niklas Sävås
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You're listening to TIP. On today's episode, I'm joined by Nicholas Savas to discuss the business model of serial acquirers. Nicholas is a senior equity analyst at Red Eye AB, where he does extensive research on serial acquirers in the Nordics. A serial acquirer is a company that grows primarily by repeatedly acquiring other businesses as a core part of its strategy.

Over the past two decades, many serial acquirers have proven to be profitable investments in the stock market. Some well-known names that our audience might know includes Berkshire Hathaway, Constellation Software, LIFCO, and AdTech. In this episode, we break down the most important factors to understanding the business model as investors. We also cover why serial acquirers are able to buck conventional thinking on making acquisitions, what the return profile is in these acquisitions,

best practices used by successful serial acquirers, and why it's important to be the buyer of choice for sellers, the most common challenges that serial acquirers face, the importance of organic growth, as well as an overview of the ROCO IPO led by Frederick Carlson, who's the previous CEO of LIFCO, whose value increased by over 100 times under Frederick's leadership. I find this business model very fascinating. Instead

And serial acquirers play a key part in my own personal portfolio. So with that, I hope you enjoy today's discussion with Nicholas Savas. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Playthink.

Welcome to the Investors Podcast. I'm your host, Clay Fink. And today, I'm happy to welcome Nicholas Savas to the show. Nicholas, it's great to chat with you here. Pleasure to be here, Clay.

So for the past couple of years, I've been interested in the business model of serial acquirers, and I have a few of them in my portfolio, and they've treated me well so far. And in speaking with other investors, I see a lot of varying opinions on serial acquirers. So I thought it'd be fun to bring you onto the show to discuss the business model, since you primarily focus on this space and know the model quite well. REQ Capital is

They also put out this great report on serial acquirers that shared that through 2023, the long-term returns of acquisition compounders, both in the Nordics and globally, have far exceeded the broader market. So I can get that linked in the show notes for those interested. To get us kicked off, how about we start with what is a serial acquirer and what makes the business model so attractive to some business owners?

Sure. So, I mean, a serial acquirer is, as it sounds, a company that's able to reinvest a lot of its generated cash flows to buy private companies. And I think for us, we deem that to be that they are able to grow by 10% from acquisitions. It's sort of a benchmark that you should be able to do. I mean, it's often or always, I would say, that you buy multiple private companies, smaller companies. And with small, I mean like...

Everything between 5 million US in sales up to around 30. I think that's at the core of it and so that we can dig into the nuts and bolts.

And it's interesting because conventional wisdom suggests that most acquisitions are not value accretive to the parent company due to over-reliance on synergies and due to management teams that want to build an empire rather than create shareholder value. Why are successful serial acquirers able to defy this conventional thinking with regards to acquisitions?

Yeah, I mean, I've read all the theory as well. One part of it is that if you do sort of large acquisition by other public companies or other private companies, they don't come on the cheap. You need to pay up for those acquisitions. And for that to work, you have to realize synergies. And I think that's a really hard thing to do. So I think much of the theory focus on that. And I think this sort of programmatic type of acquisition strategy that the serial acquirers have,

It's very different. And one piece of that is that these companies on the private market are available at quite low multiples for the long term, even though competitions sort of varies a bit over the years. My feeling is that most buyers of these companies are rational. They know that if you pay up too much, the model sort of breaks down. Then you're not able to continue to buy these companies, generate the cash flows you need in order to continue the strategy. Then you're not able to grow as much as you want.

So I think that's one piece of it. And of course, I mean, this is a risk that I always think about. If more competition would come into this space, what would happen? And we have seen from sort of a few years back, a few companies were a bit more aggressive and that led to a bit higher multiples, but not so much. So I think all sort of quality acquirers I look at, they continue to do what they had done for the years before and it didn't matter too much for them.

Yeah, you make a good point that if you're making these acquisitions in the private markets and they tend to be pretty small companies, the multiples are going to be much lower than buying a large business in the public markets that's been bid up to some extent. Talk more about the prices that are paid by these serial acquirers you're studying. You're primarily focusing on companies in the Nordics. What level of multiples are they paying and what sort of earnings metrics are they looking at in making these acquisitions?

And in addition to what are they paying, what types of companies are they buying as well?

A question many investors ask me is like, and those that are a bit skeptical to this model is that, why isn't prices going up? And I think one reason for that is sort of if you have a company which is not growing organically and doesn't have sort of good avenues for organic growth, because that's really hard. If you are sort of a niche market leader in a really small market geographically or by product, it's really hard to grow that more than GDP plus maybe a few percentages.

and you're often generating a lot of cash flow and what you can do with that is sort of dividend it out and if you have that type of business what price should you get for such a business i mean say that you're on the public market you're a bigger company but you don't have avenues for growth you dividend out everything i mean a p of 12 or something isn't strange and then

sort of you have a discount to that because you're illiquid, you're a small company and that leads to maybe a PE of 9-10. The multiple that these businesses always talk about is the enterprise value to EBITDA. I think EBIT is more or less the same but EBITDA is the metric that these public companies use because they amortize intangibles and of course they invest in intangible assets all the time. So

it gets double counted. But I think the multiple that has been sort of quite steady for the last decade or so has been around seven to nine times EV to EBITDA. I think looking back maybe 20 years, I think the multiple was lower. Even though some say that it's been stable all the time, I think it was lower back then. But it's been at around seven to nine. And if you buy a bit bigger companies, it's probably a bit higher and smaller businesses lower. And of course, also, if you look at sort of the growth rate of the company. So

But that's sort of the average, I would say. Often around eight. And then what types of companies are these serial acquirers buying?

This is sort of a key thing. And a key thing for me is sort of differentiate between quality and not so high quality. So I think the best companies, they buy companies with a moat. I mean, you need to have a moat. And often that's sort of what I mentioned before, that you are in a small geographical market and you have sort of maybe regulatory barriers or just long-term customer relationships that it's really hard to get in such a market. And as they are very small often, say if you have a market that is

maybe 50 million US in total, and one player has half of that. It's hard to see that someone invests to get a piece of that. So I think that's key here, that the best businesses understand that you should focus on those type of niche businesses. Others that maybe haven't learned the hard lessons of how it is to buy companies without a moat, they realize that when the cycle turns. And

I think that's been a hard lesson for many of these newer acquirers. The sort of established ones probably learned this a long time ago. Those type of businesses are more or less gone in those portfolios. But I think that's sort of a big differentiator. I can say also that what I talk about now is something we call niche acquirers. There is also this, of course, the roll-up strategy where you sort of acquire companies in a really fragmented market and, I mean, strive to become a market leader in that.

by that strategy. I mean, normally practiced by private equity, for example. But I think those strategies are a bit different. We can go in deeper to that if you want. Robert Leonard : Getting more into the prices paid, you mentioned multiple of EV to EBIT A of seven to nine. So if I just invert that and take one divided by eight, for example, that gives us a 12.5% return, assuming that that flows through to cash flow.

When we introduce debt into the equations, many companies are utilizing debt. So they're just not only using their own capital to make the acquisition. They're also bringing in debt into the equation. How do you think about how this changes the return profile of the returns the acquirers are getting on these deals? I think that is important in order to sort of elevate the returns. So if you're going to get sort of a return on equity above 20%,

You won't get that just from buying cheap businesses. If you don't have sort of a magic formula, I mean, we can go into specific businesses later on, but I mean, sort of Constellation Software, I think they have a magic formula. They don't need debt to get those returns. But most others, I mean, if you look at the Nordic companies, they don't buy turnarounds. They buy quality companies and they strive to improve them, of course, but it's small improvement over time. It's not sort of a big improvement the first year.

So I think if you're going to go for a return above 20% buying quality businesses, you need to elevate the returns by using debt as well. And when you're looking at a lot of the successful ones, how much debt do they tend to utilize? Usually 50% cash and 50% debt is sort of a ratio that is quite regular, I would say.

I mentioned that as an analyst at Redeye, you've looked at a number of different serial acquirers, especially in the Nordics. For those that are interested in studying some of the successful acquirers, what companies in your view have been just sort of put the model in place of just been the best of the best over many years?

I mean, there is sort of a big four. And those are the ones that have been there for a very long time. And I mean, Indutrade is one that started back in, I think, in the 80s. Lifco is another one. And then you have the Berman & Beving family of companies where Berman & Beving is a very famous company that started back in, I think it was 1976. And in 2001, they spun off Lager Kranz and Adtech.

And those have outgrown the mothership quite a lot. So I think those companies are a bit more, I mean, they're much larger and more famous now. So I think Lagerkrantz, Adtech, Indutrade and Lifco is sort of the big four. And I think definitely you should study the history of Berman & Beving, but you should also study Lifco and Indutrade, I think. If you do that, I think you get a good grasp on the model. And I think what's sort of, if you just to give some background on that, I think many of these companies started as buying trading companies.

So in the beginning, you had a trading company that was able to generate a lot of cash flows. And the managers at the time realized that, okay, what should we do with this cash? Oh, we have some similar companies here we could buy. That's at least the story I hear. And it sounds really good. So I want to take that perspective. And then they just continue. I mean, they found other businesses with the same characteristics and they continued on and on. I mean, as many of you know, Sweden is not the largest country and we're dependent on exports.

Many of the sort of trading businesses that these companies bought were able to supply the Swedish industry with sort of machines and tools and so on. So that was sort of the background. And I think many of these companies since, and this is maybe the last decade or two, has tilted towards buying a bit more proprietary product companies. But it's the basis sort of in the trading or you can call it distribution businesses.

And when you look at these big four and study them, what are some of the common characteristics and strategies that you see in them? A big focus is on cash flows. And that's, of course, something that, I mean, we as investors really like as well. And I mean, it makes sense because if you're not good at generating cash flows, you won't be able to reinvest money into the next acquisition.

So a big cash flow focus, and that means that you focus a lot on the working capital and so on, and keeping capital expenditures low. That's definitely one key. And then it's sort of this business acumen that you bring many of the companies that these buyers buy is sort of they are good for a reason. I mean, otherwise, they wouldn't be looked at from these companies, but they could improve both on working capital, but I think also in terms of pricing.

So pricing is a component that I think many of these companies are just to sort of not push prices too hard, but just make sort of the entrepreneurs aware that pricing impact can be really important for the long term. And many of the companies that they look at hasn't raised prices for a long time, and they're more, they're happy with what they have. And they don't need that in order to keep having a good life. So I think they professionalize the companies quite a bit. What about decentralization? Do you see that as a common theme?

Definitely. I mean, it's sort of this looking at sort of and studying Warren Buffett and what he has done at Berkshire. It's sort of really centralized at the top. So I mean, the capital allocation decision comes from the top. And I don't think this is so similar with the serial acquirers. I think the ones that have been able to scale the business model sort of has decentralized acquisition down to sort of business area managers or so. I mean, that's something Constellation has been successful at.

That's also the case for some, I think, Swedish serial acquirers, but I think most of them are centralized in that decision. But otherwise, how they run these businesses is that the headquarters, they have staff on the board of the subsidiary. So they keep it at that level. So they sort of have a few board meetings every year. And then, of course, the entrepreneur can call their representative from the headquarters when they need to. But otherwise, I think it's run sort of that headquarters help them with setting the strategy and so on.

But then on the execution and actually doing it, I mean, that's really decentralized. And often the case, I think it is sort of when they come into problems, then you can see that headquarters are more involved, but they don't have a big team. They don't have a private equity team who can just go in and fix things. So how they normally do it is that they replace the CEO.

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All right, back to the show. Robert Leonard It is really interesting to think about just sort of the dynamic between Berkshire Hathaway and Constellation Software. These could be considered two of the largest serial acquirers in the world, right? Where you look at Berkshire, you have Buffett and a few of the key managers making these capital allocation decisions, and they've decided not to decentralize capital allocation. So what it's forced them to do is when they deploy

deploy capital, they're often having to deploy larger and larger amounts as they grow. So they're going out and buying the stake of Apple for tens of billions of dollars instead of making these really small acquisitions and purchases like they did in the early days. Whereas with Constellation, they've grown their M&A team where they've continued to make these really small programmatic acquisitions. But of course, they've still been pushed to the point where they've had to make some larger deals. So when you look at some of these companies in the Nordics,

What stands out to you in terms of how they've been able to scale the model?

Yeah, I think many of them hasn't reached the roof. But what I mean by that is that the most acquisitive serial acquirers in Sweden maybe buy around 20 companies, maximum 25. Of course, you don't have sort of a CEO that runs everything himself or so on. But I think it's not too many for sort of the CEO to have his say, a last saying on that. But otherwise, I mean, to run all the processes, that's, of course, delegated to...

Either sort of a head of M&A is sometimes some of these companies don't even have a head of M&A. So instead, they have the business area managers who take care of that. But what I've seen is that normally one business area manager could have maybe 10 or 12 business units under him or her. When they have that role, they typically manage these companies and also are responsible for acquisitions.

So I think you need to decentralize it when you reach maybe, I think, more than five or 10 acquisitions. I think you need to grow your team a bit.

But otherwise, this is a really interesting thing, actually, in Sweden, that some of the larger ones, they have reached a size now that I think they need to think about this more and more. And it will be really interesting to see how they scale the model, if they buy one of larger companies or if they're just able to buy more and more. So I think in the next decade or so, we will see how good they are at this.

Yeah, I think a key consideration for investors is if these serial acquirers are making bigger acquisitions. Say if they're buying a company for 20 to 30 million instead of 5 million, they tend to get lower returns because the multiples tend to be higher. And there are some statistics I wanted to share here from the REQ Capital Report, just sharing on how many small and medium-sized businesses are in Europe.

I think one thing that's interesting about some of these Nordic companies is you might have a serial acquirer in Sweden, but they're looking to buy in other countries all throughout Europe and not just constrained to Sweden. So REQ Capital shared that in Europe, 99.8% of all companies are small and medium-sized businesses with fewer than 250 employees. That brings a total of 23.5 million companies. 94% of them are independently owned.

And in Europe alone, 15,000 companies are sold each year. So when you look at, say, a company like Lifco that's buying 20-something companies a year, it seems like, oh, well, it kind of puts into perspective just how large the market is that they're operating in. Maybe we can talk more about decentralization. It's interesting to think about how a company can just go out and buy all these industrial companies or all sorts of different types of businesses.

Why is it that a successful serial acquirer can buy all these types of companies and sort of give them the autonomy to act independently and just act in this decentralized manner? Maybe you could talk more about how that can possibly work.

Yeah, it's a good question. I think I want to bring some history to the discussion. And I think Sweden, in my view, has been sort of quite early on decentralization. And one of the sort of the gurus in this is a person called Jan Wallander, who was the CEO of one of the largest Swedish banks, Svenska Handelsbanken. When he joined, he just sort of revamped the company. I mean, it was

sort of really centralized, a lot of committees at the headquarters, marketing department who helped all sort of the bank branches with marketing. And when he came in, he cut sort of the marketing, the central marketing department from 40 people to one. All the committees had to motivate why they were needed. And the headquarters became sort of a support function and was not the driver of business. And I think that's a similar thing with these businesses where

It's all the business units who run the whole business. The headquarters is only a strategy and guiding, setting the direction for the company. So I think that's a really similar thing with how these are run. And just looking at the numbers at headquarters, some of these companies have 2 billion US in sales and they have maybe 30, 40 people at headquarters. So they keep it really lean, as lean as they can, I would say.

So they don't have the capacity, they can't go in and sort of work actively with the companies. They need to have great managers who run things at the business unit level. And if not, I think sort of you destroy the whole model, I think. Of course, it's an active choice from these companies that they started as this. And I think many of them realize that if sort of entrepreneurs get the freedom, of course, under accountability, then they perform better. So I think it's this

Thinking that actually leaving the companies with more freedom actually will help your business thrive.

Yeah, it's a whole lot more than just a number of scheme of buying businesses that achieve multiple. I think culture is really important. And oftentimes they're likely looking for family-owned businesses that really just take pride in what they do. And I think this ties into another key component of a successful serial acquirer is being the buyer of choice. So the buyer of choice oftentimes isn't going to provide the best price to the seller, but they can offer these other things that are attractive to

to them. So this is especially important to understand if you're newer to understanding this space, because I think it's easy to believe that most business owners prioritize price above all else. But I think in many cases, they care about many other things above price. So for example, they might care about just their employees being in good hands for many years to come, having stable career prospects for many years in the future.

How about you talk more about this concept of being the buyer of choice?

You touched on many interesting parts there. And I think one thing that I want to begin with is you have a few sort of high quality serial acquirers in Sweden focusing on industrial companies, and their stories are very similar. So if you're going to choose as an entrepreneur between selling to Indutrade or Lifco or Logicrans or Adtech, I think it's often down to sort of the relationship that you get a sort of a really strong relationship with the potential buyer, with the people actually who you talk to. I think that's a key differentiator.

And then, of course, price becomes one piece, but they will, I would guess, be quite similar in terms of price. But if you just look at this a bit broader, as you mentioned, I mean, many of the Swedish companies now buy companies abroad.

And there you definitely have other types of buyers, maybe more often, especially if you go up a bit in size. I mean, you will likely have private equity, for example, lurking, and you have other strategic buyers. So I think in those discussions, actually, the Swedes, they don't really compete against each other. They compete more against others. And then sort of their case becomes much more clear.

And of course, they can call all the former sellers. I mean, there's such a large list of sellers who have sold to these companies and have a story to tell. So I think that's definitely important. And I think this buyer of choice is actually even more maybe important if you're going to start up a serial acquirer, because we see from time to time many new serial acquirers popping up. And of course, they look at the opportunity, as you mentioned before, so many private companies out there to buy. And also, you could see sort of the difference in

multiple with what you buy compared to what you can sort of have on the public market. And we can go in a bit more to that. But I think it's hard if you come out there and you haven't bought a company before, it's hard to get an entrepreneur. Is this a safe haven for my company that we have built over generations? It takes some convincing, I think. But if you have sort of the track records of these big ones, of course, it's a much easier sell, I think.

Yeah. Acquisitions are very much a game of relationships based on what I've read. And the seller really needs to trust the buyer and trust that they're going to be providing their business with a good home because their business oftentimes is their baby and their life's work and almost an extension of themselves. So it can become very emotional and they want to be pretty decisive with who they decide to sell to. And it also sort of brings to question, you have this entrepreneur, they've built their business over 10 or 20 or 30 years.

They're ready to exit their business, which is the reason they're selling it in the first place. What does that transition sort of look like where you have this entrepreneur running the company? Do they tend to stick around for a couple of years and that's part of the model with the serial acquirers and they have a succession plan in place of who's going to run that business in the future? So talk more about what that typically looks like.

I would say it's two cases. I mean, often it's succession driven, I would say. And then you have sort of maybe at least a two-year plan. You tie an earn out to when the former owner leaves. And during that time, you try to find a successor. Or probably, I mean, hopefully in the beginning, you already know that, okay, the number two or someone running sales or someone else in the company will be the successor. Because I think these companies want to avoid having to recruit externally because they

This is a factor that I think is really hard to be really good at. So what I hear is that maybe 50% of the time you succeed with external CEO recruitment, and sometimes it can take a few CEOs before you land right. So I think this is something that these companies want to avoid because, of course, it's quite costly in terms of both actually doing the recruitment, but especially that the business could lag during that time. So I think that's really important. I

It could also be a younger entrepreneur. I mean, it's quite lonely work to be a CEO, I think, even in a smaller company. Yeah, of course, in larger companies as well. I think it's lonely and they want to have support to drive their business forward.

And I think also to have sort of the financial muscles of a serial acquirer that's backing you is important in terms of that you could have relatively high customer concentration risk that probably keeps you as an entrepreneur awake for a large part of your time. And I think to be a bit more offensive, I mean, aggressive in terms of the strategy you employ, it could also help. Should I start to export to another country? Should I sort of build...

build up that resource. I think those decisions are probably easier if you are part of a larger group.

Yeah. I mean, as we sort of get into these qualitative soft features of business, it can just make assessing a serial acquirer pretty difficult because I think you want a pretty good track record of being able to implement this just because it's so difficult. And I was actually speaking with a head of acquisitions at a serial acquirer when we were in Omaha last year. And I asked him, how do you guys approach hiring a key person when a key person in a subsidiary leaves? Because to me, it just sounds

Sort of like a nightmare when you need to find this very specific person with very specialized knowledge and they need to live in this, say, a rural town in Sweden. And yeah, he just told me that's one of the hardest parts of the model. It's not easy.

No, I agree. And that's the same what I've heard. I think that's, it's often the case that these businesses are not in the city center of a large city. They are out in the rural area. And I think this is actually quite important because if you're also a small business, so say that you only have maybe 5 million in sales, it's even harder to recruit sort of a great manager. I've tilted toward thinking that maybe you should buy a bit larger businesses. If you buy sort of 100 or 10 million US or 20 million US,

It's easier to attract a better manager. You can pay up a bit more and it's more prestige and status, of course. So I think that's probably quite difficult if you buy really small businesses. That's even more difficult because the successions will be as many as for the larger business. And every time it will be really hard to sort of get that right.

Yeah, it's a bit of a two-sided coin where on the one hand, if a serial acquirer has 50 companies, there's going to be, say, one, two, or three where you have some issues finding a key person. But on the other hand, you have a very diversified revenue base. So it's not like one or two of these issues is going to kill your business per se. But you mentioned earlier that some people can be skeptical of the serial acquirer business model. And I think the fact that a lot of the growth is inorganic can deter people

many investors. I think some investors simply just don't like acquisitions as a means of growth, and others might be just concerned about around the runway. It's hard to predict how long they're going to be able to deploy capital. Maybe the best of the best can do it for 10, 20 years. Perhaps others can only do it for the next five years and whatnot. How about you talk more about the visibility of investing in this type of business? Robert Leonard

This is one of the hardest things, I think, because what we can rely on is sort of what the companies actually do in terms of are they able to scale? Have they been able to do that for a long time? And the other piece is how many companies out there. And I mean, you mentioned a few stats on sort of how many private companies there is in Europe and so on. And of course, we can rely on that. But I think even more, it's just...

Working as an analyst, you just continuously try to check sort of that. Okay, how many businesses are sold every year to these acquirers? Do we see any commentary or any signs of this diminishing? Because I think this is really key to keep the high multiples that these companies have. I mean, they should be able to compound for a long time to come in order to get that sort of multiple that they have. So this is probably one of the key things I try to look at, but it's also one of the things that's the hardest to get the information on.

Yeah. I mean, when buying these types of stocks in the market, you just need to be mindful of if that reinvestment rate starts to slow down, then you better be careful with what type of multiple you're entering that sort of position.

Yeah, I think that's definitely one thing. I mean, if the multiples sort of go up, they won't go up a lot one year to the next. But if you see that trend sort of increasing, increasing, increasing, that's definitely a sign that sort of the pool is shrinking. So that's definitely one thing that you could keep track on. It's really important. I think one thing I've been thinking quite a lot about recently is that

With the sort of higher interest rate environment that we have had in recent years and less activity from private equity, I think that's opened up a few opportunities for many of these serial acquirers. And that's something that if sort of private equity comes back, it will be interesting to see how much that impacts sort of the opportunity. I've heard others also say that private equity is making larger entry into this space.

So typically, I think private equity has mostly focused on these roll-up models to buy companies in a fragmented market and sort of establish the market leader. And that's then typically listed on the exchange when they are not done, but close to done. So the opportunity for public market of investors in those kind of situations aren't great all the time, I think. Because otherwise, often I think private equity would have continued a few more years and just bought these companies at low multiples.

So this will be really interesting to track, I think, for the next years. How much sort of that impact will be on the serial acquirers.

Yeah, it's interesting you mentioned private equity because it seems like serial acquirers have become fairly prevalent in the Nordics, Scandinavia, and maybe Europe more broadly and not as prevalent here in the United States. And I think one reason for that is just that private equity seems to play a bigger role here in the US and they're typically willing to pay higher prices than a serial acquirer would. I'd be curious to get your take on why the model seems to be more prevalent in the Nordics, given that

price isn't the only factor that comes into a deal? Why isn't it more prevalent, say, in the US on a relative basis? Yeah, it's a bit hard. I mean, if I answer the question from the angle that why is there so many Swedish serial acquirers? I think in one way, it's success, sort of breed success. But I also want to add that many of these older acquirers, they sort of started independently. But you can see some threads in terms of mentors and so on. And I think, so for example, in Sweden, we have Electrolux.

And they were also sort of a serial acquirer in their time, a bit different from these that we talk about. They could buy quite large businesses and it was more of a roll-up model where they bought similar businesses and just grew in different geographies from that. But I think the managers from Electrolux, I think that management sort of knowledge has been used, I mean, for others. I think some people there, as for example, Carl Bennett, who is the main owner of Lifco, he comes from that school.

And I think for others, they have been an inspiration for how they have created their businesses. But then, of course, we have a long list of, you could call them copycats. I've seen the success of these serial acquirers. And especially now, the last years, when the multiples have gone up on the public markets, then many wants to copy them and do the same thing. And I think what we will see in the end is that it's really hard to succeed. And

Even if you sort of have this that, yeah, we can be valued at sort of the multiples that the best ones have. It takes decades, I think, of execution to get there. Well, that's one piece that you have managers who sometimes leaves the larger serial acquirers to start their own. I think that has been a case for Constellation Software as well that some managers have left to start their own. Of course, if you do this successfully starting up, of course, the financial return...

returns could be really, I mean, much higher than if you stay on as an employee. So I think that has probably attracted many, but I just think it's much harder than you think. It's a lot of hard work. And also, I think you need some luck in order to succeed. So yeah, it's tough. The model is sort of simple, but not easy to execute, I think.

Another interesting piece I want to mention is the fact that it might simply just be easier to buy a company in Sweden than in the US in terms of maybe the regulations, the legal fees, the contracts and whatnot. Do you think that plays a factor as well?

Could definitely be. I mean, I'm not sure, sort of, maybe you know about the multiples in the US markets for private businesses. Is it that sort of, because if the multiple is higher than usually, I mean, it will be higher to get the same return because sort of you have the similar interest rate environment probably a bit higher than us currently. So to finance those acquisitions will probably be a bit more expensive. And I don't know how

I mean, if sort of US banks are more reluctant or not in terms of financing, that could potentially be a difference. But in terms of regulations, I think you have a point that in Sweden, it's quite easy to do business. It's sort of, I think, in one way, quite similar to what Buffett has done all the time that you hopefully not too many sheets of paper. Just compare that to, for example, when the Swedish businesses entered the UK. I mean, the paperwork is much more burdensome and you have much more legal fees and

So there are more friction in terms of the transaction phase. In Sweden, it's not as costly and it's a more simple process, definitely. But to add to that, for the larger ones in Sweden, I think Sweden as an acquisition market is just shrinking because the competition has become harder. And I would say that many of the best businesses have been acquired. So there are, of course, a large pool of potential acquisitions to do. But I think if you're going to buy 20 companies a year, I think...

If you can get two or three in Sweden, I think you should be quite happy. And the rest needs to come from the rest of Nordics and especially the rest of Europe. Red Eye just hosted a conference that brings together many of these serial acquirers. And I'm almost curious, given there's so many of them, do you see them butting up against each other when they're going in to buy a company? Or do you feel that the pool is still large enough where it tends to be just a one-on-one negotiation?

I think if it's auction-led process in the Nordics, I think there is often competition between them. If it's sort of from proprietary search, I think it's less often, even though in proprietary search, there's often sort of a broker that is involved in one phase of the process just to make the transaction process a bit easier. And it's hard to tell.

I think it's not uncommon that they compete, but it's definitely not always. And definitely not that you see all of them, but maybe one or two in, especially the larger ones, definitely.

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Robert Leonard : You mentioned copycats. It's no secret that this business model can be attractive in terms of generating returns, but it's also many come to find out that it's very, very difficult to implement successfully over many years. After analyzing all the serial acquirers you have, what do you think are some of the common pitfalls that you see some of them fall under, or just some hurdles that they're not able to get over?

I must say, I mean, there is sort of, if you look at the private market in Sweden, there are a lot of private serial acquirers. And I think in my view, there is sort of a valley of death that if you have done, maybe you got funding for the first 10 acquisitions, but if three of them are not performing, say that even if you are loss making and you don't produce the necessary cash flows by then in order to continue to acquire companies, then I think the one financing this platform won't be happy to put in more money. So...

I don't think you get many chances. And I think there is this a bit of a survivalship bias that we see all these successful ones and we don't see the ones that have not succeeded. But I think there is quite a few that aren't. And I think one part of the pitfall is what I mentioned earlier about sort of buying the wrong type of companies, two cyclical companies. And if you're going to buy a cyclical company, I think the seller knows in which sort of part of the cycle they are. So they will likely sell their businesses at the peak of a cycle and not in the trough.

So that's one piece, I think. I think another pitfall, and maybe this is for if you are already public and you have executed this model and you have a good track record, still it's this, if you go too aggressively on growth, you can sometimes sort of end up buying a large business. And if you buy a large business, if that fails, it can set you back for years, I think.

So that's definitely one thing. Another thing is just buy maybe too much at a short timeframe and the leverage level goes up and you need to spend a few years just sort of paying back debt. Then I think the market looks far ahead if you execute. But if you haven't executed for two years, then people will start to question sort of how good you are as a capital allocator. And that's everything in this model. I mean, if you're going to get a high multiple, you need to...

I mean, market needs to think that you should be able to compound for decades ahead. And if you haven't grown in a sustainable way for the last years, then I think, yeah, the market will distrust you and the multiple will, you will definitely get a big hit on the multiple, I would say.

Yeah, you make a good point where there's this flywheel where you need to initially buy good companies. You need them to generate strong cash flows. And if you don't have that sort of flywheel of cash flows coming in, you can't go out and have the pace of acquisitions that you initially wanted. So of course, this is a value investing show. So every time someone's looking at a company to add to their portfolio, they're asking themselves, what's the competitive advantage and what's the moat?

of this business. And that's another tricky aspect of a serial acquirer business model. Full disclosure, I do own shares in Constellation Software. And Mark Leonard has said that anyone can pick up a phone book, dial up a company's number, and go and buy that company. Constellation's been a strong performer for many, many years. And if I had to describe their competitive advantage, I would say there's a number of things. And a couple of them would be they're very disciplined in the price that they pay. They have this culture of...

decentralization and autonomy, and they've become a buyer of choice where sellers know that it's a forever home. They own over a thousand companies, and I think they sold one in the past, but totally regretted doing so, so they likely won't be selling any in the future. How about you talk a little bit about what competitive advantages for a successful serial acquirer?

I think one piece of it is the businesses they buy. And of course, that's the case for Constellation as well, that you buy businesses with high switching costs, repeatable business. And what's similar to the industrials is that you are typically in a small niche in software, sort of the big software names. I mean, for them, it doesn't make sense to compete in such a small market. And I think that's the same for the industrial in terms of that.

So that's one piece that if you do sort of the niche acquire model that you buy the right companies. So that's one part of the moat, I think. The other part is more fussy, I would say, that you have sort of a strong culture and a great capital allocator at the top. That's really important, but I think it's maybe a bit too fussy for many investors who want to have this clear moat. I think maybe on the business unit level, it's really important that they buy the right type of businesses with moats.

And then the other side is just to have a great capital allocator.

Robert Leonard : You had sent me a red-eye report that dives into the details of all sorts of serial acquirers. And I love some of the charts you guys included that shows the historical growth of the company and how much was inorganic driven by acquisitions and how much was organic. And one company I'll mention here that you've already mentioned here in the discussion is Lithco. That's a Swedish company that my co-host Stig Brodersen pitched in a recent Mastermind discussion and it's fairly well known. Today, Lithco has an

invested in 257 companies in 34 countries. In 2024, they acquired 13 companies in seven different countries. So they're searching all over for businesses to buy. Lyft Co. has actually had some pretty solid organic growth historically, yet it's also pretty lumpy. It seems like it's just sort of all over the place where sometimes it can be up to, say, 10%, and sometimes it's closer to 1% or 2%. How do you think about...

organic growth for a serial acquirer and how do you go about assessing it?

I think organic growth over time is like a hygiene factor that they actually buy the right businesses because otherwise they wouldn't be able to show that, I think. And the lumpiness is that you don't have the same characteristics as software. So I mean, even though you buy these new businesses, the business cycle will impact you. Taking Lyfco, for example, they have some businesses which is related to construction activity, for example. So even though you are sort of the best business, your

you're selling to a market that has that inherent lumpiness in sales, I think. So that's definitely one thing. So you definitely need to think sort of over the cycle with many of these industrials that they are able to show that over time. And then the most important factor is, of course, that they show organic profit growth. And sometimes they disclose it, sometimes not. I think Lifco disclosed it over time and they have 8% average over time, which is really impressive, I think.

I think the normal level is for the other quality acquirers, it's maybe around 5%, which is still good, I think. But it's somewhere there that you should sort of hope for.

I think it's important, definitely. You need to have the twin engine between organic growth and acquisition-led growth. And some years you have higher organic growth and maybe the other side won't perform as well. The last couple of years, for example, we had this sort of inflation boom. And what I think that showed was that the best serial acquirers in the Nordics, they were really early in pushing for, I mean, raised prices. They had probably inflation adjustments in many of the companies implemented.

But some of the newer acquirers, they hadn't. So it took them a year or so before prices, I mean, they could increase prices. And also over those times when organic growth lags and the business cycle is at a low, you of course hope these acquirers to make a lot of acquisitions because you think then that competition will be lower and prices will be lower. The problem is that the entrepreneurs who runs these businesses, which are, I mean, run at good cash flows, they don't need to sell.

So typically, the business who needs to sell at that time are money-losing businesses, but several acquirers aren't really looking at those. So I think then it's just a matter of that these entrepreneurs will wait until sort of the cycle turns. So usually, actually, when the cycle is at the top, interest rates are low, much more businesses are sold. So it's really hard to be counter-cyclical.

I mean, in this model for the industrials. So I think that's sort of maybe one thing that Constellation has an edge in because they can also buy sort of underperforming businesses and turn them around. And in that case, I guess you can have a bigger inflows when it's tough times.

It's interesting also to think about how some of these subsidiary companies can actually be in a better position being under the umbrella of a serial acquirer, where if there's a situation where they need sort of a capital injection, the holdco can be supportive in that aspect. But there's also the aspect of the capital allocator can be flexible in where capital is allocated, of course. If there's a specific subsidiary that he has a big opportunity to grow that they didn't foresee initially,

Perhaps they can take cash flows from some businesses and allocate it to another one. And they might not even prioritize organic growth. If organic growth has return on capital of, say, 10%, but they can get 15% or 20% through acquisitions, then they're likely going to go out and do more acquisitions. Absolutely. I think this has been one piece that we have searched a lot for and really asked the CEOs about what's the hurdle rate for organic investments.

And I think what they will tell you is sometimes you don't get a clear answer. But what I can tell you is that they definitely demand a higher return than if they would do an acquisition. And I think that's the reason why investments in organic growth is quite low, because typically they don't have so many options. But it's, of course, trying to sell products in other countries and so on, and they support that. But those type of investments aren't that costly. So I think it's a really low share of the total. So they don't do these big...

big pushes that are costly. And they keep that down and they don't try to buy businesses that have those characteristics. Because otherwise, I think that could be sort of a bit problematic if they have sort of these businesses that could be a bit, maybe grows too fast. Because if you have a business that grows fast, it means typically that the market grows fast, which means that more competitors will go into that market. And what this here requires by is that sort of you have a stable market, which is small and not growing a lot.

meaning that you won't get more competition. So I think it's hard to get both high organic growth and this stability that you search for.

Yeah, it is interesting to think that high organic growth might not necessarily be a good thing in a serial acquirer. So some stability can be nice. So we recently hosted a call with our TIP Mastermind community to discuss Roco's IPO offering. And that company was listed on March 11th, 2025. So that was just recent year. And Roco was founded by Frederick Carlson in 2019.

Carlsen was previously the CEO of Lifco from 1998 through 2019. During that time period, he made Lifco one of Sweden's most successful companies as the value of the firm increased by over 100 times under his leadership. Talk to us a bit about the Roco IPO and how this company is different from Lifco. Carlsen

In terms of difference, I don't think it is that different. So to begin with, I think Fredrik Karlsson has just continued to do what he did before. He raised capital and then started Roco. And in Lifco, they have three official business areas, of which one is system solutions. And in that business area, they could buy more or less any type of business-to-business business. But of course, you need to have a really strong track record of great financials and high return on capital and high margins and so on.

And I think what Frederick realized was that back in the day with LIFCO, they have this other two business areas. One is dental and the other is demolition and tools. And in dental, they have this great stability. So they buy typically a bit smaller businesses distributing sort of dental equipment. They can, of course, acquire those type of companies every year and so on. And it's also product businesses, of course.

They could buy those businesses, but if they only would focus on that, the growth would be really low because there aren't too many acquisitions to make every year. And it's a bit similar in terms of demolition and tools. That won't either be enough if they would only buy companies in those areas. And Fredrik has said that when they started to buy companies in the other, I mean, system solution, it was a bit scary because it was quite easy to have sort of the track record that you had within dental. You knew what the companies looked like. You knew what you would get.

But when you try to buy other types of businesses, of course, you can get into other types of issues. But I think what they realized was that those businesses face sort of the same type of challenges as the others. And it's mostly just about buying high quality businesses with good track records. That's important because I think otherwise, if you need to buy a business within other business areas, if you are really strict in terms of which vertical you want to focus on, the risk is that you do this large acquisition.

because you won't be able to deploy all the capital you need to deploy. So instead, just buying the best business, you start to pay up and you may buy businesses of lower quality and so on. So I think that's what they realized. And so a large part of the growth in recent years has come from system solutions within LIFCO. And so Röko just continued with that. So Röko is more or less system solutions only. They buy great businesses in various niches.

Robert Leonard : Yeah. When I look at Roko's subsidiaries, it's pretty amazing just to see the diversity of different companies they have. So I'll list a few of them here. So you have a Denmark-based golf equipment retailer, you have a ski and snowboard instructor company, you have industrial companies, software, medical device manufacturers. I mean, wouldn't it be better to at least specialize to some degree in certain types of businesses you're buying? Or what are your thoughts on them really going anywhere?

I don't think it's a big problem. Of course, I think what it comes down to is that it's harder maybe to convince investors that, yeah, your business actually makes sense. You do something, you build something that will, if you add one plus one, you will get more than two, you will get three. But in this instance, I don't think that's the secret sauce. I think it's actually this rigidity in terms of what you buy and this execution in terms of sort of being able to push raising prices, improve working capital.

And you create value from that. But it's, of course, especially that you're able to reinvest that into other good businesses. So I don't think it's a big problem. I think it's actually just part of this model that you need to do that. Because otherwise, sometimes you would need to tilt. If you are focused on one specific vertical, for example, you need to tilt at some point in the future. What I would say is that it's quite common that you buy the category leader in one country.

And sort of you have that characteristics and then you buy another one in another country because it's typically sort of this geographical barriers. And then you can sort of buy this type of cluster of companies where you can share expertise and maybe sometimes sort of in terms of procurement and so on. But I think it's not pushed by the companies. What many of these serial acquirers do is that they encourage the entrepreneurs within the businesses to speak to each other. And they have sort of this management meetings and so on a few times a year where they sort

have all the business unit managers that can meet at the same place. And of course, they are businessmen. So they would discuss these things and talk about how they can improve together. So I think the reason that happens and it's

It will likely happen with Röko over time as well. I think they have done a few Bolton acquisitions as well for the subsidiaries. So I would think that that could happen definitely for Röko as well that day. I mean, you want to buy similar businesses to what you have found because they are good for a reason. I mean, you found them for a reason. So I think that that will likely be the case.

And one thing we haven't touched on yet is some serial acquirers will buy 100% of the business and some will let the founder still have some equity and give them a bit more skin in the game. What do you see when you look at serial acquirers? Does it tend to be 100% acquisition of the company or do you see a mix?

I think if you look back quite a long time back, I think it was more common to buy 100%. At least in Sweden, you have this. If you buy less than 90%, you can't control the cash flows.

I don't know if that's the case in other countries actually to what degree and so on. But I think that was a reason for you need to control the cash flows. And sometimes you can do that by you need to buy more than 90. But I think there are other ways you can do that. Because, for example, Röko is often not buying 100% and they are able to control the cash flows. I think they're often below 90. I think they are at around 75 to 80, actually, if I'm not incorrect. And they are still able to control cash flows. I think that's the reason. I think

It's a risk mitigator. You will get sort of the former entrepreneurs to have skin in the game and they will also be incentivized then to drive the business forward.

And I think it can be good that you don't have a fixed end date on his or her term that he can continue or she can continue for a few years. And I think that's definitely a risk mitigator. Otherwise, I mean, earn out is also prevalent. Some companies have quite long earn outs. So they use that instead. I think that could work as well. But I think it's just aligning the entrepreneur with the serial acquirer in terms of that. And I think

It's also ties down to sort of the overall incentives, what you give, because even though if you buy 80%, you will own 100% in the future. So there will still be a point where you do that. And then you need to incentivize, of course, the entrepreneur in other ways, maybe profit sharing or, and I think many of the established ones.

They have sort of the same metrics as they show publicly. I mean, focus on working capital, focus on organic growth. Those kind of things are what they are incentivized to drive. So if they're able to grow that pie, they get a share of that. Another point is that a risk with having a minority is the minorities, I think, will often care about their stake. So I mean, of course, even though they don't set the agenda, you need to agree on certain things and keep them up to date and so on. So I

I'm not sure what's the optimal level. I think it's good probably to be flexible that sometimes you would use that if you have maybe a younger entrepreneur that wants to stay on. Sometimes it doesn't make sense if it's a succession and that person will move on anyway. So it's a bit from situation to situation, I think. You mentioned earnouts being commonly used. For those that aren't familiar with earnouts, could you explain sort of what that means and how it works?

I think it's often you pay a large part of the purchase price from the start, but often you have sort of an earn out if they deliver this growth over two years, then they pay that. So it's typically not just a payment, it's actually tied to that they will grow the business. And for the buyer, then the seller is definitely more optimistic about the prospects than a buyer. Normally, I would say. And sometimes for the buyer, it's like, okay, I don't really maybe believe in those numbers, but

If we have an earn out, then we share the risk in terms of what the final purchase price will be. So I think that's sort of the reason why you typically use that. And then I think the good ones, actually, they really focus on that the business should realize the earn out because that means that you have actually performed according to plan. So it's not like you try to sort of

make it harder for the entrepreneur to reach the earn out. I think it's the opposite that you really push that because otherwise you get this misalignment that you don't do things that you should. That's of course the risk that you should have optimized for the short term and you destroy the business for the long term. So I think it's a risk, but I think it's a risk mitigation strategy that's probably important in some aspects, in some transactions.

I have one more question here on Roco. Given the company's backstory being founded in 2019 by Frederick Carlson, and he's really running the show, it almost feels like just a bet on Roco is a bet on the brilliance of Frederick Carlson and his ability to continue to deliver and create value for shareholders. I was curious your thoughts on that and just on Roco in general.

I mean, it's definitely one factor. I mean, many of these serial acquirers that have started from a pool of capital, I think the risk is higher. We talked about before that sort of many of these older ones have been started from one operating business and then buying the next and the next. So I think normally that's maybe higher risk because you don't maybe have that operational background that you want to see. But in terms of Fredrik Karlsson, of course, he has that. You know that he's run Lithgow for a long time. He knows sort of the ins and outs, of course.

I wouldn't say it's a one-man show. It's a great team they have, even though it's small. I think they are not so dependent on Frederick that maybe some investors think. And that's often the case with these, that it's normally a team, even though it's small, a few persons have the necessary skills. It's a bet on Frederick in a way. I think he will probably continue for quite a few more years. But I think I don't see the succession as a huge risk. So I think they have a good team.

Last question I have for you is related to valuation. I think some investors just have trouble valuing a serial acquirer, understandably so. And I think I would just take the approach of trying to value a serial acquirer like I would value any business. Give a reasonable projection of cash flows and determine the intrinsic value that way. And some of the key variables I would especially look at for a serial acquirer includes the reinvestment rate, the return on invested capital, and the projected revenue.

runway. Are there any specific metrics you like to use when valuing serial acquirers?

I think you mentioned the most important ones, to be honest. I think that's sort of the key. And it's mostly sort of the thinking around reinvestment rates. For example, in Sweden, quite a few of the acquirers have a dividend. So that, of course, it decreases the reinvestment rates. And I think that's partly because of that many of these companies are family owned and wants to have the cash flow to invest in other business opportunities that they have. But I think those metrics are the most important to look at, even though, I mean, we talk multiples.

I think multiples are just sort of the easy path and you should definitely convert it into the factors that you mentioned. And then I would just focus on sort of all these potential risks that we have talked about. So what is the run rate? I mean, do we see a trend that is in the wrong direction in terms of maybe the company paying up a bit or it seems like they are not able to deploy all the capital that they need? So just how should you think about sort of the reinvestment rate for the longer term? Jens Nielsen It's

It's more how you think about these parameters that is the key. I think there is a risk with this model that it's quite easy to model it. So it really fits the mathematical side of many investors, I think. Similar to software in one instance, I think. I don't need to add too much to the factors you mentioned. I think those are the key factors to think about.

Wonderful. Well, Nicholas, thanks so much for joining me here. I really enjoyed the discussion and hope the audience enjoys it as well. Please share any resources or please share more about your event and Red Eye or how the audience can get in touch with you.

It's been great, Clay. And I mean, it's always a pleasure to speak about something that's close to my heart. And I mean, we have the yearly event in Stockholm. This year, we had, I think, 150 investors flying in from all over the world. So it was just great to meet so many friends and new friends and so on.

And then we have at Redeye, we have a quarterly report that we present on the sector. And we, of course, have a few companies on the research coverage. And otherwise, I mean, you can maybe some of you recognize my voice from Investing by the Books, a podcast we have where we interview investors and mostly authors about books. So books is a passion for me. If you want to talk, you can find me on LinkedIn or Twitter or yeah, you can probably search for my email as well.

Wonderful. Well, I'll get all that linked in the show notes. And the Serial Acquirer event in Stockholm is each March. So March 2026 would be the next one. Is that right? Yeah, that's correct. Well, thanks again, Nicholas. I really appreciate you joining me here. Thank you so much, Clay. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes.

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