The Olympus of Serial Acquirers
Ideas and personal reflections from listening to Redeye's Serial Acquirer Conference.
One month ago, Redeye hosted their 4th Serial Acquirer Conference in the capital of Swedish’ compounding, Stockholm. While we got the chance to learn about a variety of interesting businesses, I found a great pleasure in listening to the wisdom of Sweden’s most iconic serial acquirers, as it resonated profoundly with my eagerness to learn about their business model and become a better investor as a whole. Therefore, I hope that sharing my personal reflections will be helpful to you.
We already talked about the different games an investor can choose to play. Rising popularity and an incredible performance, periodically, will attract the path of incautious jackpot-seeking that forsakes any hurdle rate or foresighted vigilance. Contrarily, we can strengthen our behavioral edge by consistently practice patience and diligence in order to build something that lasts. While the first can be regularly observed in a noticeable manner, as is their nature, the latter subtly takes one step at a time, thereby revealing its beauty only when reviewing the total work of art. Also, I noticed that the success of the latter is often accompanied by a great simplicity with regard to the core ideas and values that are largely unaltered and safeguarded by the management. Reflecting on this note, I find my mind sprinkling new ideas and references to other successful businesses. Think of Brunello Cucinelli and his idea of preserving the company by being a guardian of its values and creation. Or the most fundamental principles on which Buffett has successfully built Berkshire Hathaway for nearly 60 years. In order to let compounding do its work, we must to be patient and reluctant to mess things up for short term profits.
Perpetual Ownership
Similarly, we can view the characteristics of long-lasting serial acquirers. Much like Berkshire itself, the success of serial acquirers is based on the fundamental principle of perpetual ownership. Confirming that this concept is nothing new, Olle Backman (CEO of Vitec Software) said “I almost feel sorry for the audience here, because you stand here listening to us and we basically say the same thing, but the proof is in the pudding.” According to him “it comes to values, culture and also showing that you’re actually not just the slides, but what you’ve been doing over time. So I think it’s delivering over time and being that permanent home.”
Interestingly, while this concept might appear to be theoretical, e.g. holding your stocks for many years, it is crucially real for serial acquirers as they deal only with people and often with regard to their passionately built enterprises.
“I think it’s important to realize that when we’re out there, we usually come across companies that are fairly small, there might be 50-100 employees. They’re living in a local community, they have a company that has been run for 3 generations the same way, and I think they very much would like to have someone that act very responsibly taking over their company, so that they can go to the local grocery store for many years and feel proud that the company was well taken care of.” Jörgen Wigh (CEO of Lagercrantz) perfectly described how serial acquirers bring these fundamental ideas to life.
A Different Game
And being a honorable guardian of the life’s work of another human leads to another advantage with regard to the increasing competition between serial acquirers and smaller private equity firms. As Johan Andersson (CEO of Addnode Group) explains “the best salespeople with regard to that are the guys that we’ve previously acquired.” Seeing that these businesses are prospering (perhaps even on a higher level) after the transaction is the best argument serial acquirers have in conversations with newly interested companies. Calling back to my earlier statements, we also find here another reference to Buffett’s popular statement that “it takes 20 years to build a reputation and five minutes to ruin it.” And these serial acquirers certainly do anything to avoid ruining the promise of being “a safe haven for your business” (Lifco).
While we as investors can rashly come to the perception that the crucial decision criteria for the selling party is the offered price, we’re now learning that the interhuman relationships and post-acquisition prospects are even more significant for the outcome. And this advantage to private equity is even more strengthened as planning to hold the company indefinitely also naturally causes an incentive to make the businesses better. As Johan Andersson therefore puts it, as perpetual owners “we need to reinvest, because we’re going to make money 5 years from now, and 10 years from now. There’s no end the game to it.”
In this way, we can see why the multiples paid for acquisitions have not increased significantly for a number of years, although the interest in this industry surely has. Serial acquirers kind of play a different game (think of my recent notes on Guy Spier), which is their competitive advantage.
Drinking Coffee
Another thought that came to my mind listening to these conversations was how the serial acquirers’ description of the acquisition process differed from my own perception. During the panel talk, the question arose whether there are any specifics of the M&A process that are not well understood by investors. Recalling Jörgen Wigh’s description of a owner-operated niche business, it’s reasonable why “you don’t have all these advisers, 150-pages reports” as Olle Backman further adds, “you have to narrow down the specifics.”
So instead of analyzing the last points of data one could possibly find, the experience of serial acquirers helped to evolve an intuition. I noted Backman’s description:
“We buy the same company all over. We look at something that looks like ourselves and then we try to find it and those characteristics. And then we’re just doing a confirmatory, really light kind of due diligence, because we know what we’re looking for. And yet again we have the time to fix it if there’s potentially something that’s fixable.”
I find a possible reason for the great admiration that investors hand towards serial acquirers, perhaps lies in the similarities of their values and practices with those of fundamental investors, thus aligning their visions and interests. Therefore, it comes at no surprise that Backman’s thoughts are similar in many aspects to Buffett’s approach. In the book “What I Learned Before I Sold to Warren Buffett”, Barnett Helzberg described the story of how Buffet bought his family business.
“This can be the fastest deal in history,” Buffett said.
“But what about the due diligence?” I asked, surprised at how fast the negotiations were moving.
Most suitors demand to see every scrap of paper you’ve ever generated and to interview every top manager.
That wasn’t Buffet’s way. “I can smell these things.” Buffett said. “This one smells good.”
(I found this excerpt on an episode of David Senra’s Founders podcast)
The advantage of serial acquirers through buying family-owned businesses is that these sellers won’t do anything that harms the company. Also, those kinds of negotiations appear far more attractive from the seller’s perspective as to see the company being sold at an auction to a random private equity firm. As a preventive action serial acquirers have to constantly reach out to potential sellers, thus Jörgen Wigh at Lagercrantz calls it “drinking coffee” - a way to describe them “meeting with companies and getting acquainted with people.” Interestingly, this approach gives serial acquirers with an established and proven reputation an advantage over their younger peers, as Frederik Karlsson (CEO of Röko) recalls. As a former CEO of Lifco, who is currently building a new serial acquirer, he recognizes a disadvantage with regard to the available number of opportunities: “But we will get that, I call it Lagercrantz and Lifco natural deal flow, as we prove ourselves.”
So there’s still a moat around the Olympus of serial acquirers.
To finish first, you have to first finish.
All my reflections have shown how serial acquirers successfully bring the wisdom of long-term investing to life. This is also true for my last thought. As Charlie Munger recalled: “to finish first, you have to first finish.” Personally, I’ve considered the concept of survival as trivial for a long time, but more and more recognized its significance. With regard to serial acquirers, I find this idea to capture the essence of this business approach remarkably well, because in order to built the company for decades, all the discussed practices and values have to be aligned for longevity.
As a consequence, asking a serial acquirer to define their perspective on risk leads to the following response (is this case from Frederik Karlsson):
“If the general business cycle would be very bad for a long long time - it’s happened probably in the Great Depression and the World War 2 - you have to have situations like that, otherwise these kind of short disturbances - we have had the financial crisis, it was no problem at all, and corona was no problem, the inflation was no problem - so this kind of model is very robust and can handle short downturns at least. If you have a 10 or 20 year downturn it will be tough.”
These serial acquirers are here to stay and built to last.
Thank you!
Miscellaneous
While I hope you’ve found joy in reading my personal reflections on the conference, I want to warmly recommend reading the more comprehensive comments of my friends at “The Compounding Tortoise” and the outstandingly helpful research of Redeye regarding Swedish serial acquirers. And finally, Chris Mayer’s reflections from 2022 that initially started my admiration for this business model.