10 Serial Acquirers To Fortify Your Portfolio
Why are serial acquirers attractive investments, how to identify them, and 10 you should know.
I am Trung. I write 10+K words deep-dives on market leaders. I also write Thesis Trackers updates to follow up on their performance. When the right price comes, I buy them for the Sleep Well Portfolio, which I am building for my 4-year-old daughter to redeem in 2037. I disclose the reasoning of all BUY and SELL (ideally never) transactions (1st, 2nd, 3rd, 4th). Join me in building generational wealth.
Businesses create value (growing free cash flow per share) by investing in themselves (organically) or acquiring others (inorganically).
Today, I focus on businesses specializing in buying others, often called serial acquirers, typically categorized into four groups. I’ll attempt to explain why they can be attractive investments and how to identify them, and I'll share with you ten serial acquirers I want to add to my portfolio.
Why are serial acquirers attractive investments?
Successful serial acquirers are decentralized operators of niche businesses.
They run a decentralized acquisition process that allows them to acquire many (niche) businesses without the system breaking down in bureaucracy, centralization, and control. Thus, they can compound free cash flow per share as they acquire more. The gold standard of serial acquirers is Constellation Software; it averaged 70+ deals between 2017 and 2020.
The beauty of serial acquirers is that the more extensive the collection of acquired businesses, the more resilient their earning streams as they diversify into more customers, geography, products, and suppliers. Operationally, they also gain bargaining power against suppliers and pricing power against competitors, enjoying scale advantages.
The theory sounds great, but only a few can do it right. It requires executing a complex process of (i) forming a disciplined and decentralized acquisition process, then (ii) operating acquired businesses independently, and at the same time, (iii) facilitating a supportive system and culture to foster these two processes.
The other complex thing is that these acquirers must identify and acquire niche businesses that the more resourceful ones can’t, limiting the bidding wars. The good news is, by design, if you focus on acquiring small niche players, the selection criteria already deter larger businesses from taking an interest, especially if they are not decentralized, and you build domain expertise in a specific field, which larger ones would find it a distraction of its core.
How do we identify exceptional serial acquirers?
Serial acquirers can be categorized into roll-ups, platforms, accumulators, and holding companies.
Roll-ups focus on one specific industry vertical, such as SiteOne in landscaping or Waste Connections in waste services.
Platforms operate in multiple verticals, such as Danaher (life science + water), where they can be more tightly integrated (less autonomously).
Accumulators and holdings are generalist acquirers that can operate multiple verticals, and businesses can be unrelated with little synergies, such as Constellation (Accumulators) and Berkshire Hathaway (holdings).
Exceptional serial acquirers are like exceptional businesses. They can consistently reinvest excess cash into buying free cash flow generative businesses at reasonable prices. As the cycle of reinvestment continues, the entity becomes more resilient and diversified.
To determine which acquirers have the ingredients to execute successfully. I created a framework to help me sift through mediocre ones.
Portfolio Companies & Industry - the first is analyzing individual portfolio companies for their resiliency and cash flow predictability, their industry for long-term growth, and whether it is ripe for consolidation.
M&A Framework - the second is analyzing the acquisition process, the pipeline, the acquisition price/hurdle rates, discipline (track record), and the competition.
Decision Makers - the last is determining if the captain has skin in the game and a track record of delegating the acquisition decision and managing businesses autonomously.