We Study Billionaires – TIP713: Why Serial Acquirers Outperform with Niklas Sävås

Host: Clay Fink
Guest: Nicholas Sävås, Senior Equity Analyst at Red Eye AB
Release Date: April 11, 2025
Podcast: We Study Billionaires by The Investor’s Podcast Network

Introduction

In episode TIP713 of We Study Billionaires, host Clay Fink delves into the compelling business model of serial acquirers with expert guest Nicholas Sävås, a Senior Equity Analyst at Red Eye AB. Focusing primarily on the Nordic market, the discussion explores why serial acquirers like Berkshire Hathaway and Constellation Software have consistently outperformed the broader market through strategic acquisitions.

Defining Serial Acquirers

Nicholas Sävås [02:47]:
"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... they are able to grow by 10% from acquisitions is sort of a benchmark that you should be able to do."

Serial acquirers are firms that prioritize growth through the continual acquisition of other businesses. Unlike traditional companies that rely primarily on organic growth, serial acquirers expand their portfolios by integrating multiple smaller companies into their operations.

Outperforming Conventional Wisdom

Nicholas Sävås [03:42]:
"...the programmatic type of acquisition strategy that the serial acquirers have is very different."

Contrary to the conventional belief that acquisitions often dilute shareholder value, successful serial acquirers effectively deploy a systematic approach to purchasing businesses at favorable multiples. By focusing on smaller private companies available at lower valuations, they circumvent the common pitfalls associated with overpaying and mismanaging acquisitions.

Acquisition Pricing and Multiples

Nicholas Sävås [05:38]:
"The multiple that has been quite steady for the last decade or so has been around 7 to 9 times EBITDA."

Serial acquirers typically purchase companies at enterprise value to EBITDA (EV/EBITDA) multiples ranging from 7 to 9. This disciplined approach ensures that acquisitions are financially viable and contribute positively to the overall portfolio’s performance.

Types of Companies Bought

Nicholas Sävås [07:31]:
"The best companies buy companies with a moat."

Successful serial acquirers target niche businesses with strong competitive advantages or "moats." These companies often operate in specialized markets with high barriers to entry, such as regulatory protections or long-term customer relationships, making them less susceptible to competitive pressures.

Use of Debt in Acquisitions

Nicholas Sävås [09:33]:
"If you're going to get a return on equity above 20%, you won't get that just from buying cheap businesses."

Debt financing plays a crucial role in enhancing returns for serial acquirers. By leveraging debt, these companies can amplify their return on equity, enabling them to pursue more acquisitions and sustain high growth rates without solely relying on internal cash flows.

Examples of Serial Acquirers in the Nordics

Nicholas Sävås [10:50]:
"...the big four are Logicrans, AdTech, Indotrade, and LyftCo."

Red Eye AB identifies Logicrans, AdTech, Indotrade, and LyftCo as the leading serial acquirers in the Nordic region. These companies have successfully implemented the serial acquisition model over decades, consistently expanding their footprint through strategic purchases.

Characteristics and Strategies

Cash Flow Focus:
Serial acquirers prioritize strong cash flows to fund ongoing acquisitions. Emphasizing efficient working capital management and maintaining low capital expenditures ensures a steady stream of funds for future purchases.

Decentralization:
Nicholas Sävås [14:00]:
"These acquirers have decentralized acquisition down to business area managers..."

Successful serial acquirers decentralize decision-making, empowering business unit managers to identify and execute acquisitions. This structure allows for scalable operations and efficient integration of new businesses without overburdening the central management team.

Being the Buyer of Choice

Nicholas Sävås [25:45]:
"...the relationship that you get with the potential buyer is a key differentiator."

Serial acquirers cultivate strong relationships with sellers, positioning themselves as the buyer of choice. By offering more than just competitive pricing—such as guaranteed stability and continued support for employees—they make their acquisitions attractive to business owners seeking a "forever home" for their companies.

Succession and Transition Plans

Nicholas Sävås [28:34]:
"Earn-outs are prevalent and help align the interests of the entrepreneur with the acquirer."

Transitioning leadership post-acquisition is critical. Serial acquirers often implement earn-out agreements or facilitate succession planning to ensure continuity. By tying compensation to performance metrics, they incentivize former owners to maintain high standards and drive the business forward.

Challenges and Pitfalls

Nicholas Sävås [43:58]:
"If you buy cyclical companies, you might end up purchasing at market peaks."

Common challenges for serial acquirers include navigating business cycles, managing high leverage, and executing smooth transitions. Overextending through aggressive acquisitions or failing to maintain disciplined pricing can lead to financial strain and diminished returns.

Visibility and Scalability

Nicholas Sävås [32:43]:
"Tracking the number of acquisitions and market trends is essential for assessing scalability."

Assessing the sustainability of the serial acquisition model involves monitoring the availability of quality acquisition targets and ensuring that the company can maintain its acquisition pace without compromising on quality. The ongoing ability to deploy capital efficiently is vital for long-term success.

Serial Acquirers in Nordics vs. the US

Nicholas Sävås [35:44]:
"Private equity predominates in the US, often paying higher multiples, making the serial acquirer model less prevalent."

The serial acquirer model is more prominent in the Nordic region compared to the United States, where private equity firms are more active and willing to pay premium prices for acquisitions. Cultural factors, market fragmentation, and differing financial landscapes contribute to this regional disparity.

Valuation Metrics

Nicholas Sävås [65:18]:
"Focus on reinvestment rates, return on invested capital, and multiples like EV/EBITDA."

When valuing serial acquirers, key metrics include the reinvestment rate, return on invested capital (ROIC), and valuation multiples. These indicators help assess the company’s ability to sustain growth through acquisitions and generate value for shareholders.

Case Study: Roko IPO

Nicholas Sävås [54:46]:
"Roko continues the system solutions approach, acquiring diverse businesses with a focus on quality."

The recent IPO of Roko, founded by Frederick Carlson, exemplifies the serial acquirer model. Building on the success of LyftCo, Roko employs a diversified acquisition strategy, purchasing companies across various niches while maintaining a focus on high-quality, cash-flow-positive businesses.

Conclusion

Serial acquirers represent a formidable investment strategy that leverages disciplined acquisitions to drive growth and outperform conventional market expectations. Through a combination of strong cash flow management, strategic pricing, decentralization, and building robust relationships with sellers, these companies create enduring value for shareholders. However, the model requires meticulous execution, a keen understanding of market dynamics, and the ability to navigate common pitfalls to achieve sustained success.

Resources and Further Information:
For more insights on serial acquirers and to access Red Eye AB’s reports, visit theinvestorspodcast.com.

Notable Quotes:

• Nicholas Sävås [02:47]:
  "A serial acquirer is... able to grow by 10% from acquisitions is sort of a benchmark that you should be able to do."

• Nicholas Sävås [03:42]:
  "The programmatic type of acquisition strategy that the serial acquirers have is very different."

• Nicholas Sävås [05:38]:
  "The multiple that has been quite steady... around 7 to 9 times EBITDA."

• Nicholas Sävås [07:31]:
  "The best companies buy companies with a moat."

• Nicholas Sävås [14:00]:
  "These acquirers have decentralized acquisition down to business area managers..."

• Nicholas Sävås [25:45]:
  "The relationship that you get with the potential buyer is a key differentiator."

This comprehensive summary encapsulates the key discussions and insights from the episode, highlighting the strategic nuances that make serial acquirers a compelling investment choice.