Serial Acquirer
Serial acquirers are companies that primarily grow by acquisitions rather than organic growth.
Berkshire Hathaway has traditionally been the most prolific serial acquirer. At Berkshire, Warren Buffet uses a disciplined, value investing approach to acquire quality businesses at attractive prices.
Characteristics of Serial Acquirers
Not all companies that make acquisitions add long-term value. Many companies struggle with acquisitions due to allocating capital poorly or are unable to manage the new subsidiary post-acquisition. The reasons range from poor cultural fit, overestimation of potential synergies, and poor integration planning. This also drives out quality talent. Serial acquirers that are successful typically use an unconventional approach to avoid the problems that plague most other large companies.
Capital Allocation
Warren Buffet (Berkshire Hathaway) and Mark Leonard (Constellation Software) are known has being great capital allocators. Both follow distinct approaches to making acquisitions which is influenced by both the nature of their businesses and their investment philosophies.
Some serial acquirers are very niche specific while others are very broad. Berkshire Hathaway, for example, makes acquisitions across many unrelated industries while Constellation Software focuses on Vertical Market Software (VMS) products. Another Berkshire distinction is that Buffet will take minority stakes in other publicly traded companies. Both of these companies use a decentralized structure and neither company forces business units to be centralized to leverage synergies.
It's also important to note both Buffet and Leonard pursue companies that are already great. That is, they don't prefer to buy something that they have to turn around. Fixing a bad business is much more difficult than merely purchasing a quality business and keeping the momentum going. In the event the acquisition is a distressed company, a larger discount is necessary to both limit risk and maximize return.
When deploying capital, great serial acquirers leverage opportunity cost. Making the best choice for allocating capital requires discipline and high standards when maximizing high, long-term compound annual growth. At times, this involves taking no action while waiting for the markets to present better deals.
Asset Light
The best serial acquirers prefer making acquisitions that are Asset Light. This allows a company to grow profits without requiring much additional capital. A common problem with traditional, capital-intensive companies is that much of the profits have to be allocated to maintenance CAPEX (capital expenditures). This is for things like upgrading and fixing equipment. High maintenance CAPEX leaves less money for future growth and less for shareholders (i.e. dividends and share buybacks).
Asset light companies also offer better protection against inflation. Capital-intensive businesses must be concerned when inflation and maintenance CAPEX are growing faster than operating earnings. In this situation, the company will fail to keep up with inflation and is actually destroying value rather than creating it. This will result in less free cash flow (FCF) and less net income.
A red flag to look for is when maintenance CAPEX grows faster than depreciation. Depreciation lags inflation because it reflects CAPEX paid out in the past. The larger maintenance CAPEX becomes, it not only reduces cash flow, but will increase future depreciation expense. Which leads to lower future earnings.
Lean Overhead
Berkshire Hathaway had over 350,000 total employees by the end of 2023. However, fewer than 30 employees work at the company's headquarters in Omaha, Nebraska. Being decentralized, almost all employees work for a Berkshire subsidiary.
Since the headquarters remains relatively stable or grows little over time, most great serial acquirers experience falling headquarters-related expenses in comparison to revenues and operating income. Companies that attempt to centralize operations, on the other hand, are forced to scale their headquarters.
Decentralized
At Constellation Software, Mark Leonard has stated he prefers many small business units that run autonomously. This is the opposite of forcing the centralization of operations and trying to achieve economies of scale. If a business unit gets too large, it will be split further into smaller, more focused units. By 2014, Constellation had nearly 200 business units.
Each business unit is free and encouraged to experiment. Leonard sees this is as a means to test new ideas quickly and cheaply. If a new process works, it can be adopted by other units.
Acquisition Strategy
As mentioned above, opportunity cost is an important factor when incorporating an acquisition strategy. Constellation has a specific "hurdle rate" that an acquisition must meet. This rate is decided by the company internally before pursuing acquisitions. If a potential acquisition's projected rate of return falls short of this benchmark, the deal cannot happen.
The best serial acquirers prefer to fund their acquisitions using cash. When it's necessary to use debt, a serial acquirer will do so conservatively. Equity financing is the least preferred option because issuing new stock results in share dilution. There are rare cases where equity financing makes sense, however. This will often involve periods where the acquiring company's stock is trading at well over its intrinsic value.
The timing of acquisitions is another important part of a serial acquirer's strategy. Since making acquisitions is based on valuation, periods of tight money (often due to high interest rates) and recessions will result in more deals. This is because the valuations will be lower with less competition. During periods of economic prosperity, valuations will become stretched and competition will be fierce. It may become difficult to find a single deal that meets the required hurdle rate. Warren Buffet is known for sitting on large stockpiles of cash during these periods.
Finding the best serial acquirers can be done by analyzing a company's track record of acquisitions. If possible, it's worth examining what the intrinsic value of the acquisition is versus the price that was paid.
Over an extended period (of at least 10 years), the acquirer should have produced consistently rising FCF per share along with high ROIC (return on invested capital). As far as financing goes, it's important to make sure the acquirer isn't being reckless with debt. Some debt is OK and may be preferred as a high ROIC will more than offset interest payments. FCF growth on a per share basis is preferred over FCF alone because it accounts for share dilution.