REQ’s Serial Acquirers Primer: 300+ pages condensed into 5 insights

Who’s REQ?

Founded in 2020, REQ is a Norwegian fund manager. The CEO Nina Hammerstad is the ex Chief & People Operations Officer of NBIM, Norway’s sovereign wealth fund. 

On the equity side, REQ runs two funds, REQ Global Compounders and REQ Nordic Compounders, that invest in “companies that have the acquisition of smaller private firms at the heart of their strategy”. 

For a new kid on the block, REQ has been unusually prolific, having published a raft of analysis on serial acquirers. The culmination is the 326-page long (!) doorstopper “A Deep Dive into Shareholder Value Creation by Acquisition-Driven Compounders“. 

It’s pretty good… however we realize that not everyone has the time or the patience to sift through hundreds of slides. Therefore we have distilled the report into 5 key insights. 

If you’re hungry for more insight into how serial acquirers work, check out these articles by RollUpEurope:

17X value in 10 years…What can we learn from Lifco and other Swedish serial acquirers?

Boss Your Comps pt.3: Do software rollups deserve Constellation Software (CSI) multiple?

How lean is your HoldCo? Vol.1: Let go this much

How lean is your HoldCo? Vol.2: Why we ROIC

Insight #1: Programmatic acquirers outperform because they care

In my career I’ve worked on 100s of buy- and sell-side M&A transactions. In a majority of those involving “generalist” acquirers, the M&A process was messy. Decisions to buy or sell were often taken on a whim. There was too much outsourcing to advisers, to overcome internal resistance and to dump work (and blame) on. There was no alignment between Finance, Strategy and Leadership. To top it off, post closing integration was handled by an “internal consulting” team brought in from the cold. 

Are you surprised so many M&A deals end up destroying value? 

Here’s what “programmatic” acquirers do differently:

• Opportunity set based on a rigorous target pipeline

• Internalize expertise

• A clear value creation plan that survives closing

• Pursue small, private deals

Insight #2: Processes!

The foundation of every long-term successful serial acquirer is a robust value creation framework. Think Danaher Business Systems or the Roper Technologies’ playbook. 

The REQ study draws on the management philosophies developed by Bergman & Beving – the OG of Swedish HoldCos. These key principles have since been codified in several manuals including Addtech’s “The Mind and the Soul” and Momentum’s more prosaic “Entrepreneurship to Achieve Increased Profitability – Objectives and Tools to Achieve P/WC > 45%”. WC, as in working capital. 

By translating lofty corporate targets into easy-to-understand targets that can be applied at a product or assembly line level, Swedish acquirers have been able “to avoid unnecessary complexity. It’s about establishing an internal language that resonates, especially with small business owners who may have engineering backgrounds and might not be well-versed in financial or sales terminology”. 

Insight #3: Flexible but cold-blooded capital allocation

At RollUpEurope we worship ROIC. And so does REQ, for a reason. 

Serial acquirers’ raison d’etre is value creation through M&A. It doesn’t mean a 100% reinvestment rate in perpetuity though. Consider the Teledyne case study:

• An investor who invested in Teledyne in 1966 achieved an annual return of 17.9%, or 53X invested capital, over 25 years, compared to 6.7X for the S&P 500

• According to Warren Buffett, Henry Singleton at Teledyne had “the best operating and capital deployment record in American business.” 

What exactly did Teledyne do to impress the Sage of Omaha?

• In the 1960s and 1970s, Teledyne made 130 acquisitions financed by both equity and strong free cash flow

• In the 1970s, Teledyne bought back 85% of its (undervalued) stock. Teledyne’s buyback strategy deserves a case study of its own 

• Decentralized model combined with an efficient financial reporting process allowed Teledyne to develop a highly effective incentive scheme called “The Triple Crown Awards”. Executives were awarded monthly based on revenue, net income and cash flow performance – the three crowns

A WSJ obituary for Mr Singleton neatly summarizes his entire business career and provides context for the occasional critical press coverage (which apparently he didn’t care about).

Insight #4: Organic growth DOES matter

Put simply, organic growth is a litmus test for individual acquisitions, before we get into the weeds of Group level ROIC and EPS. The chart below shows that most serial acquirers, in fact, eke out pretty decent growth rates. Moreover the impact of leverage is magnified in declining companies – see our profile on Upland. 

Insight #5: Look out for these Red Flags

As there are WAAAY too many, I’ve had to pick my favourites:

• Companies stop disclosing organic growth, or frequently change definition

• Effort to conceal creeping leverage by excluding certain types of debt or using creative accounting to lower net debt / EBITDA

• Large insider selling in conjunction with capital raises

• Companies press-releasing several acquisitions at the same time (and repeatedly)

• CEOs leaving shortly after very large acquisitions (oh hey HP!)

• Incentive comp tied to M&A volume or revenue

• Low shareholder transparency on deal terms e.g. prices paid and earnout thresholds

Summary: The 3 sources of serial acquirers outperformance are…

Capital allocation, decentralization, people.