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

As we count down the days to our networking event in Stockholm on 21 September (signup link), we’re bringing you a two-part series on Nordic serial acquirers. 

In Part 1, we lift the lid on the playbooks of Swedish listed serial acquirers – a group that has performed phenomenally off the back of sustained value creation from M&A. We wrote this article together with Niklas Sävås and Christian Binder from Redeye, a Stockholm based investment bank which maintains extensive coverage of the serial acquirer listed universe. 

In Part 2 we will cross the border to Norway to examine Visma’s performance, in particular, a) its origination setup; b) capital allocation; and c) comparison vis-a-vis Constellation Software. 

Back to Sweden though, we structured the article by answering these four questions:

1. Why do Swedish serial acquirers keep multiplying?
2. How do they approach capital allocation?
3. How do they approach integration?
4. How are they valued in public markets?

By and large, HoldCos are rare in Europe

But first: why is this topic relevant for our readers? Let’s face it: entrepreneurship through acquisition remains a niche concept in Europe. It is exercised primarily by private equity, wealthy dynasties, and, increasingly, state-backed actors. In recent history, there are very few examples of first-generation entrepreneurs building large, $100M+ market cap businesses by way of small-ticket M&A. In this respect, three countries stand out: Sweden, France, and the UK.

France is home to several highly successful luxury goods roll-ups, such as LVMH, Hermes and Dior. Case studies abound on these storied names, as well as their founders. We consider them to be too large and too consumer centric to be relevant for our readers.

On the other hand, much of the UK’s conglomerate population has been dismantled and sold off to foreign acquirers and private equity after years of inconsistent performance and onslaught by activist shareholders. The dearth of IPOs on the London market isn’t helping either. That said, we believe it’s only a matter of time before more British serial acquirers (re)list, inspired by the example of CorpAcq. 

1️⃣ CorpAcq SPAC presentation

Finally, Swedish consolidators keep going strong – and multiplying! Names like Teqnion (share price up ~10X since the 2019 IPO) and Lifco (~10X since the re-IPO in 2014) have provided inspiration to quite a few budding software consolidators. And will continue to do so as they hopefully grow further. 

Insight #1: Why are there so many serial acquirers in Sweden?

By visualizing the ownership structures of Sweden’s largest companies, one may conclude that the country’s entire economy is, in fact, a product of several giant conglomerates. After all, holding companies such as Investor (aka the Wallenberg family), Kinnevik, Industrivarlden and Carl Bennet control a substantial chunk of the country’s listed universe. Oddly, this oligarchic setup not only has not inhibited Sweden’s solid economic performance, but is credited by some researchers for the outsized population of highly competitive multinational corporations. 

Contrary to the myth that most serial acquirers have descended from a single company, Bergman & Beving (B&B), conglomerates have existed throughout Swedish history. One early form was called Investment Development Companies or IDCs. Founded in the 1960s, IDCs were connected to commercial banks through interlocking directorates and indirect ownership. Some have survived until today, albeit in significantly altered form. For example, Hexagon, a digital reality solutions provider with a $25B market cap. Then there are companies such as SKF and Electrolux which have been highly acquisitive throughout history.

Which isn’t to take away from B&B’s totemic image. Established in 1906, over the years B&B has spun off Lagercrantz, Addtech, and Alligo (then Momentum Group). Further, Addtech later spun off AddLife, and Alligo/Momentum Group separated into two listed companies. Although B&B was not the first mover, its model became unique during the 1970s and the 1980s and it’s definitely the one that most resembles the playbook from many serial acquirers today. 

Fast forward to today: below, we list 20 serial acquirers that trade on the Stockholm market with a combined market cap of $30B (median market cap of ~$800M):

Market data as of 22 September 2023

In addition to the above names there are privately held acquirers like Röko, Dacke Industri, and, Marathon Software (formerly known as Tempeludden). 

You will notice a disproportionate number of industrial components manufacturers and distributors. In fact, B&B was first established as an importer and agent for foreign manufacturers to sell industrial products to Sweden right when the country’s industrial revolution began. 

Why is that? As Johan Sjö, a former CEO of Addtech, explained in an interview to the expert network InPractise, value-added distribution is attractive in the Nordics for several reasons: 

• Relatively small population of 26 million people spread across multiple countries with different languages
• Critical mass required, for example, due to the need to translate manuals and provide customer support in local languages

On top of that, value-added distributors have deep relationships with end-customers which typically leads to opportunities to sell private label products to solve the niche problems not addressed by suppliers.

While any generalisation is inherently difficult, Swedish acquirers appear to share four core principles:

• Simplicity and focus on simple capital-adjusted profit goals
• Culture of autonomy that helps loosely integrated, industry agnostic HoldCos remain viable at scale (Lifco has $2B+ revenue)
• Ambitious people striking out on their own after cutting their teeth at established consolidators – Röko is a good case study of that
• Investor confidence in the business model built up through the industry’s long-term track record of stable, excess returns

The culture piece is the most important of these four principles. This culture of trust between employer and employees is quite unique, which is why most of these companies have stuck to Northern Europe.

Sweden’s unique tradition of decentralization is encapsulated in the works of people like Jan Wallander (Handelsbanken), Hans Werthen (Electrolux), Percy Barnevik (ABB), Jan Carlzon (SAS) and Gerteric Lindquist (Nibe).  

2️⃣ Svenska Handelsbanken: Accomplishing Radical Decentralization Through ‘Beyond Budgeting’

Insight #2: How do they allocate capital?

These are some hard-nosed value investors! Here’s what we’ve got in terms of publicly disclosed hurdle rates and target multiples:

• Indutrade: a maximum of 8X operating profit after tax
• Lifco: up to 8X EBITA depending on the situation
• Teqnion: 5-year payback

This is consistent with the analysis compiled by Redeye: “Multiples paid have stayed relatively constant in the last 20 years…mostly ranging 5-8X [of EBITA] based on initial purchase consideration”. 

Organic initiatives are also monitored, for example: “When we redeploy money in our own daughter companies, we want to keep that at a five-year payback period also” (Teqnion deep dive by P&R Investment Management). That said, when asked about hurdle rates / IRRs on their organic investments, most Swedish acquirers don’t seem to have a good answer 🤷‍♂️. 

Being sector agnostic certainly helps keep multiples in check. As Fredrik Karlsson, the CEO of Röko (and the former CEO of Lifco) told Inpractise: “If you are sector-focused and the sector is not huge, you run into problems if the sector suddenly gets popular because multiples become too high and you cannot acquire. You will be forced to buy bad companies because there are not enough good deals around. When we look at small companies, we try to find market leaders in a niche with moats, but that is sometimes difficult to judge and you can make errors on the quality aspect”. 

Working capital efficiency is a key source of value-add – which is logical considering the business model of distributors so beloved by these acquirers.

For example, B&B’s profitability target is for each unit to achieve a return on working capital of at least 45%, measured as EBITA for the rolling 12-month period as a percentage of average 12 months’ working capital (defined as inventories plus accounts receivable less accounts payable). 

As to where capital is deployed:

• Family owned businesses with 10-20+ year history. Profitable and growing
• Geography: Nordics and the UK. To a lesser extent, Benelux and Germany. On the other hand, acquisitions in Southern Europe are less common given the differences in business culture

That said, many serial acquirers hold such an advanced view of decentralization that they do not factor synergies into return calculations – in addition to being sector-agnostic. Which means that for a quality business and for a good price, geography is secondary. 

Insight #3: How, and why does the decentralized model work?

Put simply, decentralization allows for a high degree of autonomy in the subsidiaries, allowing the lean, frugal HQ teams to stay lazer focused on M&A and portfolio improvement. Turning to the latter, focus is paramount. As the CEO of Lifco said in an interview to Acquirers.com, “You have to be very careful about which issues you have an opinion on at the subsidiary level. You can have an opinion on a maximum of two things at any time”.

The flip side is limited synergies. Some acquirers go further than others. For example, Addtech supports subsidiaries with financing, FX, accounting, logistics, ERP systems, framework agreements, and legal matters. 

That said, there’s a tradeoff between decentralization and industry expertise.

Most serial acquirers end up concentrating on the sectors that the HQ is most comfortable investing in.

For example, Lifco is structured in three divisions: Dental, Demolition & Tools and Systems Solutions (which is the “catch-all” label for the acquisitions that don’t fit the first two divisions). 

Insight #4: How are these businesses valued?

To quote Redeye once more, “EBITA is the best measure to compare different serial acquirers given their considerable acquisition-related amortisation charges, historical data is often hard to access or incomplete. Therefore, we use EV/EBITA multiples to compare serial acquirers’ current valuations, but EV/EBITDA multiples to illustrate the valuations they traded at over time”. 

Notwithstanding the inevitable deviation within the peer group, valuations appear to converge in the 15-20X EBITA range. In absolute terms, the Redeye constructed Serial Acquirer Index has significantly outperformed the local market benchmark.  

3️⃣ Redeye Serial Acquirers: Q1 2023 update

These premium valuations reflect the acquirers’ excellent return on capital metrics, for example, Lifco:

• Over the last decade it has grown EBITA almost sevenfold while delivering an average ROIC of 13% and a ROE of 21%
• This standout performance was managed thanks to a) a healthy M&A pace (closing a deal a month on average); b) acquisition of quality assets – Lifco’s organic growth was 11% in 2022; and c) not overpaying (EV/EBITA multiples consistently in the 6-8X range, with 1-2X deferred)

The market has given credit where credit is due. Lifco (re)IPO’d in 2014 at SEK 93 (equivalent SEK 18.6 adjusted for the subsequent 1:5 split). Today the stock is trading at SEK 200+, with an $8B+ market cap. 

Summary

• As a highly industrialized, export-focused economy that was spared both world wars, Sweden was a natural breeding ground for conglomerates. It has produced dozens of those, large and small. While the market’s attention has been captivated by dedicated compounders like Lifco and Teqnion, the much larger “traditional” industrial companies like SKF, Electrolux and Hexagon have been highly acquisitive too
• Successful serial acquirers share four core principles: 1) simplicity and focus on simple capital-adjusted profit goals; 2) culture of autonomy / decentralization; 3) ambitious management striking out on their own; and finally a 4) supportive investor community
• Being industry agnostic and geographically selective has helped the acquirers keep the multiples down – and the ROICs up
• We conclude with a case study of Lifco, whose stock has surged more than 10-fold in the 9 years since going public, to an $8B+ valuation. Its recipe? Ability to ramp up the M&A machine without sacrificing ROIC (mid/high teens) or organic growth