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  • Chris Mayer

Notes from Stockholm

Observations on my recent trip, in no particular order.


In Sweden, there are a number of what investors call “serial acquirers.” I own two, Lifco and Teqnion. And I visited both while I was there. But there are many others including Addtech, Indutrade, Lagercrantz and more.


What makes a serial acquirer a serial acquirer? As the name suggests, a large part of the growth of the company comes from acquiring smaller private companies that fit some template. Serial acquirers are typically decentralized, with the acquired companies enjoying quite a bit of autonomy. The free cash flow of these daughter companies is funneled to the mothership where it is deployed – in new acquisitions, dividends or whatever. Typically, serial acquirers look to hold companies forever.


That’s a very basic outline. One question I liked to ask is “Why Sweden?” Why are there so many of these structures in Sweden? You don’t find them in other European markets. There are some. The UK has several good ones. But it’s not the same as you find in Sweden.


Two common answers I got when canvassing different people: One is a matter of history and culture. Swedish society works with a high level of trust. So the decentralized model more naturally took root here. Add to this: it is easy to acquire companies in Sweden. You can do a deal with a 15-page document, whereas, say, in the UK you have a hundred pages and lots of lawyers involved.


The other popular answer is to look at the success of Bergman and Breving, which spawned Addtech and Lagercrantz. Their success led others to copy the model - and then you have what I call the Silicon Valley effect, where serial acquirers tend to start in Stockholm because others are already there (and so is the talent pool, etc.).


I have to say I’m not that fond of the label “serial acquirer” because it underplays what the better companies actually do… which gets me to my second observation.


It’s not so easy to build a successful serial acquirer. It’s not just buying a bunch of companies and trying to play a financial arbitrage game. Things can go horribly wrong. And a case study on this would be Storskogen, an aggressive gobbler of companies:



In my own studies of these structures, I have noted the best are really company builders. They are looking to buy something particular, a special fit. Yes, there is a financial profile – whether based on return on capital employed, or margins, or sales growth or whatever. But there are also intangible qualities, too, around culture and competitive position and complexity and much more. The best ones have built up a process over many years. They are focused on returns on capital.


When they are successful, they can be wonderful investments. Here is Lifco since its IPO in 2014:


This is not a singular instance... Look at the charts of Addtech, Lagercrantz, Indutrade and more... All those charts are up and to the right over a long period of time. (As one CEO told me, "The differences between them don't seem to matter. They have nearly all done very well.")


Teqnion, though it's only getting started, has been a big success:


Owning a serial acquirer is like owning a fund that buys private companies and aims to never sell them. A publicly traded coffee can portfolio of sorts. What it comes down to, then, is a bet on capital allocation, a bet on the people and the process. While I had “met” many of the operators over video calls, I enjoyed meeting them in person – which leads to another observation…


You learn some things during a visit that you might not pick up otherwise. As I say, I had “met” several of these companies before over video calls. But not in person.


So it was interesting to go to their offices. Arriving at Lifco HQ, I was greeted by Per Waldemarson, the CEO, who was the only person there at the time. The office was in a nice building, but was quite modest and small. Most people are out in the field and HQ is tiny for an $8 billion company.


Johan and Daniel, the dynamic duo behind Teqnion, rent shared office space in Solna, a 25-minute Uber ride from where I was staying in central Stockholm. We ate lunch at the cafeteria in the building. (Daniel has pictures of Warren Buffett and Charlie Munger on his wall. He has the right heroes. Heh.)


I mean, you don't want to give too much weight to such things, but I can tell you not all companies give off the same vibes. I won’t name names, but lavish office space is a warning that perhaps the focus is not where it should be. (As an aside, I wonder if there have been any studies on vanity projects such as paying for naming rights on a stadium. How does a stock fare after that?)


I also must admit that sometimes the things I focus on seem not to matter. Recently, a friend of mine and I were lamenting over the fact that we passed on a stock that had subsequently done very well. We liked the business, but we choked on the proxy. The incentives were all wrong. For example, management was paid on sales growth and "adjusted EBITDA." We passed and the stock seems to have beaten everything else we own since. It seems like we would’ve been better off not reading the proxy.


But… I keep reminding myself that I am looking for businesses that I can own for a decade or more. Incentives clearly matter over that span of time. And there will always be exceptions – the companies that do very well even though there is poor alignment between management and shareholders.


You also have to think about your ability to hold an investment through inevitable drawdowns. It's easier to do when you trust the people and have alignment.


Today’s environment is a good test for management of these companies. It’s remarkable how the same themes kept coming up in my visits. All these companies are dealing with the same issues – inflation and supply chain constraints. The first requires price increases. Some are dealing with this challenge better than others. And the second means inventories are up as deliveries arrive and/or as companies carry extra in anticipation of further delays. But this should start to correct itself soon.


One question I liked to ask was whether they see any evidence of recession so far in their businesses. And the common answer was something like “so far, no, but we read the papers and are bracing for one.” The exception would be certain pockets of the economy that show definite weakness now, such as housing.


One thing I like about investing in serial acquirers is you get some built-in diversification. You’re getting a collection of different businesses. Slowdowns in one area may be offset by strength in another. As a group, I’d expect their financial results to be resilient.


Might there be better opportunities for serial acquirers when times are bad? All those debt-fueled private equity buyers may disappear. Maybe. But then the concern is the good companies won't sell. They'll hold out because they know what they could've sold out for before and won't accept less.


We will see. No one can predict the future, all we can do is prepare for a variety of scenarios. As David Hume put it, “Stercus accidit.” Speaking of Hume…


I read David Hume’s An Enquiry Concerning Human Understanding while I was traveling. It’s a slender book and easy to pack in the bag. (Yes, I still like physical books). The book had been sitting on my shelf for over a year and I finally decided to get to it.


I love Hume’s gentle skepticism, the modesty of his approach. I think it’s a good way for an investor to think too. Some passages I highlighted in my copy:

  • Thus the observation of human blindness and weakness is the result of all philosophy, and meets us at every turn, in spite of our endeavors to elude or avoid it.

  • Philosophers, that give themselves airs of superior wisdom and sufficiency, have a hard task when they encounter persons of inquisitive dispositions, who push them from every corner to which they retreat, and who are sure at last to bring them to some dangerous dilemma. The best expedient to prevent this confusion, is to be modest in our pretensions; and even to discover the difficulty ourselves before it is objected to us. By this means, we may make a kind of merit of our very ignorance.

  • Nor is it reasonable to conclude, merely because one event, in one instance, precedes another, that therefore the one is the cause, the other the effect. Their conjunction may be arbitrary and casual. There may be no reason to infer the existence of one from the appearance of the other.

  • A wise man, therefore, proportions his belief to the evidence.

  • In general, there is a degree of doubt, and caution, and modesty, which, in all kinds of scrutiny and decision, ought forever to accompany a just reasoner.

Great advice! I could fill several pages with such quotes.


Hume seemed amiable, reasonable, tolerant, wise and did not take himself too seriously. One of his best friends, Adam Smith (yes, that Adam Smith!), said Hume approached “as nearly to the idea of a perfectly wise and virtuous man, as perhaps the nature of human frailty will permit.”


By the way, Stockholm is a great city. I had never been. It’s not too big; you can walk almost everywhere you need to go. It’s pretty, with interesting architecture and water all around. There are lots of great restaurants. And not far outside the city are some great places to hike and historical sites to see (Viking runestones, old churches, etc.). I’ll be back next year!


Some pictures of Stockholm…


Tasting a Swedish classic at the food market and a tray of smoked moose and bear sausage...

Viking runestones and twilight hiking...

The view from my hotel in Gamla stan, where they are building the largest Christmas tree in Stockholm:


That’s all for now. Thank you for reading.


***

Published November 15, 2022

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