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The Rare High-Quality Serial Acquirer


"In reviewing my uneven record, I've concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding - but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party's hopes. In other cases, disillusionment is swift. Applying those images to corporate acquisitions, I'd have to say it is usually the buyer who encounters unpleasant surprises. It's easy to get dreamy-eyed during corporate courtships."


- Warren Buffett (Trades, Portfolio)



When it comes to stock picking, an acquisition-driven growth strategy often discourages us. We generally think of the risk of overpaying as substantial, given the value to be harvested throughout an acquisition. We would highly prefer that our investees return excess capital to us if there exists no opportunity to reinvest in organic growth at an attractive rate of return or repurchase shares at a discount.

Nonetheless, we have encountered some members of an ultra-scarce species that has a proven track record of successful acquisitions while compounding shareholder value, reflected by a consistently high return on capital over a long period. They share the same trait of being disciplined capital allocators, in our view. Below are our top picks.

Halma PLC

Halma (LSE:HLMA) is a global group of life-saving technology companies that makes products for hazard detection and life protection. The company's growth is mainly underpinned by acquiring and growing businesses with global reach in the chosen niches of safety, health and environment. The management aims to double earnings per share every five years while maintaining high returns on sales (targeting 18-22%) and total invested capital (targeting more than 12%). It also targets an organic profit growth of more than 5% and an acquisition profit growth of over 5%. The company has conducted more than 20 acquisition deals since 2014. For the past decade, Halma delivered an average 22% return on equity

Constellation Software

Canada-based Constellation Software (TSX:CSU) is an international provider of market-leading software and services to several industries, both in the public and private sectors. The company concentrates on acquiring and growing market-leading software businesses that develop specialized, mission-critical software solutions in various verticals. Looking at the company's listed acquisition criteria, we feel that the approach is quite quality-focused with its emphasis on experienced and committed management, consistent profitability, above-average growth and leading market position. The organizational structure is decentralized, as Constellation Software hands off the day-to-day management of its businesses post-acquisition, which reminds us of the Berkshire Hathaway (BRK.A)(BRK.B) style. Notably, the management refers to return on invested capital and organic net revenue growth as the company's key performance indicator in terms of acquisitions and as the forecast of the internal rates of return on those acquisitions. For the past ten years, Constellation Software achieved an average 44% return on equity capital.

Chemed

Cincinnati-based Chemed (NYSE:CHE) operates two wholly-owned subsidiaries, VITAS Healthcare (provider of end-of-life hospice care) and Roto-Rooter (a provider of plumbing, drain cleaning and water cleanup services). Both subsidiaries employ an inorganic growth strategy that consolidates the respective niche by acquiring smaller franchises. The management emphasizes reasonable multiples with respect to the purchase price. Additionally, it appears to have clear long-term thinking on the future of both businesses, including the considerations of further investment and divestiture. It is worth mentioning that Roto-Rooter and VITAS were acquired by Chemed in the 1980s and 2000s, respectively. For the past decade, Chemed delivered an average 23% return on equity.

Rollins

Atlanta-based Rollins (NYSE:ROL) is the premier provider of pest and termite control and related services for household and commercial customers around the world. The pest control industry is highly fragmented, enabling Rollins, as the market leader, to grow through consolidation. Recent major acquisitions include Clark Pest Control in 2019, AMES and Kestrel Pest Control in 2018 and Northwest Exterminating in 2017. The company also leverages acquisitions to enter new markets. For example, it acquired Aardwolf in 2018 to enter the Singapore market. Over the last ten years, Rollins delivered an average 31% return on equity.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do own shares of Rollins.

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