Halma, Danaher, CSU & Serial Acquirer Org Structures

In Practise Weekly Analysis

Halma PLC

Why is this company interesting?

Halma is a UK-listed serial acquirer of niche highly engineered industrial or medical products that dominate their respective small markets.The company was founded by David Barber who pioneered the model of rolling up and integrating industrial businesses that have strong market power and durable earnings. Barber’s philosophy, which still underpins Halma’s culture today, is best explained in this short speech.

Today, Halma is structured into three sectors with 50 operating companies: Safety, Medical, and Environmental and Analysis. Each sector has ~20%+ net margin and the group aims for 16% growth in profit before tax every year, half from organic growth and half driven by acquisitions. Halma aims to acquire 15-20 profitable, high quality companies each year and between 2003-13 the company paid on average ~8x EBIT.

The 20-year FCF CAGR is 15% and the 33-year dividend per share CAGR is 5%. This has led Halma to become one of the top performing UK businesses over the last 40 years.

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"My observation is that acquisitions have the best chance of creating value where the business purchased as nearly as possible meets the following criteria: it is paid for by internally generated cash, it is a replica of one already owned by the purchaser, it is a bolt-on or quasi-bolt-on, and it is likely to improve the quality as well as the quantity of earnings. This is effectively the route we have followed in Halma." - David Barber, Halma Cofounder and Former CEO, 1998

Halma is a UK-listed serial acquirer of highly-specialized industrial and medical companies that dominate small, niche markets. In 1972, David Barber founded the company with a simple set of principles to create long-term shareholder value: use retained earnings to acquire profitable, niche businesses that management understands. Over the last 20 years, Halma has compounded FCF at 15% and the dividend per share has compounded 5% for over 33 years. Barber’s philosophy underpins Halma’s success and forms the foundation of the company’s strategy today.

There are many great write-ups by Scott Management here, Exploring Context here, and Demesne Investments here which explain and categorize types of serial acquirers. This note builds on these write-ups so if you haven't already, we'd advise reading each piece before this Weekly Analysis.

In December, we interviewed three former executives of Halma operating companies to explore a question that we believe is crucial for ‘platform-type’ roll-ups: how is the company organised to scale acquisitions.

Halma started as an ‘accumulator’ serial acquirer. Operating companies were decentralised with CEOs running individual P&L’s reporting to Barber. This structure is similar to Constellation Software (CSU) in VMS or Addtech in B2B distribution where the parent company aims to add value by sharing best practices across opcos rather than centralising services to cut costs.

This strategy worked well until the early 2000s when Halma’s revenue and FCF hit a wall. The business didn’t grow for 4 years. In 2005, Andrew Williams became CEO, sold off underperforming businesses and moved into the medical equipment business. Prior to 1997, over 70% of Halma’s acquisitions were small, niche businesses within existing health and safety sectors. We would argue that Williams started Halma’s transition from an ‘accumulator’ to a ‘platform’ acquirer. In other words, from a Constellation Software-like operating model closer towards a Danaher-like operating model.

In 2015, Halma deepened this transition by reorganising into four ‘Sectors’; Process Safety, Infrastructure Safety, Medical, and Environmental and Analysis.

Halma introduced ‘Sector Teams’ which added a layer of middle management between opcos and Sector CEO’s: the opco CEO would report to a Divisional CEO, who reports to a Sector CEO, who then reports to Andrew Williams, Halma Group CEO. The Divisional Sector CEO (DCE) would also have a CFO and a VP of M&A to help run the sub-sector. Halma effectively has two management layers above the operating company: the Divisional Sector CEO and the Sector CEO.

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