Halma is a best-in-class serial acquirer for niche manufacturing businesses. In 1972, David Barber founded the company with a clear set of principles to grow by acquisition:

  1. Use internally generated cash, not equity
  2. Buy similar businesses that you already own
  3. Focus on bolt-ons or quasi-bolt-ons, rarely move into new areas

Since then, HLMA has compounded EBIT 15.3% and dividend per share ~4% for almost 50 years.

We recently interviewed the CEO of SDI Group, potentially a smaller version of HLMA, and this comment particularly stuck out:

Halma was the first business I looked at. Halma started exactly the same as us and the same as David did in the 1980s…They started getting bigger and bigger, buying bigger businesses. Then they started putting divisions and then managers and CEOs over the divisions. That is a structure that you do – I’m sure we will do it and David will do it – as you grow the businesses. What you don’t want to do is put a structure in place, at head office – which I’ve seen many times – where you say, now we’re going to buy the business; it kills it. These businesses run autonomously. - CEO of SDI Group

This organizational ‘structure’ that HLMA added in the 1980’s was pivotal to scale beyond owning ~25 companies. The bigger the revenue base, the harder it is for acquirers to grow inorganically.

Over the next 5 years, SDI and Judges Scientific will either need to acquire, merge and integrate more assets (Halma), acquire more smaller companies (CSU), or acquire bigger companies and run them better (DHR).

Today, SDI and JDG typically buy companies with £1-2m EBIT for a ~5x multiple. Post-acquisition, each business is treated as a standalone profit center.

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