Over the last five years, a core area of our IP Research (proprietary research led by IP Co-Founder Will Barnes) has focused on industrial holding companies that have built multi-decade track records creating shareholder value. Our research is built from 200+ hours of interview material on our platform covering industrial acquirers.

Industrial acquirers are companies that conduct programmatic acquisitions of durable, niche industrial assets with high returns on capital and low-single digit organic growth. Persistent M&A is a core strategic tool for the company. The combination of 20%+ ROICs, ~5% organic plus 5-7% of inorganic growth leads to a diversified and durable earnings stream that can compound for decades. 

But M&A is risky. As we all know, on average, it destroys capital. So how do companies like Danaher, Lifco, Halma, Judges Scientific, and the Bergman & Beving spins create so much value? 

Our research has focused on understanding when and why the model is durable, how acquirers are organized to scale, effective M&A frameworks, post-acquisition operational playbooks, and optimal incentive structures throughout the groups. Each company follows a similar corporate strategy but operates in a slightly different way.

We list some of our published research below and explain why we’ve covered these specific angles. This work excludes the research on aerospace companies such as TransDigm, Loar, and HEICO which we recently covered here. This is a work in progress and we plan to continue studying industrial acquirers for many years to come. 

  1. Halma, Danaher, CSU & Serial Acquirer Org Structures: compares the org structure and scalability of industrial acquirers like Halma and Danaher with Constellation Software 
  2. Halma, Judges Scientific, SDI, & Scaling Niche Manufacturing Serial Acquirers: explores the limitation to scaling M&A for niche manufacturing acquirers using Halma and SDI comparative case study 
  3. Röko: Sector-Agnostic vs Sector Focused Acquirers: explores the advantages and disadvantages of sector-focused vs agnostic acquirers 
  4. Lifco vs Halma: Org Structure & Opco Incentives: compares how Lifco and Halma organize the group and incentivise organic and inorganic growth at the division and subsidiary CEO level 
  5. Lifco vs Halma: M&A Team Structure & Incentives: how Lifco vs Halma structure and incentivise its M&A team and differences in the M&A philosophy 
  6. Danaher Business System: Batch to One Piece Flow Manufacturing: how Danaher deploys Lean DBS tools post-acquisition 
  7. Danaher Business System: PSP, Kaizen, & Six Sigma: how the PSP tool is deployed at Danaher and differences in Kaizen and Six Sigma tools
  8. Bergman & Beving, Lagercrantz, Nordic B2B Distribution & M&A: introduction to Nordic acquirer and value-added distributor model
  9. Diploma PLC: Leadership and M&A from Bruce to Johnny: history of Diploma under its former CEO and the culture and organizational changes under its current leadership. 
  10. Bergman & Beving: Lagercrantz 2.0?: walks through history of B&B, the current portfolio, and value-creation strategy compared to Lagercrantz in the mid-2000s
  11. Addtech: The History of Bergman & Beving: history of Addtech and B&B’s value-added distribution model and why P/WC is an effective KPI
  12. Perimeter Solutions: Fire Safety: exploration of the operational moat around Perimeter’s Fire Safety business 
  13. Perimeter Solutions vs Fortress: Aerial Fire Retardant Competition: history and risks of Fortress competing with Perimeter’s leading PHOS-CHEK retardant 
  14. IP Company Profile: Judges Scientific PLC: overview of JDG business and acquisition model 
  15. Judges Scientific, Geotek, & GDS Instruments: Geotek unit economics and business model and the history of Judges’ M&A strategy 
  16. SDI Group: Challenges and Risks in the Acquirer Model: a Former CFO at SDI Group provides an honest account of the challenges scaling smaller acquirers 
  17. M&A Accounting: Constellation Software, Vitec, Lifco, Lagercrantz, & Teqnion: how the recognition of goodwill and intangibles in purchase price accounting can distort the P&L of acquirers. 
  18. Topicus, Transdigm and Value-Based Pricing: compares TDG and CSI / TOI value-based pricing techniques and pricing power of PMAs vs vertical market software 
  19. Addtech and Topicus: Competitively Advantaged Buyers: how acquirers like Addtech and Topicus have an edge over acquiring family-owned companies 
  20. Addtech & Lessons from 25 years at Leading Nordic Serial Acquirers: insights from how Addtech scaled over the last 20 years and insights into how Storskogen has struggled.

A critical question of our research surrounds how acquirers are organized to scale. After studying Halma’s history, as acquirers reach over £150m revenue, the pressures of scaling can potentially break the organization. At such scale, it’s harder to acquire 5-10% inorganic growth. If the group isn't growing organically, and isn't organized grow 5-10% inorganically, the M&A multiple arbitrage compresses which pressures the group's valuation.

Since 1972, Halma has compounded EBIT and dividends per share at 15% and 4%, respectively. But it wasn’t a completely smooth ride. In the early 2000s, Halma’s cash flow hit a wall. It struggled to acquire enough companies to grow and wasn’t organized adequately to grow organically. The incoming CEO reorganized the group into divisions and delegated M&A power down the organization. Delegating M&A down to Divisional or subsidiary heads enables more capital to be deployed annually but increases the risk of capital misallocation. The limitations of scale caused Halma to transition from an ‘accumulator acquirer’ like Constellation Software to a ‘platform acquirer’ like Danaher.

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. - IP Research

Scale isn't necessarily the friend of industrial acquirers. At $100m EBIT, acquiring $1m EBIT companies doesn't move the needle much unless you can complete 10+ annually. This is difficult. Most acquirers evolve to compete for larger, more expensive, and potentially riskier transactions. This is where Danaher sets itself apart: its DBS operational playbook enables it to continually pay a fair price for larger assets and still generate best-in-class returns. This research goes on to explore the importance of an aligned org structure and operating philosophy to scale beyond $100m EBIT and ~50 companies in the group.

It’s interesting to compare Halma’s structure to Danaher, arguably the best performing "platform" serial acquirer. Danaher acquires larger, leading assets that form the beginning of a platform for bolt-on acquisitions in a new end market. As platform acquirers scale, they typically choose to buy fewer but bigger businesses rather than increase the volume of small acquisitions. It's a much quicker and easier way to scale but typically leads ROIC to revert to the mean. Today, Danaher is 14x the size of Halma with under half the opcos. If Halma follows in Danaher's footsteps, the larger the company becomes, the more Williams' capital allocation skill matters to conduct fewer, large acquisitions. There is also one big difference between the two: the Danaher Business System (DBS).  - IP Research

We’ve explored how Danaher creates value post-acquisition using various DBS tools such as one-piece flow manufacturing, Kaizen, and Six Sigma. 

Go to Gemba, everyone. This applies not only to product quality but also to all other business processes. For example, I manage many transactional process improvements. Once we reviewed the process at Gemba, which means really observing what people are doing in the system, it was often different from what we expected…I can tell you, I've managed around 100 Kaizen events or more in my business life. What I've seen is that during discussions with engineers, they explain how the system works and why we have a problem. I always stop the discussion and say, "Let's go to the place and observe the process." For example, if there are process issues, in 95% of cases, it's different from what the engineers think. That's my personal experience. For example, if there's a problem in a manufacturing process, like assembly, where we're producing a lot of scrap. During discussions in the PSP process, every engineer involved can explain why. But when you say, "Let's review the process and observe it," meaning Gemba evidence, it's often different. - Former Director at Danaher

And, more importantly, the cultural challenges of deploying such a stringent DBS philosophy across a $200bn organization. 

The DBS is the DNA of the whole thing. It is about transparency, involvement and permanent improvement. It’s about really reflecting on positions, really reflecting what it is and then use methodology and the PDCA cycle to make things happen with action plans, but then really monitor this rigidly. It is very painful. In the beginning, I hated it, having to be monitored every single week. Have I done this, this, this and this? I said to someone, I’m grown up; I don’t need to do this. After some time, I realized that with that kind of rigid monitoring, you really gain traction. Normally, whatever happens, the first question is, do you want a PSP? The second question is, do you have an action plan? The third question is, have you executed the action plan? The last question is, is your action plan bringing the projected results? If you fail to say yes, yes, yes, yes, you always go one step back. - Former Director at Danaher Corporation

The scalability of an acquirer also depends on the types of assets it buys. This highlights why software is one of the best types of assets to acquire programmatically. Software benefits from tighter customer feedback loops, higher recurring revenue, and higher intangible assets that are easier to integrate compared to physical assets.

Halma owns a gas detection business selling portable monitors to oil and gas customers and a cardiovascular business for ambulatory blood pressure monitors. The range of expertise and knowledge of technical products, customers, and end markets makes it very difficult for opcos to stay ahead of the curve without an experienced opco CEO with full P&L ownership. On the other hand, Vertical Market Software businesses are not only higher quality companies, but also seem easier to manage and understand. This lends itself to a higher velocity of acquisitions. - IP Analysis

Put simply, there are two ways to drive inorganic growth at 5-10% for decades. You're organized to either: 

  1. Buy a large volume of small companies i.e. Constellation Software
  2. Buy fewer, but bigger companies and have an operational playbook to create value i.e. Danaher 

Companies in the middle will potentially see growth and ROIIC decay faster with scale. Understanding this dynamic has been an important part of our work. Alignment of the operational philosophy and organizational structure is critical to determining the sustainability of growth and ROIC.  

After interviewing the Former Lifco CEO and Founder of Röko, we explored an interesting question: why and when are sector-focused vs sector agnostic acquirers more attractive long-term investments? This research explores the trade-offs and risks in both models:

The beauty of this business model is that you invest in many companies in different industries, so it doesn't matter if you make a mistake in one company. Lifco and Indutrade are two of the oldest in the business. I discussed this with Alvesson who is more experienced in the business than I am, and he makes mistakes once every 20, but it doesn't matter. I cannot think of a company where we had to close or inject cash. The mistake you can make is buying a company for 20% more and it goes down 10%, but it still contributes cash and you end up with a slightly lower return on investment. - Founder and CEO of Röko and Former CEO at Lifco

We also spent ~6 months comparing Lifco and Halma. Two companies with similar strategies at similar scale but completely different operating philosophies. Halma is organised as follows:

Lifco is far more lean. We explore the differences in the org structure and how it shapes inorganic growth and ROIIC.

We also explore the details of how subsidiary CEOs and M&A leaders are incentivised across both companies:

Bergman and Beving (B&B), founded in 1906, is a 8bn SEK Swedish-listed B2B value-added industrial distributor and serial acquirer. B&B is the mothership of ~5 listed entities, including Lagercrantz and Addtech that have compounded FCF per share ~20%+ for over two decades.

B2B distributors like B&B, Watsco, Ferguson, and Fastenal are a business model we focus on at IP. This research is a good introduction to the Nordic value-distribution model and how the groups evolved into acquiring niche manufacturers across Europe.  

B2B Distributors serve fragmented value chains
B2B Distributors serve fragmented value chains

B2B Distributors use their purchasing scale to receive better purchasing terms and pricing from suppliers that it can pass onto customers. Over time, the Nordic distributors built technical product knowledge and offered training, advice, installation, and other ‘value-added’ services. This added incremental gross margin on top of a simple ‘trading’ product margin for distributing commoditized products.

Nordic acquirers moved from B2B distribution to owning product IP
Nordic acquirers moved from B2B distribution to owning product IP

This research is focused on the history of Bergman & Beving and explores the parallels with Lagercrantz in the early 2000s before it proceeded to compound at 20%+ for decades.

We also interviewed the CEO of Bergman and Beving, who shares the history of Lagercrantz and parallels in building B&B today.   

The B&B spincos target 45% EBITA / WC, a proxy for return on capital invested excluding goodwill for distributors. 

EBITA / WC as proxy for tangible ROIC
EBITA / WC as proxy for tangible ROIC

The metric includes five variables: sales, net margin, inventory, receivables, and payables. This interview explores why this metric is effective and shares more insight into the operating philosophy of Addtech and the B&B group:

The only parameter that you can increase to infinity is the sales. Out of the six parameters, everyone in the company understands that it is the sales that is going to really make the difference, because you have a commercial organization; I think that is very central. Also, if P divided by WC is bigger than 45% then the business will be self-financing and you will have a profitable business. - Former VP at Addtech

Perimeter is a relatively new US industrial acquirer in the fire safety business led by the former CEO of TransDigm. Aerial fire retardant is a highly-regulated, mission critical product that is less than 3% of the customer budget. Low-cost, high benefit. 

The third economic criteria is we like products that account for critical but small portions of larger value streams, what Nick calls small into big. And Perimeter, again, scores extremely highly on this dimension. Retardant is the active ingredient and a critical component in wildland firefighting where failure, of course, is measured in loss of life and property and potentially severe environmental damage. And despite its criticality, retardant consistently represents a low to mid-single-digit percent of overall wildfire suppression costs, thus providing a tremendous customer value. - Chairman of Perimeter Solutions, 2021

We covered PRMs retardant business from multiple angles earlier this year, especially as its largest competitor has an interim qualified copycat product. We expect PRM to deploy FCF into new industrial end markets over the coming years. 

Judges Scientific is a UK-listed 100-bagger of scientific instrumentation manufacturing companies that exports globally. Its founder and CEO has one of the most succinct capital allocation framework of all industrial acquirers: 

The Group’s acquisition model is to acquire small/medium-sized scientific instrument manufacturers, paying a disciplined multiple of earnings and to finance any acquisition, ideally, through existing cash resources and/or bank borrowings. We are highly selective in seeking to acquire businesses with a focus on sustainable profits and cashflows, in order to obtain immediate and enduring earnings enhancement for our shareholders. It is paramount that acquisitions are completed only when the Directors are satisfied that the target business has sound underlying strength with robust and defensible margins. - David Cicurel, Judges Scientific Founder and CEO

This research explores Geotek, its largest historical acquisition and Armfield and Scientifica, arguably two prior M&A mistakes. 

We’ve also explored how these models go wrong. We've studied Storskogen's mistakes and this interview with a Former SDI CFO provides an honest account of the challenges scaling this model:

I think there's been a change. And he would admit this himself. Initially, the first few acquisitions he made were about buying a stable company. He wanted it to be stable. He was paying four times profit or five times profit, and my own valuation of SDI was higher than that. So he was doing a good deal here. And that was true. However, as we grew and as our shareholders became more demanding, you need more than that. That will allow you to grow in a linear, comfortable way and the share price will go up, and everything's fine. But when you start to compete for capital with Judges and others who are further up that curve and are looking for, not just a steady profit but growth in profit from their organic growth and profit, then I think the pressure increased to see if we could do more. So we have a strategy which involves individual operating companies growing as well as just growing by acquiring steady businesses. - Former CFO of SDI Group

Finally, we explored the principles of Purchase Price Accounting and how various acquirers recognise goodwill and intangibles upon acquisition. This can distort comparisons between acquirers that is worth considering. 

Purchase Price Accounting (PPA) can provide a small but fairly accurate lens into management’s principles. Such accounting policies typically fly under the radar as companies direct investors to EPS or EBITA. PPA can set apart conservative and aggressive companies; those with an eye to massage EPS versus those with rigor. It can also help explain a company’s operational philosophy; the synergies and value-add the parent believes it can add post-acquisition. - IP Research
IP Research Analysis
March 20, 2024

M&A Accounting: Constellation Software, Vitec, Lifco, Lagercrantz, & Teqnion

IP Research
IP ResearchConstellation Software IncVitec Software GroupDanaher CorporationHEICO CorporationTransDigm Group IncorporatedLagercrantz GroupLifcoTeqnionSdiptechStorskogen GroupIndutradeRoper Technologies IncHalma plcDiploma PLCJudges Scientific plcBergman & BevingAMETEK IncSwitching CostsProcess PowerB2B SoftwareSerial AcquirerOEMs w/ Installed BaseMission Critical Products & ServicesB2B MiddlemenInformation TechnologyHealth CareIndustrials

Further Research Questions 

  • What is the operational playbook for acquirers to drive organic growth post-acquisition?
  • What is the best organizational and M&A transaction structure for sector-agnostic acquirers?
  • How can acquirers scale the number of transactions of smaller companies without moving to larger acquisitions over time? 
  • Where do these models typically go wrong?