How to Execute a Merger & Acquisition (M&A) Strategy

An Ackroo Case Study

April 1, 2025, marked the end of a significant chapter in my investing journey. It was the closing of Ackroo’s (TSX-V: AKR) acquisition by Paystone, a privately owned strategic acquirer.

Ackroo was one of the first stocks I ever bought in 2014 when I started investing my personal capital, and the company made it as one of Rivemont MicroCap Fund’s top holdings when I contributed to the launch of the fund in January 2018. The stock remained a core position of the fund for the next 7+ years, and boy was it a roller-coaster!

The journey culminated in Ackroo being taken private at $0.15 per share, a 40% premium to the fund’s average cost base of $0.107 per share. While it was rewarding to end up with a profit, the compound annual return on the position (less than 5% per year) was quite disappointing.

There’s nothing inherently wrong about a microcap compounding at 4-5% per year. Most microcaps actually generate negative returns over the long term. The damages are pretty limited when you identify the underperformers quickly and sell them, or at least don’t scale into large positions. What made matters worse on Ackroo was getting the position sizing totally wrong. The stock was a 10% to 20% holding in the fund for the better part of seven years, which created a significant drag on returns.

The past is the past, and I can change nothing about it. That said, several lessons learned have hopefully made me a better and smarter investor in the future.

Business Overview

If you’re unfamiliar with Ackroo, the company was a consolidator in North America's gift card, loyalty and point-of-sale software space. Think of their offerings as the software that powers your small business’s gift card or loyalty programs. Ackroo’s target customers had a few dozen to a few hundred retail locations in the hospitality, petroleum/convenience, retail, and automotive industries. Customers paid a monthly fee to use the software, which made almost all of Ackroo’s revenue high-margin (90%+ gross margins) recurring revenues.

Growth Strategy

When I first invested in Ackroo, the company was not profitable yet (it was actually going to go bankrupt if it didn’t raise financing). The financing they were raising was supposedly the last one before they would reach profitability. So was the next financing, and the next one. I quickly learned about the pitfalls of investing in money-losing microcaps.

That said, the company eventually figured out how to make money. The strategy was pretty simple. Ackroo started to acquire struggling competitors that were also losing money. It would then migrate all of the acquired customers to the Ackroo platform, shut down the competitor’s platform and let go of most employees. Ackroo could quickly turn a money-losing enterprise into one generating 50% EBITDA margins after integration. The company quickly created value by acquiring small competitors for 2-3x revenues (pro-forma 4-6x EBITDA), eventually turning into a self-sustaining, cash flow generating business.

Throughout the whole Ackroo journey, I became intimately familiar with the economics of the business and often chatted with Steve Levely, its CEO. I also spent considerable time analyzing other roll-up (M&A driven) strategies in the Canadian microcap market. This experience helped me understand how challenging it can be to execute such a strategy and the key ingredients to succeed.

What follows are some of the key learnings.

Key Ingredients to Succeed

1. A fragmented market: Ideally, you want many small targets that are subscale and presumably struggling to keep up. These targets typically don’t attract larger, sophisticated buyers such as private equity firms, which leads to my next point.

2. Cheap valuations: Several things can go wrong with acquisitions, but building a substantial margin of safety by buying at low prices can mitigate many of those risks. I prefer industries that are deemed unsexy, or at least not the flavour of the day. You want to avoid industries where capital is pouring in, making the competition for deals much higher (i.e., Artificial Intelligence currently).

3. Organic growth: I’ve noticed that companies with decent organic growth prospects (10%+) tend to do better. Rolling up an industry tends to involve raising multiple financing rounds to support the pace of M&A. When capital markets dry up during periods of uncertainty, companies growing organically can keep improving while the rest wait.

4. Profitability: As I alluded to before, investing before a company turns profitable is riskier because you have no control over the magnitude of the share dilution to get there. Profitable companies can at least choose not to raise capital if the price or the timing is not right.

5. A strong shareholder base: Ideally, a company has one or a handful of large shareholders with deep pockets that can lead financing rounds and support the company in its capital raising efforts. Having a market cap of $100 million or more also helps because it opens the opportunity to be supported by investment banks and institutional shareholders.

6. Investor relations (IR): Again, this relates to the ongoing need to raise capital. While I’m not a huge proponent of marketing and stock promotion, a well-thought-out IR program is key to ensuring you get the support from the capital markets. Roll-up stories can’t ignore the capital markets like a profitable organic growth story can.

7. A disciplined operator and capital allocator: When the growth strategy is based on an individual (or handful of people) making decisions about what to buy and how to integrate and run these acquired assets, the quality of the people is paramount. There’s no magic formula to identify great people, but I tend to gravitate towards non-promotional CEOs with skin in the game and a solid track record.

To go back to my Ackroo example, I think the company definitely had a fragmented market and cheap valuations (points #1 and #2) going for it, as well as profitability (#4), a few years after I invested. #3 was probably the weakest spot, with very little organic growth. The shareholder base (#5) was generally patient compared to most other microcaps, but nobody had deep enough pockets to really support the long-term growth ambitions. The company did very little in the way of IR (#6), which probably took away some opportunities to raise capital on better terms over the years.

Lastly, I’d be remiss not to highlight the outstanding job that Steve Levely has done as CEO of the company (#7). He was dealt a challenging hand to start and did a fantastic job of turning things around. Steve was a first-time CEO with no track record before Ackroo, and he blossomed into one of the best operators I’ve met. I look forward to seeing what he will do next, especially if he’s dealt a better starting hand next time.

Key Risks (To Avoid or Monitor Closely)

1. The share price (valuation) matters: M&A strategies work best when companies can raise capital at attractive terms with little friction. If a stock trades at 5 times EBITDA, raising money and buying assets for 6-8x EBITDA makes little sense. However, if the stock trades at 15x EBITDA, these same acquisitions become significantly accretive (the same can be said for revenue multiples or any other valuation metrics). M&A strategies tend to work well as long as the share price and valuation stay healthy. Management teams who are cognizant of this dynamic can sometimes feel the pressure to deliver results and news to the market, knowing that a failure to meet expectations could be fatal.

2. Not raising capital at the right time: The flipside of consistently raising capital is failing to do so when the time is right. Investors tend to throw money at companies when their prospects are rosy, and the growth strategy works. It can be tempting for management teams to drink their Kool-Aid and turn down capital, hoping for even better terms and less dilution down the road. My experience has taught me that when you’re a serial capital raiser, and the money is there, take it (or at least some). It might not be there anymore when you actually need it.

3. Customer churn: I watch this metric closely for any software companies, but even more with roll-ups. Acquisitions generally lead to changes and disruptions to how things have been done. It can mean changes to the pricing strategy, personnel turnover, etc. If a company consistently loses customers after it acquires assets, that could mean serious problems.

4. Banking on synergies to make the model work: Broadly, there are two types of synergies. Cost synergies mean reducing the expenses of the acquired asset by eliminating redundancies (e.g., you don’t need two accounting systems, two legal advisors, etc.) or unnecessary costs. Revenue synergies rely on upselling/cross-selling one customer base with the products or services of the other company. The former can work wonders, like in the Ackroo example, while the latter can be way trickier to implement. Overall, I prefer M&A strategies where the economics already make sense before synergies, and synergies are gravy on top. Buying unprofitable assets hoping to make them profitable through synergies is riskier.

5. Integration: Some companies tend to completely integrate their acquisitions (such as Ackroo, which migrated all customers to a single software platform). In contrast, others prefer to run a decentralized model and let subsidiaries operate fairly independently. It’s essential to be aware of conflicting messages here. Cost synergies tend to materialize when there’s a tight integration happening. If you hear a company touting synergies while running a decentralized model, put on your skeptic hat. From my experience, most M&A driven microcaps that blow up tend to run decentralized models and buy assets that don’t fit well together, leading to all sorts of problems. The problem was likely a lack of expertise in purchasing the right assets in the first place, with no overarching vision of how everything fits together.

6. A story gets too complicated: This can relate somewhat to the integration strategy. A company buying many disparate assets and running them independently can become a pretty convoluted story for investors because of all the different moving pieces. Ultimately, the market tends to pay up for simple stories. Since the ease of raising capital at a healthy valuation is key for M&A strategies, I am a big fan of simple stories (one or a handful of products, one platform, one brand, etc.).

Returning to my Ackroo example one last time, the company’s strengths were predominantly in areas #4, #5 and #6. Ackroo had a clear and simple model to integrate acquisitions tightly and realize consistent cost synergies from one deal to the next, and its story was relatively straightforward.

The weakest point was #3, with an annual churn rate of 10-11% for the past three years. Not only was there little organic growth, but the company had a hard time keeping its existing clients. The customer churn increased the urgency to make acquisitions to show a healthy growth rate and keep investors engaged. As you can imagine, it was a tough sell, which made the valuation and share price unattractive (point #1) to raise more capital and make additional acquisitions.

Ultimately, the company got stuck for long periods when all it could do was execute small deals with creative structures, partially funded by internal cash flow generation, without access to external capital.

Besides the obvious risk of using too much debt and blowing up, I’ve found that getting stuck with a bad share price and few growth options is ultimately one of the most significant risks of executing an M&A strategy, especially as an illiquid, undiscovered microcap.

That dynamic is subtle. As investors, we always think our stocks are undervalued and a re-rating is just around the corner. Getting stuck in a no-growth zone is a silent killer. It’s not that things are going poorly; it’s just that nothing is progressing.

The opportunity costs add up one day at a time without you realizing it, like the proverbial frog in the pot of boiling water.

One day, you wake up and realize you’ve held a large position in a stock for seven years with little returns to show for it.

Such is life. You live and learn.

On to the next one!

I’d love to hear about your own lessons from past experiences, or even your current favourite company executing an M&A strategy. Please let me know in the comments!

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Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund does not hold shares in any of the companies mentioned. Always do your own research and consult a professional before making investment decisions.

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