Serial Acquirers

Bergman & Beving to Addtech, a best-in-class serial acquirer

Gustaf Hakansson
|
May 25, 2022
High return hurdles can unleash creativity, simplicity promotes a sense of agency, and the importance of pricing.

Background

Bergman & Beving (B&B), founded in 1906, has a rich history of decentralization and simplicity, starting their acquisition journey already in the 1960s.

But for more practical purposes, our story begins with the entry of an Anders Börjesson.

Anders Börjesson is Addtech's largest shareholder

He started his B&B journey as an external auditing consultant and gained fame by spotting a tax declaration error that saved the firm millions.

And this was around 1976, the year of B&B’s IPO, when the revenues and EBT of B&B were SEK 167m and 8m, respectively.

“I almost became considered a genius” - Anders Börjesson

If he was not fully considered a genius back then, Börjesson would undoubtedly be considered one in time.

Six years earlier, at his student dorm, he had read the book “The new millionaires, ten new super entrepreneurs in the Swedish Middle Way (‘Folkhemmet’).”

Five of the profiled entrepreneurs, including Ingvar Kamprad (IKEA) and Erling Persson (H&M), had almost been forced to become asset-light, as net assets of privately held firms were subject to a wealth tax. And Börjesson took notice.

He entered B&B’s group management in 1979, launched the EBITA/WC metric together with his mentor Torsten Fardell in 1981, became CEO in 1990, and stayed on until 2001. In his last year, he split the group into three by separately listing Addtech and Lagercrantz.

B&B’s EPS grew by 18% annually from 1976 to 2001, and the annual total shareholder return (TSR) was 25%. Lagercrantz has boasted a 20% TSR CAGR from 2001 to today, while Addtech has performed even better.

In the picture below, you see the evolution of B&B into its listed entities of today. We will study B&B’s poster child Addtech, but you will find many similarities with the other firms.

The B&B family three (from Momentum Group)

Addtech introduction

Addtech has increased EBITA by 18% annually since its listing in 2001 (without diluting shareholders).

The firm markets technical products from leading suppliers and complements with their own production in well-defined niches of larger markets, always with a high technology component.

Addtech (a “value-adding distributor”) is independent and can combine solutions from several suppliers and educate customers on new technology. Addtech is somewhat like a technical consultancy, but that gets paid through subsequent orders.

Leading positions (#1 or #2) in their niches let them lead market developments, increasing the probability of continuing as leaders. In short, winners win in niches.

Addtech’s 140+ autonomous subsidiaries are divided into business areas to facilitate knowledge sharing. The business unit managers are tasked with coaching and supporting the subsidiaries.

Picture from Addtech

Via active board representation Addtech works with profitability and business development by moving, merging, and splitting businesses. They augment smaller subsidiaries with resources, benchmarking, internal rankings, networks, and know-how.

The bigger group lends credibility for larger deals and when customers streamline their supplier count.

Free cash flow is harvested from subsidiaries and allocated to where it can do the most good. Effectively, Addtech has created an internal capital market that is more efficient than private markets, thanks to better transparency, cooperation, and know-how.

Addtech’s culture

“Even if an internal competition to be best prevails, there really is good comradery and community between the subsidiaries.” - Mikael Boberg, a subsidiary CEO in 2006

Addtech wants subsidiaries to focus on what they do best, developing their businesses by working closely with customers and suppliers. Therefore, Addtech supports subsidiaries with financing, FX, accounting, logistics, ERP systems, framework agreements, and law.

Addtech praises simplicity and - beyond offering the administrative functions above - wants to minimize bureaucracy and planning that will need changes anyway.

They encourage entrepreneurs to stay in the acquired businesses, and the autonomy has resulted in many of them thriving.

Addtech is maniacal about working on the “right thing” and measures effectiveness with the EBITA/Working Capital metric. If a business unit should work in theory but does not in reality, it is considered worthless - no matter how efficient it is at that.

They instill in their employees the 80/20 principle. And through experience, they know that pricing and procurement often deserve more attention. Activities that can bring significant improvements but feel “scary”.

Addtech is self-aware that they are often their own biggest enemy, as they already have acquired strong niche players. Instead of value-based pricing (charging what the customer is willing to pay) it often feels safer to apply a standard mark-up (you can find the implications of offering discounts in the appendix).

They educate employees that customer losses seldom stem from pricing. Their research says that customer loss is most often due to a lacking engagement on the sellers’ side. And, fittingly, Addtech teaches employees that indifference is Addtech’s biggest threat.

Addtech cherishes the entrepreneurial spirit, but their employees are told that they must work for the shareholder to keep their entrepreneurial freedom.

As it needs to be in a decentralized organization, responsibility is well-defined regarding customers, products, functions, profitability, and profit. For example, salespeople should be empowered to make judgment calls without liaising with their boss.

Addtech’s acquisitions

“more than 160 businesses have been acquired since the end of the 1960s. More than 85% of the acquisitions have been successful." - B&B’s 1999/2000 annual report

Addtech prefers targets with a high knowledge & technology content in their existing niches, that possess strong supplier relationships, and that are profitable with growth potential. Börjesson developed the following checklist for evaluating businesses, where it is best to have marks on the left, and it is still in use today:

Standard products were historically a bigger share of sales (today c. 35%). The increasing share of self-produced, modified, and customer-adapted niche products makes personal sales efforts in cooperation with customers a positive.

Addtech makes sure that key individuals (often owners, but sometimes the marketing or technical managers) are motivated and enjoy running their businesses under the Addtech umbrella after selling.

Business owners frequently sell to Addtech as they continuously encounter Addtech’s commonsensical approach within their niches. When choosing Addtech, sellers can be comfortable with having a long-term and secure owner that will look after employees, realize growth, and add networks.

Addtech seldom underwrites synergies. But new acquisitions are expected to realize efficiencies and engage in add-ons that complement themselves.

Selling a business to Addtech

Please reach out to Daniel Prelevic at Addtech if you own a business and are interested in getting to know Addtech better.

One who has sold a firm to Addtech is Anders Claesson. When one of Claesson’s business partners (the majority owner) wanted to sell Sittab in 2013, Claesson was strongly opposed to the idea of selling in general. Conversations started with Addtech, and Claesson interviewed an Addtech-affiliated supplier hoping that they would say that Addtech was “crap”.

But the supplier (who had been a selling entrepreneur) praised Addtech instead. Claesson warmed up to the idea of selling to Addtech, as they were down-to-earth and interested in really getting to know Sittab and its people. Addtech was not in a hurry, and they asked good questions, had a pedagogical acquisition process, and offered sister companies with similar customers.

Addtech was also flexible in structuring the deal and made great efforts to inform employees about the transaction.

Claesson himself also highlights the career opportunities within Addtech, as he is now the Business Unit Manager for Vehicle Solutions, focusing on acquisitions and business development while staying on Sittab’s board.


Addtech’s goals

Note that Addtech does not force arbitrary EBITA margin averages onto all of its units. They understand that there are many ways for subsidiaries to combine margins and asset turns to reach the 45% hurdle. Addtech sets the bar; it is up to the subsidiaries to navigate there in a decentralized firm.

From the book on Serial Acquirers

However, they do tell subsidiaries that a high operating margin often gives better control and resilience in downturns!

Addtech’s business development

Every subsidiary must annually - in concrete terms - describe what goals they have and how they will reach them. Börjesson and his mentor Fardell settled for these four questions to analyze and develop businesses:

  • What is it that we do? Who, what, and how?
  • What is good or bad? EBITA/Working capital
  • Why is it good or bad?
  • What are we doing with the good or bad? Improve, sell or wind up units not meeting the hurdle. It is crucial to make the hard decisions and carry them out right away, even when they bring change.

Börjesson noticed that very few companies knew what they were doing and that the question “why?” weirdly enough is often forgotten. Business units that were thought to “cover their costs” leeched on profitable ones. And the discrepancies between units in terms of EBITA/WC were more significant than expected.

Launching the EBITA/WC metric and educating employees on its levers made for an explosive improvement at B&B:

Conclusion

To sum it up, B&B and Addtech have shown that a high hurdle can unleash employee creativity and that a sense of agency - the indifference antidote - is sparked when the EBITA/WC levers are explained in simple terms. Everyone can help make minor tweaks that together make all the difference.

Appendix: a note on discounts - hold your ground!

A discount requires the following increase in volume to keep the same dollar contribution: discount  / (contribution margin - discount)

Volume increase needed to offset a discount

For example, a 10% discount for a 30% contribution margin product results in a 50% needed increase in volume sold to get the same contribution (10 / (30-10)).

To illustrate, let us assume sales of $100, which yields $30 in contribution before the discount.

After the 10% discount, the contribution becomes $20 on sales of $90 (costs are unchanged), and the contribution margin becomes 22.2% (20/90).

To regain the lost $10 in contribution, we have to sell products for $45 (10/22.2%), an additional 50% from $90. A similar exercise should be done for price increases.

The article is based on the book "Tisenhult", public reports, and conversations with employees and peers.

Disclaimer: This is not investment advice. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice. Any reference to or omission of any reference to any company should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. The author may hold positions in securities discussed. Any forward looking-statement is subject to risks and uncertainties. Read further disclosure in the Terms of Service.

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