May 6, 2022
Today we’re joined by Johan Steene (CEO) and Daniel Zhang (CXO) at the publicly listed Swedish serial acquirer Teqnion.
Teqnion is a decentralized niche acquirer and has 21 subsidiaries in Sweden. But they’ve also started to glance at other Nordic countries and the UK.
Teqnion shrugs off brokers and largely self-sources. They look for leading B2B niche firms with stable revenues of 20-150 MSEK, operating in understandable markets that they believe will be profitable and cash flow generative for as far as the eye can see.
Niching down allows Teqnion to dictate terms. They prefer industries with regulations and standards that decrease competition.
Because when a non-niche firm achieves efficiencies, so do often their competitors. But in more oligopolistic situations, less - of the relative - efficiencies must be shared with customers. Though, the absolute efficiencies that accrue to customers can still be significant!
And, should Daniel’s Excel spit out a feasible five-year payback period, they may hit the acquisition trigger. But only if the chemistry is right.
Their pitch to sellers boils down to: “Once Teqnion is onboard, we think you’ll want to stay.”
That pitch feeds one’s curiosity. Or it effectively lets owner-operators self-select out.
But enough of my ramblings. Let’s hear it from them!
Gustaf: Johan, what bet did you lose to call Daniel “Batman” in a recent presentation? Who is this Daniel?
Johan: What do you mean I had to lose a bet? 😊 He is our Batman, among many other things. It is just how it is here… A bunch of superheroes but without the cool outfits.
Daniel is probably one of the world’s best CXOs. Constantly driving us forward, never hesitating, always learning, and at the same time teaching us everything from investment strategies to his humble ways. He makes me so much better. He makes the entire team world-class.
Gustaf: Where did you catch your contagious enthusiasm for entrepreneurship, and how does it feel to interact with entrepreneurs all day?
Johan: I believe I was born as a conscientious official. Luckily enough, I grew up with my friend Jonas Häggqvist who is a full-blood entrepreneur, and as time passed, some rubbed off on me.
Later, when I had to drive the growth of Teqnion, I slowly adapted into becoming more of a business-building, risk-taking, win-win deal lover. Over the years, I have had the opportunity and honour to meet many great business-developing entrepreneurs: the people who make us and our society rich and prosperous.
My job makes me happy and young. I am constantly learning.
Gustaf: Let us back up a bit. In 2006-2007 you found the Indutrade/Addtech model replicable enough but thought: “Hey, why are they so slow?” What happened next?
Johan: Since we had no initial capital, Jonas and I started by persuading the owners of two small trading companies to start Teqnion together with us.
Luckily (and skilfully) for us, two of the five existing shareholders were Jonas’ parents. Jan and Ingegerd Häggqvist were pretty easily convinced of our ideas for the future. The other three were more justly sceptical of our plans and our abilities, and the whole persuasion process took about six months before we finally could establish Teqnion in November 2006.
With these good people and the two companies as a starting platform, we took off. We had really high ambitions but unfortunately little experience and business knowledge.
Our plan was drawn on a piece of paper in resemblance of a true hockey stick. The growth was to be high and fast. Jonas was ready to take over the world in three years; I was more modest and thought we needed five.
The industrial economy was prosperous at this time, and we made good money by working hard and by motivating our colleagues to perform. All generated cash flow was invested into the company group by hiring more co-workers, buying companies, and by opening offices in Finland and Estonia.
The companies we bought during this initial era were the ones we could afford and not the ones we would seek today. Our concept is to identify and acquire quality companies with sound financial history and low business risk. They should be in a niche market with an offering that will be relevant ten and twenty years from now.
The companies we bought in the beginning did not fulfil all these criteria since we could not afford the ones that did. But we said to ourselves that these fundamental rules did not apply to us since we were a little bit better than everyone else. Young and naive with high confidence. What could possibly go wrong?
A whole lot, it turned out.
The financial crisis happened in the fall of 2008 and our balance sheet was thin as a single-layer toilet paper. We had to jerk the lever from “full speed ahead” to “full reverse”.
More or less all the income was gone in a few weeks, and we were left with our industrial group of cash draining costs. We had to find money to survive, and via contacts we met a small investment company called Paron Ventures that capitalized us with funds sufficient to keep us from going under.
They took over the majority of the shares and have been with us since. Downsizing and cost-cutting were more or less all we did during the winter of 2008 and the first half of 2009. Then, at the beginning of the summer, we finally were on firm ground again. Half of what we had been the year before, both in terms of sales and employees.
But we had our black figures again and could start over. Since Jonas is not a sentimental soul and he felt like doing something else after this rise and fall endeavour, he quit. I am a slower thinker and mover, more stubborn and hence, I am still in the company.
Gustaf: What did you learn?
Johan: We learned very many things.
How tough it is to let go of your co-workers that have become your friends. How much you can work when trying to save something compared to when you are trying to win something. It is never too late to slow down, back up and do the right thing. You can always do more. Always keep your balance sheet healthy.
And once again, I learned that there are no shortcuts; to build something sustainable, you must get everyone aboard and start with a robust foundation before reaching for the skies.
The fall of 2008 was a terrible period but a good teaching, admittedly one that I would rather have been without but still a good one. It definitely made me more humble about how hard it is to build a sustainable organisation.
Gustaf: And, how did your work responsibilities change afterward?
Johan: In the summer of 2009, when I found myself alone in the parent company, I started by employing Maria Johansson from one of the subsidiaries. Since then, she has become our greatest asset when it comes to keeping all the books in shape.
I had to learn the company acquisition tasks that had been on Jonas’ table while attending the management of the existing group.
It was fun and scary.
The first discussions with potential sellers were tentative. How could we convince them that Teqnion was a good owner and a worthy heir of their life’s work with our fragile history?
It was a true challenge, but since we knew how to run small industrial companies, there slowly emerged ways to reach into their entrepreneurial hearts and gain their confidence.
The acquisition rate was slow due to my lack of experience and Teqnion’s lack of money. We also had to focus our efforts on making the existing subsidiaries healthy and profitable, which took up a lot of my time. Everything slowly started to develop, and a good and healthy culture grew.
We had left the station for the second time - this time in a more old-fashioned manner where we earned money first and invested later. Not so sexy but more robust.
Gustaf: You were often required to get your hands dirty in the “old Teqnion”. What is your strategy now?
Johan: Being on the ground in the subsidiaries with our colleagues, doing the different tasks needed to be prosperous, is the best business school of course. Having the opportunity to thoroughly know the products, your customers, and suppliers and build personal relationships with them gives you a profound idea of what a good sustainable business looks like.
Nowadays, we make sure to have a board in each company that can support the management with long-term strategies and repeatedly give them the very important mental energy boosts. We coach the CEOs to become successful leaders and strong ambassadors for our ways. Humble, simple, and profitable.
Daniel: Nowadays, we focus on really high-quality businesses that we can understand. Financially we define high-quality as companies that have shown a robust growth coupled with high profitability and high cash flow generation, and where we believe that those heuristics can continue far into the future.
Fundamentally, that means that the company is composed of individuals that are skilled at what they are doing and pop up to their workplace every morning not only because they get paid, but because they want to become better and make the company better.
If we can find those characteristics in a narrow niche where the organization, over time, has built strong defenses towards competition through e.g., long and strong relationships, deep industrial competence and culture, we would love to discuss the opportunity for us to be part of the journey.
We want to keep the entrepreneur, the local management and, of course, the individuals that have done the work – everything that has made the company great. We then let them continue to do the things that have made them successful.
Hopefully, we can add some value by being a good sounding board in strategic decisions, a cheerful friend, and sometimes financial support. We have seen that great companies together with us have developed a little bit quicker, become a little bit more profitable, and hopefully the journey has been more fun as well.
We believe that this strategy will help us grow earnings per share significantly over the long term while keeping our promise to the entrepreneurs – taking the best possible care of their life’s work.
Gustaf: Why did you IPO?
Johan: Around 2017, I felt that we had made plenty of mistakes along the way and hopefully learned a lot from them. We were ready for another pace since we knew better what to look for in companies and people.
We realised that we could increase the acquisition frequency if we just had access to more capital. Up until this point, we had only grown from our own generated cash flow and bank loans. The IPO project felt like a natural step, to boost our quality in both running and presenting our business, but it was also a great way to access cash from the financial market.
With the money from the issued shares, we accelerated to buying more than three companies per year compared to perhaps one company every other year before this stage. My guess is that we will probably do a list change and get onto the main market in a couple of years when we are ready to gear up one more step.
Gustaf: Why do people sell to you?
Johan: I think some people sell to us because they truly believe that we understand what they have been through to become successful entrepreneurs. We know about their hardships, and they believe we know it.
We can be trustworthy as an eternal owner and trustee of their life's work, and we will care for and include their colleagues in our ever-growing family. We have a very good track record of taking care of our companies and co-workers.
Daniel: We have a track record of taking good care of the companies in our group and keeping our promise to the entrepreneurs. For the ones that join our group, I would say that that is the single most important factor.
Of course, they get paid fairly for their life’s work but that is not the most important thing.
They want to know that the company can thrive even after their retirement and that the individuals they have been working with and often spent more time with than their family will be well looked after.
Words are cheap but we are happy to let new potential sellers call any of the previous sellers for references and that is a strength.
Gustaf: How are acquisitions financed, and what are your thoughts on non-controlling interests in conglomerate subsidiaries?
Johan: As in everything, we try to be clear and simple when it comes to ownership.
We pay with cash for 100% of the shares. In my experience, there is no strong enough incentive for the seller to keep a minority post. To detach the individual from ownership is often a personal energy boost and a mental relief that gives us more energetic and happy entrepreneurs that stay on because it is fun, and not because they must.
It is not uncommon that the sellers instead buy Teqnion shares after a while because they want to be a part of the family and the growing saga. I truly believe that most people are true to their grit regardless and to their willingness to be the best they can be.
Company builders are not people who can stand to be bad at their work, regardless of if they are employers or employees.
Daniel: Usually, we finance the acquisitions with 50% cash at hand and 50% with bank loans. We always pay with cash and the reason is simplicity. We want to keep things simple and transparent and reduce potential future friction.
By paying in cash instead of shares, promissory notes, dogecoins etc., for 100% of the shares, the seller knows exactly what they get. We do not want to end up in a situation where the seller thinks that they sold their life’s work for a certain amount of money, just to realize later on that the actual value was much lower due to e.g., share fluctuations.
For the same reason, we want to acquire the whole company. 100% is simple and straightforward. Being a minority owner where the majority owner is a listed company is a strange situation where one, in theory, cannot make the big decisions anyway. If the seller wants to use some of their money to purchase shares in Teqnion, we would of course be very happy but that is never part of the negotiation – it is completely voluntary.
The ones that sell their companies to us are not primarily driven by money. There are companies out there that pay more than what we do. Therefore, financial bonus schemes are less interesting. These great individuals are not more or less motivated by keeping some shares or having a hefty bonus based on the company’s performance.
Gustaf: How do you operate the group?
Johan: One of the key things is that we do not control how our companies do business; we help and support them. Teqnion has board representation in all subsidiaries where we try to push positive energy onto the CEO.
If something out of the ordinary happens - which happens - someone from the Teqnion management can be landed in the company and help them sort things out. We have four business area managers in the parent company that have the responsibility to fill the board seats and to coach their specific CEOs to success.
We encourage CEOs to become friends amongst themselves and exchange ideas and beers. We try to meet up a couple of times per year to build strong relationships, learn new things and inspire each other to greatness.
Gustaf: How did you end up doing most of the deal sourcing yourself? How is this structured?
Johan: When we started, I believe that no one took us seriously and no broker was really interested in sending good cases our way. To get any prospect company into our pipeline we had to cold call them.
It was fun and energetic and pretty soon we learned the benefits from doing it this way. After a few years and acquisitions later, the brokers finally saw us and started pitching their objects and we have actually bought a few companies through such channels.
But I prefer the direct contact with the entrepreneur for many reasons, where one is that you get the true reason of why the company might be for sale.
During the last couple of years, the valuations have gone north for brokered deals since it has become popular to buy small industrial companies. We have naturally and happily gone back on our favorite path, the cold-calling and our own scouting rounds.
Daniel: One reason to do the sourcing ourselves has of course to do with price levels, but that is not the primary driver. By doing it ourselves, we have control of the whole process, and we can look for whichever company we want instead of waiting for the plat du jour.
We can discuss directly with the entrepreneur about the partnership, and it is much easier to get closer to each other when it is only us. I believe one can look at the process a little bit like a dating ritual. Would one really like a situation where one can only choose a partner based on what a matchmaker sends you and then go on a date with the matchmaker sitting on the side of the table?
Gustaf: How many acquisitions do you think you will make annually – applying the standard boilerplate disclaimers of things outside your control, etc. – five years out? Will the focus be on bigger acquisitions, more acquisitions, or a mix?
Johan: I think we will be sticking to our plan to buy sound businesses from sound people in the size we prefer.
Daniel: Not bigger. The size is what we are good at and everything equal, if we go up in size, the prices tend to go up as well. However, we are quite flexible, so I would not be surprised if we found something bigger (or smaller) one day, but that would not be part of an active strategy.
Regarding the quantity, it is difficult to say. More than today should be the expectation as we continuously grow and hopefully get better at what we do. However, we will only buy something if we think it is truly good and if the price is right.
Personally, I would not have a problem with going longer periods without a single acquisition if we cannot enter a good partnership. That is why our financial target is to double EPS every five years instead of 15% per year, which mathematically is the same thing (almost). Our acquisitions can come in lumpy and one should be careful with extrapolating the pace.
Gustaf: Will you incentivize subsidiaries to source add-ons?
Johan: Not really but we do not forbid it…
Gustaf: Daniel, what are your four defining characteristics of a serial acquirer?
Daniel: Serial acquirers have the following four attributes:
With that said, financially, I see Teqnion as a platform with the purpose to significantly grow shareholder value over the long term. As of now, focusing on the activities of a serial acquirer is the best use of funds and time.
But like truly great companies, such as Berkshire Hathaway, the shape of the company might change in the distant future, but we will always allocate capital to where it creates the most value. That is however not a forecast, only a philosophical thought. We are not afraid of change.
Gustaf: What sets Teqnion apart as a serial acquirer?
Johan: I truly believe that we are special cause we love our team. We love to build great things, and we love to be at our best. The Teqnion management team only exists to do tough tasks, support the subsidiaries and make the group more robust and more profitable. Since we cost money, we need to put more value in through work. We try very hard to perform well for the group, not for ourselves.
I do not quite understand how it became like this, but I love it.
We know that true change comes from tens of thousands of small improvements, not by a few big strokes. Thousands of small nudges that turn into sustainable improvements and mastery. The culture is true to decentralization. We are much faster since we are always closer to where a decision should be made. We love the deals, and we cherish the people doing them.
Daniel: Culture. It is difficult to describe in words, but I believe that people that meet us feel it directly. Being at Teqnion is not a job; it is a lifestyle.
On the surface, I think there might be some other things as well. We are religiously disciplined when it comes to capital allocation. We have our valuation model and that is how we value companies.
Compared to many other companies, we are acquiring fewer companies per year and the reason is simple. We focus on cultivating the greatest trees, we are not interested in growing the largest forest. If we wanted to, we could easily double or triple our current pace, but not without risking diluting our culture, quality of acquisitions, or valuation model.
Gustaf: Johan, what kind of book changed your life in 2011? I am giving you room to brag here; of which race are you most proud? And while you are clenching onto your bragging rights, what is the secret to being the best Gin & Tonic maker that Daniel knows?
Johan: Once I read a good book about ultra-running and since I am easy to influence, I started running. And since I am a nerd, I started running a lot.
Since then, I have been running in really long races around the world and competed in world championship events where I actually got a bronze medal in Belfast 2017 for running 266.515km in 24 hours [yes, that is over 6 marathons in one day].
I hope I can run until I die [sounds plausible], or at least jog. It is a fantastic simple hobby that can totally wreck you and throw you to the very edge of discomfort.
When it comes to drinking, please drink something tasty. A gin tonic is preferably made by pink gin from Stockholms Bränneri and Fever Tree Mediterranean tonic, pored over a clear ice sphere that precisely fills the entire diameter of a highball glass, and on top you decorate with a thin lemon peel. If you, for some reason, need wine instead, you stick to Churchill’s edition of Pol Roger, not because it is the best but because it is the one to win wars with.
Daniel: Johan is the absolute best manager I have met. Often, I forget that he is my boss and instead think of him as a great friend, my older brother, or my business partner. That means that I get to do things my way with a lot of inspiration from what Teqnion has done previously and of course having Johan as a sounding board.
With that said, I think I only have received one direct order from Johan, ever, and that was how to mix the Gin & Tonic. I did as I was told, but I was laughing and surprised about the situation, so I had actually forgotten the secret recipe… I guess you will have to come to our next AW to see for yourself!
Gustaf: I am sold! Daniel, what is your forecast for Teqnion’s EBITA in 50 years?
Daniel: What is EBITA? Haha! Jokes aside, I seldom think about EBITA. If you asked me about our current EBITA I would not be able to answer.
We have said that we want to at least double earnings per share every five years. This should be a little easier now than in a few decades, but it should be doable.
When I started at Teqnion in the beginning of 2021 we said that we aimed at 1000x the value of the firm. Given that the value follows the profit and that we had a net profit of 44 Msek in 2020, I guess that number would be closer to 44 Bsek in 2070. Sounds hefty but that is still only half of what American Express makes today…
Gustaf: Daniel, where – beyond Munger’s desk – can we find your book An Investment Thinking Toolbox? What is it about?
Daniel: Yes, it can be found on amazon.co.uk and also in most Swedish bookstores. If you are interested in a signed copy or want to support a poor author, please feel free to mail email@example.com. All proceeds will be used to buy Teqnion shares.
The book is basically a confession of some of the mistakes that I have made regarding investments. I have made many more than those of course, but nobody wants to read 1000 pages.
The book is structured after different mental models – ways of thinking that I have found helpful in my investment journey, such as circle of competence, second-level thinking, and survivorship bias. I have tried to add concrete advice regarding how to mitigate some of the mistakes that hopefully can help someone not make the same mistake as me.
Quick questions with Daniel:
What books will become mandatory reading for your children?
Any learnings or habits that have influenced you recently?
What do you do when out of the office?
What is your favourite failure?
What bad advice do you hear in your industry?
Who would you choose if you had to let someone else manage your money?
Daniel: Do you have a great company and would like to be part of something exceptional? Maybe you know someone that does? Or maybe you would personally like to join us and grow Teqnion with 1000X? Feel free to reach out here.
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.