November 4, 2022
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In 2004, Johnny Alvarsson became CEO of Indutrade. EBITA would go on to compound at c. 14% annually until his exit in early 2017.
And instead of diluting shareholders to achieve that growth, Indutrade had a healthy dividend. That resulted in a total shareholder return CAGR of c. 22% over Alvarsson’s tenure.
Indutrade wasn’t only an industrial technology trading company with a few product companies. They were a succession-solution specialist.
Under Alvarsson, the group grew from some 60 companies to over 200. And he aggressively increased the proportion of companies with proprietary products.
The acquisition pace was possible by not integrating firms. Therefore, synergies are a quick topic for Alvarsson as they didn’t have any, “I was pretty much the only one.”
Alvarsson is passionate about decentralization and is sometimes himself surprised at how well it works to push down both authority and responsibility.
Gustaf: Hi Johnny, why did you quit Ericsson after 13 years in 1987?
Johnny Alvarsson: Gustaf, I learned a lot at Ericsson. I was responsible for finance, planning, a factory, mechanical development, software, and hardware.
But there were several support functions above us, which irritated me. In theory, these should help, but many just look after their own big-company careers.
And my personality also played a role. During military service, my lieutenant said:
“Alvarsson leads the squad differently. But he achieves results!”
That made an impression on me.
See, I didn’t focus on the command structure but on motivation and enthusiasm.
And within Ericsson’s framework, there had been an opportunity for education at INSEAD. We were taught to think about strategy, and I got a taste for that.
I’ve always been rebellious and thought, “I want to try that myself.” So ironically, Ericsson motivated me to leave them a few years later!
Gustaf: How did you end up at Zeteco?
Johnny: I was put into contact with a family business that had SEK 70m in revenues and made tipper trucks, an industry I had never heard of. While Scania and Volvo make the chassis, someone else makes the “tips” in the back.
The firm was called Zetterbergs, and I didn’t know the family. But the family was bold to bet on me, and I thought, “I’m not that old. Why not take the chance and see if this works?”
I joined on January 1st 1988, and we became publicly listed six months later. And after a year, I had acquired a company our own size. It was a container lift, ‘spreaders’, business.
Zetterbergs changed its name to Zeteco, and we started acquiring other firms. So, we went from SEK 70m in revenues to SEK 1.7bn when I left in 2000.
Gustaf: A big acquisition to make early on. What happened next?
Johnny: Looking back, I can think so too!
But there was a pattern. Zetterbergs, only doing business domestically, was sensitive to economic conditions in Sweden. In contrast, the spreaders firm was an international business in a growing industry. And it performed nicely in the 1992 recession when the tipper trucks industry went to 0.
Zeteco was later taken private in 2000, and I pulled my golden parachute. Otherwise, I would have gotten stuck in a big organization again.
It was now the autumn of 2000, and the dot-com bubble was in full swing. I had proposals from PE firms. But I wasn’t interested in having a 5% ownership and a PE having the rest. That would have been like having a boss. And I had my last one when I left Ericsson!
Elektronikgruppen popped up as a CEO opportunity. It was a publicly listed distributor of electronic components, and Ericsson was a big customer. So at least I knew something about the industry when I joined this time.
Of course, the overheated IT spending soon collapsed. And it was the second time I experienced a tough downsizing.
Elektronikgruppen eventually got a new significant shareholder. And while we didn’t fight, I wasn’t too fond of his vision for the firm.
In 2004, a headhunter called about Indutrade. I had never heard of it and barely knew what a vent was. While I had worked with serial acquiring, it hadn’t been to the same extent.
Indutrade was wholly owned by Industrivärden at the time, and the idea was to either divest it a year later or put it on the stock exchange.
With my background, we went down the IPO track. It was a fight between Hemtex and us about who would become the first Swedish IPO in 18 months. We went public on a Tuesday. Hemtex was listed on the Wednesday!
A newspaper columnist wrote that Hemtex was an exciting investment but that Indutrade was as sexy as a quarry. Then history had its way.
Gustaf: When Indutrade went public, the then B&B Tools CEO said McKinsey had told them that technology trading companies had no future. Why were they wrong?
Johnny: The technology trading business has been declared dead for 50 years.
But big players have no interest in a small country like Sweden. Better to have an engaged local market distributor that sells their stuff.
I have said that the interesting markets from a technology trading perspective are the Nordic countries and maybe Holland, Switzerland, and Austria. Not England.
But I was wrong. England is a big country, but large companies focus only on material deals. Smaller ones are not interesting for them.
For example, ABB handed over the distribution of certain products to one of our firms. The extensive administration with all overhead became too heavy for them.
Still, Indutrade was 96% technology trading businesses when I joined. And as my background was in products, that number had shrunk to c. 50% when I left.
Gustaf: What’s your decentralization philosophy?
Johnny: For example, Addtech is a similar business to Indutrade. But they decided that their firms should be on the same computer system. And two years ago, they got hit by a hacker attack costing them some SEK 150m. Whereas I said, “Every firm has its own systems.”
I hired a person from Addtech, and he said that their management meetings spent considerable time discussing car policies. We said that everyone should just keep their own. And we always performed better than them.
Also, many think that one should centralize finance functions. But for companies with all their invoicing handled in, for example, Spain. Who cares down there if someone doesn’t pay bills on time?
In comparison, every time a salesperson walks past a small firm CFO, he will be asked why a customer hasn’t paid. That outweighs the savings you make from centralization.
And you should keep support staff to a minimum in the holding company. They start doing stupid things if they have too little to do.
Gustaf: How did your thinking on management evolve?
Johnny: The economic crisis of 1992 was a turning point. Before that, I still had some notion that it was beneficial to integrate operations.
When the crisis hit, the tipper trucks industry went to 0. And our tipper trucks business had a state-of-the-art factory north of Uppsala.
In contrast, the international container equipment business continued to perform, even though they operated out of a pretty lousy site in Bromma.
So, I discussed with the CFO, “Should we move the performing business to the new factory instead, now that it's not fully utilized?”
But that wasn’t reasonable. We shouldn’t punish a well-performing company by moving its production to a sister company. Additionally, we may have factory blueprints for moving production, but they’re never correct.
At that point, I internalized that you should not tamper with the drive of someone who is succeeding just because someone else is doing poorly.
Also, we had merged our two tipper trucks businesses in 1990. We divided up manager roles evenly between the two previous teams. But it never worked to integrate them; a leopard never changes its spots.
And as a funny aside, the container equipment firm had big international customers such as Samsung, who flew in to inspect them.
But as I said, the container guys had a crappy production site. So, we temporarily installed just a few of their things in the fancy Uppsala factory and instead flew the customers there in a helicopter!
Gustaf: Is there any particular firm you’ve studied?
Johnny: I looked at a firm called ITW, Illinois Tool Works, in 2005. They remind me of our journey. It then consisted of a couple of hundred companies. I’m not sure what has happened since, but they had a similar philosophy.
We had a lecturer from ITW at our CEO conference in 2006. A Belgian who had sold his company to ITW, and he was now buying European companies for them.
He had asked ITW for a handbook, and they responded, ”No, we don’t have that. Don’t conform to a manual that says, ‘This is how we do things.’ You must adapt to reality.”
Gustaf: What were the standard post-close encouragements you made to firms?
Johnny: To look at pricing and weed out unprofitable customers.
It was common to hear, “No, it’s not possible with a margin above 7% in our industry. It cannot be done.” But then we could say, “Look over there. It’s possible.”
They or their previous owners thought it was ok to earn 7%. But I had the rule that a trading company should aim for 10%, a contract manufacturer for 15%, and an own products business for 20%. Those were the goals.
It boils down to what you decide. If you want something and challenge yourself, you can make significant progress. Maybe not all the way, but almost.
In certain companies, you need to exit some customers. And I have an amusing example of a pricing exercise.
A CEO was checking the profitability of different products sorted by article number. He saw one with a low margin and went down to the big customer in question, Volvo Trucks.
He requested a 50% price increase, and the buyer responded, “This is crazy.” But the CEO stood his ground, “Else, we can’t supply you.”
And our CEO prevailed. It was only a marginal product in Volvo’s world, and finding a new supplier would have been troublesome for them.
Then a few months later, the CEO is going through the article numbers again. He had looked at the wrong row! So suddenly, this product had an extremely high margin.
Gustaf: How did you evaluate sellers?
Johnny: The business must be the most important thing in their life.
For example, there was a great trading company working with medical products in Norway. But the CEO gave us a bad gut feeling regarding personality fit. The owner asked why we didn’t want to acquire them, but we knew it wouldn’t work.
Ultimately, we didn’t pursue 20% of the acquisitions accepted by the board. Sometimes you feel “that you must grow, just must grow.” And then you risk buying the wrong ones and too many.
On a similar theme, you might have heard the saying, “Never acquire in a country that has a beach facing the Mediterranean.” The cultural differences make it more difficult. And I usually say, “Never buy in France.” Many have tried and failed.
I bought a distributor in France in the 90s because my colleague was a Francophile. That didn’t end well.
For example, a couple of years ago, there was a picture in Swedish newspapers of an HR manager in France climbing a fence with his shirt torn when the unions were protesting.
Gustaf: Why was Germany difficult to enter?
Johnny: Generally, Germans want companies to stay in the family. And I’m speculating, but maybe they also want firms to be owned by other Germans. But if you get a foothold, you can start getting somewhere with local ambassadors.
Gustaf: You’ve mentioned that 95% of your acquisitions turned out well. How did you value them?
Johnny: Many have been under the illusion that we actively engaged in multiple arbitrage. But, of course, we ran the numbers on each business.
We put a capital charge of 6% for all capital, independent of where the financing came from. We then deducted depreciation, and we also deducted half of any goodwill amortization. After that, there was supposed to be money left for our shareholders. Always a return for our shareholders!
We paid a maximum of 8x operating profit after tax. Few people even have that in their dictionary; everyone else speaks about it before tax.
Gustaf: Maybe multiple arbitrage only works long-term when you don’t consider it.
Johnny: Yes, if the stock market was up or down didn’t matter. Technically, it became more of a multiple arbitrage when the stock market was booming, but that wasn’t a factor in our decision-making.
In some ways, we didn’t benefit from being publicly listed. It was mostly a problem. We had quite high dividends, didn’t issue shares, and used internally generated cash flow and debt for acquisitions.
But we did get some publicity and the trust that comes from that.
Gustaf: How did you work with benchmarking?
Johnny: I was the second CEO at Indutrade. My predecessor had said, “You should earn a 10% profit margin”. That had been the bar.
When I joined in 2005, I quickly introduced benchmarking based on four parameters: growth, profit margin, return on capital employed, and profit in absolute terms. It can be discussed whether they are economically relevant, but they were accepted and worked sufficiently well.
Previously, when subsidiaries had asked what others’ margins were, my predecessor had replied, “You shouldn’t worry about that. Look after your own business.” But I made it open books for everyone.
Every year, CEOs competed to see who had performed the best. The winner received a “1” made of glass. And each quarter, we sent out an update on how they ranked.
For instance, we had a German firm where the CEO was 65 years old. He had always had a 10% profit margin. And then suddenly, his margin began to rise. I got suspicious; you know you can manipulate inventory valuations etc. So I sent down a guy, but he didn’t find anything.
And in 2008 the German was doing 18%. I called him and asked what had happened, and he answered, “Well, it’s thanks to you. You challenged me!”
He remained with the firm until he was 71 years old. So, in his last six years, he made between 15% and 18% with the same products and customers. That was the most extreme example.
Gustaf: How were company sellers incentivized to stay?
Johnny: They had contingent considerations and then nothing in particular thereafter. We preferred that sellers stay with us, which many did. They thought it was great fun to become part of our community.
Otherwise, they quit. And in those cases, we had identified an internal successor in the firm.
As CEO, you could sit on the board of another firm. And I used to say, ”You’re king in your own country. If you want to become emperor and build a group, you can do that too.”
Depending on ability and interest, many business unit managers basically ran smaller versions of Indutrade.
Gustaf: How did you monitor companies?
Johnny: We had three board meetings per year with the business unit manager, some finance person, and maybe a colleague from another firm. The board went through customers and so on.
It’s worth noting, however, that it’s impossible to micromanage a company experiencing difficulties. You first need to understand if the problem is industry-wide or company-specific. And then allow a few years for the CEO to try to sort it out.
But you cannot control a CEO through back-seat driving. In case of trouble, you need to change the leadership.
Gustaf: How did you work with M&A auctions?
Johnny: When brokers are engaged, you usually present yourself to the sellers. In several cases, our way of acting made sellers choose us even when we didn’t submit the highest bids.
We usually said, “If they want the highest price, then it is for someone else to buy. Not us.”
We had a very unusual businessperson. He would charm, discuss finances, and all that. Then I came and didn’t even mention balance sheets. I talked about technology, and the sellers thought, “Oh, here comes the group CEO talking about a data bus and voltages!” They were hooked.
And it’s not really about what you say but what you do. For example, we didn’t have a fancy office in Stockholm’s finance district. We sat in Akalla. Entrepreneurs from across the country appreciated that.
Gustaf: What’s your thinking on handling suppliers as a distributor?
Johnny: If a distributor performs well, some supplier employee will come up with the idea of taking that market themselves – which doesn’t always work in practice. But you need to be smooth with suppliers. It’s a game.
And my strength is not to bow in all directions! But I had others who were good at managing that.
Especially with large suppliers, you may sign a deal to become a distributor for the long term. But suddenly, they get a new manager who wants to change the terms.
That’s why we preferred family-owned suppliers, which can be quite large, such as the German ones. The Japanese also tended to be long-term.
If you don’t have a supplier, you don’t have a customer. And if you don’t have a customer, you don’t have a supplier. My strength was more products businesses. But luckily, others were talented in supplier management.
And on that note, if you look at my previous life at Ericsson, I found driven individuals that the organization had suppressed. And the same thing happened at Indutrade. My predecessor had suppressed the guy I ended up working with the most for some reason, but he blossomed. I believe that contributed a lot to our success.
Gustaf: Let’s pretend that the year is 2005. What would you do today?
Johnny: I sit on the board of Sdiptech. And they are making a similar journey as Indutrade but solely focusing on manufacturing businesses with proprietary products.
Product companies are more stable, and they suit my background. You don’t suddenly face a supplier who says they will do it themselves. Sure, you must develop your products. But you have a safer business as long you are not competing on the latest software technology.
Sdiptech is something I could have seen myself founding. And I did guide them to consider England because of valuation multiples and the availability of decent-sized companies there.
Gustaf: What’s your favorite book?
Johnny: The Gospel of the Eels. It’s an amazing one. I was eel fishing with my father growing up, so it stuck with me.