Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Maybe you can talk about your background and how you got to Addtech and what you did while you were there?

I have a medical background and I have been working my whole professional career within the biotech, the pharmaceutical industry and also the diagnostic industry. I have worked in all positions from product specialist to sales manager, marketing manager and then CEO for bigger biotech and diagnostic companies like Organon, in the Nordic countries. I then got some missions in the US, in Holland. When Organon was divested by AkzoNobel, half of the company went to Merck and BioMérieux acquired the diagnostic part of Organon and I stayed in diagnostics.

So I became the general manager of BioMérieux in the Nordics and then I moved to France where I was a division manager for a full lab automation, so microbiology actually, and in 2011 I was head hunted to Addtech and I became the CEO of Addtech Life Science. At that time, when I started, Addtech Life Science had 12 daughter companies, so it was very decentralized. Actually, there were 12 CEOs that were reporting to me, and I worked there for 10 years. We took the Life Science part of Addtech and we made a new company – a listed company called AddLife – in 2016.

By the end of 2017, I decided to move back to Gothenburg where I'm from, from Stockholm, and do something else. I have been sitting on the board of 35 companies, working as a consultant for different groups. I had also a mission as CEO for a pharmaceutical company called ABIGO which just finished at the end of 2020 and, since then, I have been helping companies like Cellink with acquisitions because in Addtech and AddLife I did probably more than 25 acquisitions. I have a very good global view of the business in the biotech pharmaceutical, but mainly I think what's interesting is also how the strategic business model works for a company like Addtech. I don't know if you are familiar with Danaher?

Yes.

When we wanted to explain how Addtech works, it is actually a little bit like Danaher. There are certain similarities but also certain differences.

That makes sense. I think we can go into those.

Yes, so this is my background.

Those 12 companies that you ran with Addtech, were they global or are they just focused on the Nordics. What was the market?

Yes, so some of them were global, especially in the medtech industry. We acquired a company called Mediplus and they had business in many countries. Mainly the business was in the Nordics countries. We had probably 70% of the turnover coming from the Nordics and Baltics and also Iceland. Iceland is a very small country, so mainly Nordics and Baltics.

My understanding is with Addtech is that there are kind of three buckets. There's the stuff they distribute and then there's stuff where they do value add, and then there's some of their own products. How did that work with your group? Did you have that kind of mix or what was the product mix like?

Yes, so you can say that 30%, maybe a little bit more, was on production. I will say more than half of the products were OEM and distribution. So the rate between OEM and distribution was probably 50%.

When you say OEM, does that mean Addtech makes it or someone else makes it and you're distributing it?

Someone else makes it for us, exclusively with our brand name and we sell it.

Exclusively. Did your group make anything itself and design stuff itself?

As a matter of fact, Addtech is a company that has existed since 1906, and it was called Bergman & Beving. It was two gentlemen that had the idea, very early on, to grow by acquisitions. They had a lot of subsidiaries and they also got the idea to keep it decentralized. They saw, by keeping the companies decentralized, it's much better for the integration process and also it's much faster to acquire companies. They were very early with this thinking. In 1976 the company went to the stock exchange and, by the year 2000, the company was that big that they split the company into three.

Addtech became one of the companies. The other company was called B&B Tools and the third company was called Lagercrantz. If you also look also what we did in 2016, when we took the Life Science part of Addtech and became AddLife, we did the same. If you count the total amount of companies since the beginning it's more than 500 companies in the group. It has been a very successful journey and a very successful business model as well.

Yes, I think all those companies have done very well. What was the main motivation for splitting AddLife into its own piece and how many companies was it at that point?

First of all, I think my idea was to create more value for the group which had four business legs. You had industrial solutions, energy, components and the first one was Life Science. From an investor perspective, it didn't make sense, because if you want to put money on a dedicated biotech business, then you didn't go to Addtech because, for us, maybe Life Science was growing very well but, for example, components may not have been following the same life cycle as Life Science, because of the conjecture.

For that reason I think it was more investing in a fund rather than a dedicated business area or dedicated company. That's why we took the idea that if we separated the Life Science then one plus one will become three. It actually did, because if you took the market value of Addtech and AddLlife together, it actually became more than three, so that was quite amazing. That happened only one and a half year after the split. I don't recall exactly how much it was but, let's say, in Life Science we probably we €350 million in markup and, in Addtech, it was probably 1.5 billion. That became, today, four billion for Addtech and 2.2 billion for AddLlife.

I think this is something that is quite interesting. Actually, AkzoNobel did the same when I was working for them, because we had a chemical part; you had the fibers, the coatings and the pharma, and it didn't make sense.

Do you think Addtech will do that again? Do you think there's rationale?

Definitely, yes, because you have many more similarities between the business areas that you have today. If you think about components, energy and industrial solutions, it could be, for example, that energy, because of the critical mass, could stand up as their own company as I think that is also a very niche area. That looks quite interesting because they have much higher growth than the other business areas.

Yes, so on these products, just to get a sense again of how they work just generally, if somebody else manufactures it and then you distribute it, Addtech likes to talk about how they're value added. What would be some practical examples where you might add value to a product?

The easiest way of explaining is if, for example, you are selling batteries to a customer and you ask the customer what they are doing with the batteries, the customer may say that they are putting the batteries together and making a battery pack. They may also put in some electronics to control, for example, the electricity lights on the streets. We could then say to the customer, but we can do that for you. In this way, we integrate vertically closer to the customer, and this is adding value. We could also add value by providing different kind of services; not only delivering the instruments or systems but also asking, okay, what do you do with the system?

They might tell us that they use some reagents but then we could produce also the reagents and we could sell it as a package. That also has been the idea from the beginning, like a Coca Cola machine, for example.

So is it more consultative? Would you have a person that would work closely with the company, almost like their own account rep, who might help integrate things. How does that work practically?

Another practical example is that you have many companies only delivering instruments, for example, and so it's what we call digital sales or binary sales. It's a little bit tricky because, once you have sold to a customer that's it and you don't get recurrent sales. But if you have a business model where you create some kind of disposables or consumables, that is, of course, much better. If you go further and, for example, you develop some protocols or seminars or trainings or things like that that are a little bit intangible, that provides even more added value for the customer.

So we always work with the very simple Boston Matrix where we try to approach the current customers and sell more products to the current platform. That has always been the idea and, I think, something that is quite good and quite elementary. The difference between Danaher and Addtech is that Addtech has always been focused on niches. As you know, a niche becomes a commodity after a certain time, especially if the niche became quite profitable and attractive. That becomes a commodity so you need to look for other niches. The business idea has always been to try to get niche areas where you can differentiate your offer.

Some of these products were branded, so did Addtech have a reputation in the market or is there another brand, not necessarily Addtech? Did each of the 12 companies that you have had their own brand, or was there an Addtech facing brand. How does that work?

First of all, I think specifically in the Nordics, in order to establish in nine countries, for many companies it's much easier to get one company, one distributor. Otherwise, you need to translate your products into nine languages, you need to have critical mass in each of the countries and so on. That was one of the added values where we could say, hey, we cover nine countries. Today, with AddLife, they have almost 20 countries because they also have Central Europe. I think is also a very good added value.

We could also OEM the products for the customers; a little bit of the strategy that you have in the retail industry. I think that's also quite good and that also brings an added value. It could be the same problem, just branded under another exclusive name.

Could you talk about how the acquisition process worked; maybe walk through how a typical transaction might work?

Absolutely; I will say most of the success of the company has been the strategic thinking when it comes to acquisitions, first of all, because of the process. When I started at Addtech, the CEO told me, you need to drink a lot of coffee with your prospects. I think that's very true because if you are going to make an acquisition, you need to get to know the people very well. That's very important. The other thing is that you need to understand the culture. You need to get to know the people in such a way that you build up trust. Also, if you were going to make acquisition A, you should already have a plan for acquisition B.

What happens if you acquire that company? What are you going to do next? It wasn't an opportunistic approach. It could be an opportunistic approach in a way, because sometimes situations rise up where you have a very good target and then you cannot refuse to buy it. But you should anyway build up a case where, if you acquire that company, what's going to be next? I think the acquisition process was very good and well-structured. Not only did it have a proper discovery phase, but the negotiation phase was very good because they worked very closely with the targets, with the prospects.

Then of course the DD process. We also did the commercial DD ourselves because that's a very good way of getting to know about the company, so we never used a consultant for that. For the financials, we always use our own resources and sometimes, depending on the size of the company, we could use a consultant, but we were very much involved in that process as well. For the legal part that doesn't matter; there you can have a consultant company. And sometimes we also had DD for the IP and you can also use a consultant for that. When we did the negotiation phase and the DD, the most important part is the integration process.

The integration process is probably where the success will come, because honestly speaking, with all the acquisitions that we have made, we have always been able to improve the EBITDA and also the turnover of the company much more than they could do themselves. This is because partly because they could focus on what they are good at, because we have shared services when it comes, for example, to CFPs and EFPs, CRMs, ERPs. We could have, for example sustainability and other types of shared services that they could take whenever they need, depending on the size of the company.

But most importantly, they could focus 100% on the commercial side, instead of doing all these admin strategic tasks. We have these shared services, or what we call the toolbox, and the toolbox was a very good thing that all the companies could use. The other thing is that we did the integration process ourselves. The first thing we did when we acquired a company was to have training with them, going through the vision, mission, etc., objectives. We worked very closely with the companies that we acquired, and also worked with a CEO, trying to gain synergies from the other companies in the group.

I think the integration process was extremely good, extremely well-done and well-organized. We also had our own business school. All the employees went on training that was very general for all the employees, so it would normally be done in two days. We could have, for example, a business school for sales, with different models, depending on the experience, and we could also have training for leadership and management. You can imagine, in Addtech, for example, if you have 180 companies, you need to have some glue that keeps all these companies together. This glue is not only that you have a lot of good structures in the company, but also that you have very committed, very persistent, very passionate leaders in the company. I think that has been the key for success.

Yes, the culture, the glue, they talk about that a lot. Maybe we'll talk a little more about that too. I want to get your opinion on culture. One of the things they talk about and you mentioned is that it is decentralized. And then they always emphasize these return metrics; return on capital employed as a company. I’m wondering, with your experience with the culture there, how does the head office keep track of your group? Was it daily or weekly reports? How did those interactions go and what can you tell me about the culture, just generally?

Yes; it was, of course, very much walk the talk and being a good role model. To be able to do that you also need to be very visible as a manager or as a leader. For example, we had at least weekly talks with the CEOs. Probably five times per year, sometimes six times per year, we had a board meeting with the company. Normally, the CEO of the company and the CFO is sitting together with the business area manager or business unit manager from the group, and once per year we had a CEO meeting for all the CEOs. We also had a strategy meeting once per year, normally in September/October, but very much working very closely with the companies. I could call my CEOs daily if I wanted or they could do the same.

Did those people tend to stay in those positions? Were they long tenured positions or was there a lot of turnover at that level?

Yes, and this is quite interesting because actually we did an exercise once when we had a CEO meeting, and saw that more than 60% of the CEOs were staying after the lockout period. They really like to stay in the company because there was a very good and collegial atmosphere, but also because it gave them career possibilities. Many of the CEOs could become business unit managers and also business area managers. Therefore, the business area managers that we had in Addtech, they came from the companies that were actually acquired. I think we have 15 or 16 business unit managers and I would say more than 10 also came from CEOs that we acquired.

They probably did much better in the new Addtech too, as far as money was concerned?

Yes, absolutely. I believe that the key to retaining the personnel was also that we always had freedom of responsibility in the culture and that gave them room to be able to develop. Also we kept the companies decentralized, so we didn't kill the culture. If, for example, you are Thermo and you pull the flag of Thermo day two after the acquisition, you can very easily kill the motivation of the people. In most cases, they used to replace the management, but we didn't; we kept the management. Of course, if they were selling the company due to age or due to that they really wanted to make an exit, then it's okay, but the retention of the employees was quite amazing. We had a very low turnover of employees. I think that was always very positive because we work a lot with talent management in the group.

When you reach a certain size, it's very important that you have a succession plan. We had a succession plan in all the companies, even for the CEO, and this was very transparent. We would say to the CEO, what will happen if you get in an accident tomorrow? Who is going to be able to step into your shoes? If we identify somebody that could be a talent or a replacement for the CEO, then we had also a thinking behind how we are going to train that person in leadership or whatever is needed in order to replace the CEO when it's time. We always tried to recruit internally for management positions. That has also been a key for success.

How much of this was driven by numbers? If you were meeting your CEOs, did they have certain targets like sales or return on capital or did you monitor accounts receivable? I'm just trying to get a sense for how deep that went. One of the things that's impressive when you look at Addtech is they just consistently hit these numbers in return on capital and the way they manage their capital and everything is very tight.

That's a very good question because we had very clear objectives that we are going to grow by 15% over the life cycle. Nobody knows how long a life cycle is. If it's six years or 10 years or five years, it doesn't matter, but we had 15% target for turnover growth, but also for EBITDA. We measured this well because we could set up objectives in a very distinct way. We sat together with the companies; it was not taken from the air. We also had an objective to improve the companies that had lower than 15% but also to be able to improve the companies that had more than 15%. If they could make 15% or 20%, maybe they could do 25% or 30%. We worked both ways, not only with the bad companies, but also with the good companies and I think that's also very important.

The other thing that is very particular is that we had a parameter that we called a super parameter or the super profitability parameter, which is the profit divided by working capital. Profit divided by working capital should be higher than 45% because then you can finance your business itself. All the employees in the company they knew about this P/WC because we could see P/WC in all the product groups. For example, we could see that this product group is not profitable because we have a very bad P/WC. P is actually the sales times the gross margin, minus the costs and the working capital is the inventories or the stock, plus account receivables minus account payables.

So it's only six parameters and it's very easy to monitor the six parameters because everybody in the organization can influence one of the six parameters or several of them. Everybody in the company, for example, can influence the costs. As you know, you can screw five of the parameters to a certain limit, because if you screw the costs too much then the company became anorexic and nobody wants to work in the company. If you want to improve your gross margin, then you increase your prices or you decrease your cost of goods. You need to have a good enough inventory. You cannot have too little either because that's not very good; you can optimize that. For the account receivables, you can ask the customers to pay you in advance but that's not realistic.

For accounts payables, you can do it to a certain level. You can ask your suppliers to wait two or three months but also that's unrealistic. The only parameter that you adjust for the eternity is the sales. That was always the medicine when we were looking at this super parameter, P/WC. We always tried to see all the parameters and say, okay, we cannot screw more than this, not more than this, not more than that. The only thing we have is that you need to improve the sales. For example, if we have a P/WC was lower than 45% then we know that we need growth. It was quite good to monitor the company be doing this and, even when we were doing acquisitions, we used to look at the P/WC.

So you could ask any employee of Addtech or AddLife, what P/WC is and you will get the explanation; that's fantastic.

Yes, that's really interesting. Even when you acquired companies you looked at that, so those are maybe the areas I guess you would look to improve, if you took over a company. Normally people come in, they fire a bunch of people or cut costs, but it doesn't sound like that's necessarily Addtech?

No, definitely not. We could look at it with very open eyes and say, okay, what is the 80/20 in the company? We would look at it and see that we have this bunch of products here that are not profitable so let's cut the tail, so we did. We could cut the tail because we had a bunch of products that didn't make sense. Typically, what we say in Swedish, it’s like a Chinese store. I don't know if you heard about the expression, but if you go into a Chinese bazaar, you have hundreds of articles. And if you go to Lidl, for example, which is a German group, you have very few articles, and that's why they are very profitable. A Chinese store is not profitable at all because you have hundreds of articles. I think focus was one key thing also that we could say okay, it's much better to put your energy on these 20 products or 30 products, and then we get rid of the rest or we can sell them or whatever it is.

Or we need to have a plan how we are going to improve it. We always analyze what's good, what's bad, what can we do to what's bad and how can we improve what is good to become better? I think it was a very pragmatic way of analyzing the business. And something that was extremely good is that there is a book that all employees in Addtech have, called Idea and Soul.

I know what you're talking about, I've come across this, yes Idea and Soul. I wanted to get a copy of that book somewhere but I haven't? What's it like? What is the Idea and Soul?

It's only 80 pages. It is 80 pages explaining culture, explaining vision, explaining mission, explaining how we measure the profitability, talking about the super parameter, for example. It also explains how you correct things that are wrong in the company and how you improve things that are going well to become even better? It's a very interesting book. Actually, that book is why I said yes to working at Addtech. When I went from France to Stockholm to meet the CEO of Addtech and I had the interview, and then I was going to fly home to Lyon, he gave me the book and he said, can you read this book and when you have read it can you give me a call to tell me if you like it or not.

I was reading the book, I arrived at Lyon and I had some pages left, so it was so interesting, so I stayed in a chair and finished reading it. I called the CEO and I said, are you really doing everything that is in the book? And he said yes. I then said I would take the job I said, because it was very attractive, because it's an extremely pragmatic way of analyzing the business and improving the business. For example, Boston Consultancy or others are very surprised when we told them how we analyze the business in a very simple way. Actually, you should try to get that book, it's very good.

I'm going to try to get it. I guess that culture is probably across all three of the B&B ecosystem companies?

Yes, absolutely. I think sometimes companies try to maybe make things more complicated than they are.

That makes me think about the competition. When you were doing these acquisitions, were there two or three people bidding on the same time or how did that work? How did Addtech get the acquisition ideas? How did you find the companies? Also, how much competition did you have when you were doing the acquisitions? Were you bidding against someone else all the time?

Yes, and I can explain to you why we won, even at a lower rate, and that's very interesting. First of all, we had probably four different ways of screening the market. The first one and the most important was, of course, our own way of doing it. We should have the knowledge and something that is I think very important if you have 1,000 employees in the company, is that you have 1,000 antennae. The acquisition process is not only a process that the management is doing, but everybody in the company needs to contribute to also, to listen to the market and to listen to the customer needs. You will get the inputs from the employees, from your colleagues, saying hey, guys, I think this company is very interesting. That was very well communicated in the organization.

I think that is a very good way of getting the organization more engaged. Of course, we also had our own business intelligence because we were working very closely with all these companies, so we learned to know the competition and we had a very good mapping of the market. The other thing was via acquisition groups – so JP Morgan or whatever – who knew us so they could come with inputs. The third way was that we went directly to companies that we wanted to acquire. A fourth way was a little bit opportunistic; it was situations that raise up in the market. The idea was always to keep the companies separated and independent but, in some cases, the companies themselves could also do acquisitions. So not only the group, but also one of the companies could acquire another company and put them together because it makes sense.

That was also another way of growing that was also actually very good because, by doing that, the company's CEOs were also very engaged in the acquisition processes. We were growing as a group by acquiring companies, but the companies were also growing because they could acquire also other companies, or products.

Why did we win the deal a lower price? It was due to the story that we had, having a decentralized organization with this toolbox in the middle, with the way that we are managing the companies, that was very attractive for many CEOs. They saw that okay, these guys they are going to preserve my baby. They are not going to kill it. I am going to preserve the name, I'm very proud of the company that I have created and we are going to continue to develop the company, and maybe, most importantly, that I am going to be a part of it.

That was extremely attractive and had a very big value. If we were competing with an investment company, and they understood the advantages that we could provide, that was always much better. I have been in cases where we have been paying seven times the EBITDA, and they had offers that we knew that were 11 or even 12 times, but they chose us. I think that's quite important when you have companies that are driven by entrepreneurs. It's very important for them.

I mean there are a number of other Nordic acquirers; you mentioned Lagercrantz, the other B&B. I guess they are in different lines so you don't run into them very much, but maybe like a Lifco, were there other acquirers where you ran into those type of buyers as well?

Absolutely, you have Indutrade, you have Lifco; you have a lot of Nordic companies that are working more or less in the same way. But I think if you take Indutrade, for example, they are much more centralized and I think with the model that we had, it was better in a way because I think some things make sense to centralize, because being totally decentralized is no good either. You need to have some synergies between the companies and also you need to have some things that should be consistent for the whole group. You have to find a balance there and I think Addtech succeeded in having a very good balance by having good decentralized organization but also some things that were centralized.

Yes, how many companies do you think are out there that are possible Addtech acquirers? Maybe not exact number. I will ask it another way; do you think there are still a lot of opportunities to continue to do this for years and years and years?

Yes; every year, we sat down and did the M&A exercise. We had a long list with M&A targets, and all the time we added new ones, new ones, new ones, and it was never finished. There were always new opportunities coming, because each time we acquired a company, suddenly we could gain others because we could get input also from the companies that we were acquiring. Something that is interesting is that when we had a business unit growing, then that could become a business area. If a business area was too big, then it could become a separated company, as we did with AddLife. This continues and as you can see Addtech and AddLife are expanding.

They are expanding in the UK; they are expanding in Central Europe; they are expanding in many other areas.

Yes, this is the other thing I was going to ask you about is do you think there's any reason why they shouldn't be successful in any of those other markets? Do you think the Addtech formula carries well into these other markets?

Absolutely, and that's very attractive. It’s something that we always have been thinking about and has to do with the culture we have in Scandinavia, where it's very much based on the freedom of responsibility and it's not very hierarchic. If you look at similar areas, first of all there's the Benelux, then I would say the UK is also quite similar and also Germany, Austria, then it's a little bit more different in Italy, France, Spain, Portugal. In the beginning, the board was a little bit afraid of coming out of the comfort zone which was the Nordics. But when we did some acquisitions in Poland and we did some other acquisitions in the UK and the US and China, we suddenly could see that this model works wherever because it's a matter of having clear objectives. It's actually a very successful way of acquiring companies.

Did you run into any home bias? In the UK, the UK has some companies that are similar, like a Halma and there's other sort of acquirers that are decentralized, they are broadly similar. Did the sellers not particularly care, that it was a Swedish company?

Yes, I would say so. I think it has to do with what I mentioned before, is that we were very keen of drinking a lot of coffee with the companies that we acquire. Actually, when they saw our genuine interest saying, hey guys, this looks very interesting but let us have a lunch together, let’s get to know each other, then they saw okay, that's very nice. Whereas maybe the others they just wanted to run the process. We were more genuinely interested in the people because you acquire a company is not just because they have good products in the end, but because they have good people. That they have good products is a result of having good people in the company.

I think that's also very central and if you act that way and your management also knows it and act also in the same way, I think that's very important. You will gain the confidence from the counterpart. I think that has been very much to do with the leadership, absolutely. If I look back at my colleagues in Addtech working in management, they were very good people; very committed, very engaged, passionate, persistent. That has been the key of success, I would say. It's not only the processes.

What do you think are the biggest risks to watch out for to keep an eye on with Addtech? Does anything come to mind from when you were there; stuff you had to watch or you think is a risk?

No. Being a bunch of companies and having the decentralized model, it makes it much easier to identify companies that probably are not going well and you can sell them if you want. Or you can merge with other companies in order to gain profitability and that's also something that we did.

You had to sell businesses when something was not performing and you didn't think you could fix it?

Yes.

That was accepted as part of the process?

Yes, absolutely. You minimize the risks when you have decentralized organization, so it's much easier. I have worked in very big companies and, unfortunately, these big companies became a little bit like the dinosaur organizations with the big body and small brain, because they lost the agility.

Yes, bureaucracy sets in.

Yes, and by having a decentralized organization and by having the way we were organized, you keep the agility and you are much faster and you can also change much faster. In bigger, centralized organizations it's very difficult to do it. Of course, from a short-term perspective, instead of being let's say 150 small boats you can be a transatlantic, but the problem is that long term, you will lose. Short term yes, you will decrease your costs and so on, but in the end, you will lose because you will lose the creativity; you will lose a lot of other things that come with that.

Are there any other companies in the Nordics that you think have the same kind of mindset about creating value and culture that may be worth taking a look at? Somebody else you respect that's doing it?

Absolutely, I mean Cellink is a very good company.

Cellink, yes.

Yes, that's a very good company, that also has similar intention on newly acquired companies to keep them decentralized. You have Lifco, for example, and they have been very successful. I will say you have Indutrade, not because they are quite focused on some areas that probably you don't have the same growth opportunities, but there are a number of interesting companies.

Well that's a, well thank you very much, close to our hour and I think you've answered all my questions and given some very thoughtful answers so I really appreciate it.

Thank you.