Addtech: M&A Process and Strategy

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.

Rutab was a company purchased by Addtech shortly after you joined; can you briefly explain what Rutab looked like at that stage in 2009?

It was a small, profitable company with €5 million turnover and 8% to 9% EBIT margin. We focused on selling machine cable components, mostly cable glands, to electrical wholesalers in Sweden and directly to machine builders and were market leaders in the segment. We were the only ones focused on those products and had 23 employees.

Were these big mechanical machines?

Yes, robots and construction machines and equipment. ABB and Atlas Copco were large customers of ours but it was mostly through electrical wholesalers like Ahlsell, Sonepar, Elektroskandia and Rexel, all international wholesalers.

How were you different from your competitors?

We were the only ones who were focused. We started off by developing our own cable glands and we realized that electrical wholesalers had five suppliers where they only needed one. We set out to be a one stop shop in a focused niche, which worked very well. We were a competence center within cable glands and machine cable components, and gradually grew within the segment to adjacent products such as machine cables and protective conduits. We did that by acquiring companies.

Was that industry segment simply too small to attract competition?

Yes, but it is still not as big as machine cables for example, which is a huge market. We entered the market from basic accessories, whereas others started with machine cables which they produced themselves, then moved onto accessories, without becoming an expert in those accessories. We took a slightly different path to success from many of our competitors.

Did you have a monopoly on that manufacturing segment, selling mainly to distributors and wholesalers in the Nordics?

Yes.

Why did Addtech acquire Rutab?

Addtech acquires companies who have strong market positions. They prefer to see both turnover and profitability stable over time. They do not focus on seeing future growth or demand you grow your business by 10% annually. They want to see stable secure cash flows in the future as well as strong management teams, and Rutab ticked those boxes. We had a structured auction process when Rutab was for sale, and there were 50 players interested in acquiring us. It was a long autumn before the company was finally sold.

You mentioned Addtech looked for stable turnover and profitability. What was the framework for choosing companies and which variables did they look at?

Addtech looked at companies in verticals which they knew something about. When I was a business unit manager at Addtech, I had my own verticals, machine cable components and professional lighting. All companies I looked at were within those fields. We were allowed to venture outside those fields, as long as it was logical. We preferred companies who shared suppliers in the same customer segments. When you bring many people together from different countries and they work in the same manner and with the same customers and suppliers, something magic happens and you end up learning a lot.

Would you prefer companies with similar suppliers and customers?

Yes, but it was extremely important they had at least five years of being profitable. We did not want to acquire companies which fell down and lost 20% of the profit in two years.

Would you look at the EBIT over working capital?

The EBIT margin was very important but we also looked at what we call EBIT over net working capital. That was our way to ensure the companies coming into Addtech provided strong cash flows to enable us to make other acquisitions. We often saw significant improvements in EBIT over net working capital post acquisition because we focused on that. It was even part of the bonus programs for the managing directors of the portfolio companies.

In terms of acquisition size, was there a minimum or maximum revenue?