Redeye Serial Acquirer Event - 17th March, Stockholm

If you're interested in companies that use programmatic M&A as a core strategy, you will certainly enjoy this event. This year will include the CEOs of companies such as Indutrade and Addtech amongst many other acquirers. This is the only conference we return to each year. Reach out if you're interested and look out for us in Stockholm!

Content Published Last Week

Bergman & Beving: The Capital Allocation Model

This interview with the current CEO of Bergman & Beving, the 770m EUR market cap original Swedish serial acquirer, explores how the company allocates capital throughout the organization in its “Focus Model”. This interview is free to listen or read here (Spotify / Apple)

At B&B, only divisions or subsidiaries with P>WC (a simple proxy for ROIC for asset-light manufacturers or distributors) above 45% can deploy capital into acquisitions. Those with P>WC less than 25% don’t receive any additional capital from HQ and have to improve margins and profitability before making acquisitions. 

It’s also refreshing to see a company diligent in how it incentivises its team. For divisions making acquisitions, all costs are accounted for when calculating performance including interest on capital from HQ, D&A, and any adjustments. 

EBT [is the metric we use]. I think this is also very important.You need to establish a follow-up system and incentive system that holds the division head accountable for investments in companies organically, as well as what they pay when buying companies. In our model, they need to account for depreciation in the companies and amortization from acquisitions. We also have a division interest cost based on how much working capital they tie up in the division, as well as the interest rate on the acquisitions they are making.- CEO of Bergman & Beving

This interview pairs well with the first interview we hosted with Magnus back in January 2023 and provides a lens into how B&B enforces a culture of rigorous capital allocation throughout the organisation.

Wayfair: Cost Structure & Culture

Wayfair’s market cap is only ~35% higher than its IPO valuation in 2014. The stock is trading close to its COVID lows. As COVID pulled forward years of furniture demand, like many ecommerce companies, Wayfair built excessive cost into its business. Over the last 3 years, it has been repeatedly cutting these costs. Its opex is now ~25% lower than Q422. 

This interview with a Former Wayfair executive provides insight into how its cost structure has grown and the evolution in Wayfair’s culture throughout this tough period. 

The interview questions whether Wayfair’s lack of discipline started much earlier than COVID:

The way the system worked was through our headcount management system. You would submit a request for headcount, and it would go to the Chief Operating Officer, who at the time was James Savarese. James Savarese instructed his executive assistant to auto-approve every headcount request because he didn't have time to review them and needed to focus on other matters. So, anything you requested was automatically approved. - Former Executive at Wayfair 

Another question is whether Wayfair has the technical depth to ensure its stack was agile enough to support the company's growth.

I believe they never had effective technical leadership. When I joined Wayfair, the CTO was a man named John Mulliken. John Mulliken had been in a customer service or operations leadership role. He was a former BCG consultant with zero technology background, yet he was the CTO of Wayfair when it was a $5 billion company. During that time, Steve Conine was an engineer, but more of a hacker engineer. He's the type of CTO you'd want for the first three to five years, but he stayed much longer. Steve was always focused on enabling what the business wanted and supporting what Niraj wanted, figuring things out later. There was a succession of technical leaders who operated this way. Frankly, I don't think Wayfair has ever had a strong CTO. Jim Miller was probably the strongest, but it's hard to tell since he was interim. - Former Executive at Wayfair

As the business slowed post-COVID, Wayfair found itself with a bloated cost structure and no top-line growth to support it. The company rushed to cut headcount which seems to have led to an exodus of technical talent. 

The second and more critical part of replatforming was data and database decoupling. Regardless of whether an application runs in the monolith or a decoupled service, it needs data. Wayfair was an extreme example of overusing relational databases, leading to a massive proliferation of databases across the company. This made it difficult to have a single source of truth for anything. Modifying existing data or database structures was challenging without disrupting a massive dependency chain of applications. Changes could break systems in unforeseen ways, leading to a mummification of the tech stack and hindering innovation. I have examples where this held Wayfair back, consuming time and energy without success. This is the most crucial part of Wayfair's tech stack replatforming. As the employee count decreased, the ability to maintain systems as they were became the focus, making new initiatives nearly impossible. For instance, the new Wayfair loyalty program was built in the monolith, not in the new replatformed stack, due to the time constraints I mentioned." - Former Executive at Wayfair 

This seems to have impacted Wayfair's CastleGate offering, a key differentiator for the company.

The inventory system is extremely unstable. Going back to databases, the way Wayfair represents warehouses in its databases was all combined into one table. This table held information such as the supplier as a commercial entity, their primary contact, business address, phone number, emails, and contacts. It also included the supplier's drop ship warehouses, their lead times, and how to ensure enough time between an order and a pickup. Variables for these were included. Additionally, CastleGate warehouses were mixed in together. If you're an inventory system or a team like FOPT that needs to know the source of truth for inventory at a warehouse, you're accessing this table with tens of thousands of records. There are all these supplier records, and then probably a few hundred between drop ship warehouses and CastleGate warehouses. CastleGate's are obviously in the dozens, so it's relatively small, but all the suppliers' drop ship warehouses are included. Any application accessing that table must know what type of row it's looking at and take the appropriate actions to be accurate. By the way, any system can go in and overwrite values in that table." - Former Executive at Wayfair 

This interview goes on to explore management’s current mentality, challenges changing the company’s culture, re-platforming issues, and more details about the inefficient cost structure.

Howmet & Precision Castparts: Single Crystal HPT Blade Investment Casting Process

As part of our aero coverage, this interview walks through the investment casting process of a single crystal engine blade. Howmet and Precision Castparts, owned by Berkshire, both own a combined ~80% of the single crystal airfoil market. It’s a mission critical part with a highly complex manufacturing process:

To make the airfoil pattern, this is the tricky part. You've got a ceramic core which forms the inner passages at the end of the process. You inject wax around that ceramic core. You then take that injected composite piece, now ceramic on the inside, wax on the outside, and weld that to the pigtail. There's a bit of support structure to keep everything in place. Then it goes into the normal process, which usually involves a special face coat, the very first ceramic slurry dip that gets put on. Most of these single crystal alloys have reactive metals like hafnium, a bit of titanium, aluminum, and other metals that will react with typical alumina or silica. The very first coat you put on the pattern is what the metal will see. You want to reduce or eliminate reaction, so they put a specialized coating on, apply very fine sand, and then start their backup layers. They progressively make thicker dips with coarser sand until they build up a structure that can withstand the casting process but isn't so big and bulky that you can't remove it without damaging the casting. - Former VP at Precision Castparts

We also discuss pricing power. Since the spin, Howmet’s EBIT margins have over doubled. Our work explores the differences in culture between PCC and Howmet and how contracting works with GE / Safran and Pratt for engine castings.

Fever-Tree and Beer vs Spirits Distribution Networks

This was one of our favourite interviews YTD. In light of Fever-tree’s recent partnership with Molson, we explore the fundamental differences in spirit and beer distribution in the US. There are many quirks in the regulation that determine how products are distributed. For example, although spirits are more potent, beer distribution franchise laws are stronger. Spirit suppliers can also easily adapt pricing whereas breweries can’t discount products. This leads spirits to be bought in bulk and warehoused by grocers whereas beer is distributed directly to stores (DSD).

One insight from the interview is how beer distributors are winning spirits contracts from large spirit distributors like Southern Glazers. Spirits suppliers are looking to benefit from DSD and a greater distribution to c-stores. Due to strict beer franchise laws, it's easier for beer distributors to acquire a spirits license than spirits distributors getting a malt license. Beer distributors have greater distribution reach and greater merchandising control at the store. This is attracting spirits suppliers like Sazerac.

Traditional spirit organizations, like Sazerac, are now creating malt-based versions of their brands. Fireball, for example, has a malt-based version, which opens up market opportunities in convenience stores. However, if you're with a traditional spirits wholesaler and create a malt-based version, they still won't serve you if they don't cater to convenience stores. Over the past 18 to 24 months, Sazerac, the second biggest spirits company in the world, shifted from traditional spirits wholesalers to traditional beer wholesalers for their distribution across many states, including California, for their entire spirits portfolio. - Former Reyes and Diageo VP

The interview goes on to explore how Molson can scale Fever-tree and potential challenges it may face incentivising distributors to execute a slower-moving item.