Published Last Week

1. Carrier, Trane, Lennox & HVAC OEMs Landscape

2. Roper Technologies: iPipeline Acquisition & Insurance VMS

3. First Brands, O’Reilly, Tesla: Power within the US Auto Parts Aftermarket

4. Midwich Group: History of Professional AV Technology

5. Ryan Specialty & the Wholesale Brokerage Business

6. Privia Health: Athena Integration & Payer Rate Negotiations

7. MongoDB: Sales Org Incentives, Growing Accounts & Consumption Model

8. Cogent: IP Transit Strategy, Competitive Positioning & Peering

9. IP Podcast: M&A and Purchase Price Accounting (Spotify / Apple)

IP Research Upcoming Coverage

We have recently published or plan to publish material on the following companies in one of our IP research formats:

USA: Heico, Transdigm, Loar Group, Danaher, Progressive, Markel, Kinsale, Brown & Brown, Ryan Specialty, Spotify, Microsoft, Wayfair, Amazon, Veeva, Appfolio, Procore, Credit Acceptance, Old Dominion Freight Lines, Carvana, ACV Auctions, Copart, O'Reilly, Tesla, Watsco, Ferguson, Fastenal, Intuitive Surgical, CCC Intelligent, FTAI, Autodesk, Corpay, Perimeter Solutions

ex-USA: Constellation Software, Lumine, Terravest, Diploma, Howdens Joinery, Burford Capital, Judges Scientific, Spirax Sarco, Ashtead, Fever Tree, The Gym Group, Dino Polska, Basic Fit, Rightmove, Bergman & Beving, Lagercrantz, Lifco, Vitec Software, Sartorius, Eurofins, D'Ieteren, Mainfreight, bioMérieux, Idox, Safran, MTU, Rolls Royce

You will find a recap of IP Research published in 2023 here and a list of the most popular interviews published in 2023 here.

How do we choose what to cover?

1. Owner-operator: management’s economic fate is intertwined with that of the business

2. Management has high integrity

3. Management focus on ROIC and FCF per share

4. High quality governance

5. Business is customer obsessed

6. Structurally advantaged business model (brands, scale economies, network effects, low cost operators, etc)

7. Companies with a long growth runway

8. Win-win dynamic: customers, employees, suppliers, shareholders, regulators, local community all win as a result of the growth of the business

9. Stable legal jurisdiction

Carrier, Trane, Lennox & HVAC OEMs Landscape

This interview with a Former Sales Manager at both Carrier and Trane discusses the differences in company culture and the OEM relationship with distributors including Watsco:

I think it's about leverage. If you look at Carrier in particular, the biggest issue they face is that Watsco now controls so much of their distribution, which can be somewhat nerve-wracking. Typically, you don't want all your eggs in one basket. While Watsco is a great partner, they are also extremely shrewd from a business perspective and have been acquiring independent Carrier distributors as well. They've transitioned from having a small component of partnership on the ICP side, owning a couple of distributors like Baker Distributing and Gemaire Distributing, who are big ICP customers. They also own all of CE, thus the entire CE business and that partnership with Carrier. Now, they also own two or three independent Carrier distributors, like TEC in Chicago and Peirce-Phelps in Pennsylvania. What's happening now is Watsco is becoming heavily leveraged over Carrier. For example, during the last couple of years with the pandemic, the distribution model has been very strained and challenged due to labor and parts shortages. Watsco has effectively stepped in and demanded priority, saying, "You have to take care of me before you take care of anyone else." It's hard to deny that as a requirement when they own so much of your distribution. So, I think if they move towards a direct channel, which has been indicated by several big OEMs like Daikin, it's so that they can de-leverage from their current partnerships in distribution. - Former Sales Manager at Carrier and Trane

Roper Technologies: iPipeline Acquisition & Insurance VMS

Over the last few weeks, we have published various interviews covering Roper subsidiaries. This week's interview with the former CEO of iPipeline, a $1.625 billion acquisition in 2019, shares insights into the quality of the assets Roper is acquiring. In the announcement, Roper disclosed iPipeline would contribute $200 million in revenue and $70 million in aftertax FCF.

Our net retention rates, just to give you some clues, were about 105%, and our gross retention rates were about 99.8%. We basically were gaining market share because, firstly, our competitors didn't have as sophisticated an end-to-end solution as we did. Ebix was particularly poor at managing customer expectations and providing high levels of service, which iPipeline prided itself on. - Former CEO of iPipeline, Roper Technologies

The mission-criticality of the platform, implementation costs and its market share partly explains these impressive metrics:

"I would tell you it's extremely critical, and I'll take you through the products that we offered and how we operated. We probably had about 65% to 75% market share of all the solutions that we had in the marketplace. (..) These platforms are extremely sticky. First of all, putting one of these platforms up can take, at a minimum, probably six months for a small insurance carrier that might have four or five products, to two years for someone like New York Life, that may have 100 different products that they want to put on those platforms to be able to sell them and collect the data electronically. - Former CEO of iPipeline, Roper Technologies

We plan to further explore the quality of Roper's portfolio relative to CSU and other VMS acquirers.

First Brands, O’Reilly, Tesla: Power within the US Auto Parts Aftermarket

The top 10 part retailers - the likes of O’Reilly, AutoZone, and Advance Auto Parts - control more than 50% of the US auto parts aftermarket. In this interview, an auto parts manufacturing, distribution, and installation veteran sheds light on the balance of power between the different stakeholders in the US auto parts aftermarket:

As I was working with Carl Icahn on this, I collaborated with both Bain & Company and BCG. I had relationships with them from my time at Best Buy and Advance Auto Parts. I asked them to provide examples of weak manufacturers disintermediating powerful distributors and to help me understand the path to success. Both firms researched extensively and concluded that there was not a single instance in all their engagements where that strategy had succeeded. There are examples of powerful manufacturers disintermediating weakened distributors. Apple is a perfect example; they bypassed Best Buy and opened their own stores. The path to success, according to them, was for Federal-Mogul to do what First Brands has done. Get each of the businesses you're in to 40 plus percent market share to where the industry can't live without you, and then do it. What Federal-Mogul was is they had 23 separate brands, and there were instances where we had 5% share. Anco was a 5% share business. So they had these tiny shares across countless product categories. They said it has nothing to do with how many product categories you're in. It's how deep you're in to certain product categories. So they said, spin out."

Midwich Group: History of Professional AV Technology

Midwich Group is a £400m UK-listed distributor of AV technology to professional buyers. The company has been acquisitive to fuel growth, averaging 3-5 acquisitions a year for the past decade. The company believes it is in the early stages of consolidating the AV distribution market with currently only 3-4% TAM penetration. An industry veteran with 40 years in AV technology, who also sold his business to Midwich, walks through the history of AV technology distribution:

There have been mature waves in the business, and yet, AV is everywhere now. We're communicating through it today. As a result, pre-packaged systems and system-in-a-box concepts have returned. We've come back to the box business in a way. However, that was a difference. Our legacy was systems from the beginning, and Midwich's legacy was box-based. But they certainly understood integration and had acquired enough companies that were familiar with it. I think they really bridged that gap. - Former CEO of Midwich operating company

As distributors, Midwich subsidiaries rely on adding value by bundling various equipment and manufacturers so AV integrators can deliver projects to earn its ROCE in excess of 15%. This is similar to Addtech or Poolcorp value-added distribution businesses.

A company named Bose, which you may be familiar with, entered the professional market quite late. They did something unique and somewhat shocking at the time by building systems for stadiums and other public venues and decided to sell directly to large customers. This also happened in the cinema industry. With the cons olidation of the cinema business, small exhibitors were being acquired by larger companies, which then started to leverage direct sales. For instance, AMC Theaters, based here in Kansas City, benefited from this. One of the individuals who runs his integration company in Kansas City was instrumental in this shift because he knew how to set up a cineplex with 18 theater screens. AMC wanted it installed before the paint dried, so he had to work on a very fast track, which is what Zoom wanted. Thus, direct selling began to occur at higher levels, as I mentioned. - Former CEO of Midwich operating company

However, consolidation in large buyers of AV equipment may provide the opportunity for manufacturers to sell directly, which could eventually put pressure on Midwich's gross margins.

Ryan Specialty & the Wholesale Brokerage Business

This interview is with a 25-year property broker veteran. The executive explores how Ryan Specialty lured them away from a competing wholesale broker. We explore the process, economics, and risks of brokers competing for profitable books of business across the property insurance market.

I had signed a non-compete agreement at CRC and was compensated for it. There were a few years left on that contract, and CRC sent me an email reminding me of the non-compete terms and the remaining duration. If I wanted to exit the agreement early, I needed to repay some of my compensation, which was prorated. I did so, and it wasn't a problem. I was able to take over my book of business without any issues...In the beginning, probably only under 50% of clients stayed. I was actually very fortunate that the person who took over my book at CRC did not do a very good job. Most of my clients weren't pleased with the service. They came back to me, saying they tried staying with CRC, but it just wasn't working out. The service wasn't there, and the person wasn't getting back to them. That's what happened with me. One of the main differences I find in culture between CRC and our team was the management, which basically came down to leadership.

Privia Health: Athena Integration & Payer Rate Negotiations

As the US healthcare system migrates towards value-based care, small independent healthcare providers may be pressured to negotiate fee-for-service rates. This could accelerate industry consolidation:

I firmly believe that purely independent primary care will be extinct in five years. This means you won't find a physician in any market who isn't affiliated or contracted with some organization. It will become unsustainable for small practices, those with one to five doctors, to operate independently because they can't negotiate fee-for-service contracts effectively. No payer is going to increase their fee-for-service rates; they're only going to pay differently, which is through value-based care. - Former VP of Growth at Privia Health

In this interview, a former VP of Growth at Privia Health shares a perspective on the company's positioning in the market, advantages stemming from its integration with Athena, and the dynamics between payors and healthcare providers regarding rate negotiations.

MongoDB: Sales Org Incentives, Growing Accounts & Consumption Model

MongoDB is an $18 billion NoSQL database technology provider. Its flagship Atlas Database-as-a-Service platform was released in 2016. This interview with a former Sales Executive explains how the GTM organization had to adapt to drive consumption and migrate customers over to Atlas.

"Net new clients were all moving to this consumption-based model. (...) I always said, you live by Atlas, you die by Atlas from a compensation plan perspective. Since I started in 2020, it was all about Atlas, which was probably new at the time, maybe two to two and a half years in, and it just continued to grow. I remember when I started, about 45% of the client base was on Atlas. By the time I left, it was between 85% to 88%. Everyone was moving to the managed model. - Former Sales Executive at MongoDB

Cogent: IP Transit Strategy, Competitive Positioning & Peering

To reach a critical mass in the commoditized global IP transit market, Cogent offered its customers lower prices relative to the competition while advising them to reroute traffic through more expensive upstream providers in case they encounter problems.

Schaeffer's shrewdness really stands out. He entered the business about 20 years ago through a fire sale of some assets. What I think is fairly brilliant is how he positioned himself to reach a critical mass of customers, which they've maintained for about five to 10 years now, establishing themselves as a truly global carrier. To achieve this, he undercut the market. He pitched to customers that they should choose his services because they would be cheaper than any other provider, encouraging them to send their business and traffic his way. For any traffic issues, customers were advised to use their more expensive upstream providers. This strategy effectively got his foot in the door with many customers and angered the competition, as it left them handling the most difficult traffic. - Former Senior Director of Product Management at Lumen

In this interview, a former Senior Director of Product Management at Lumen sheds light on Cogent's IP transit strategy, competitive positioning & peering.

IP Podcast: M&A and Purchase Price Accounting

This podcast (Spotify / Apple) was recorded in April 2024 and explores the intricacies of purchase price accounting. We explore:

1. How companies define 'identifiable intangibles' and goodwill

2. Why and how there are different philosophies to PPA

3. Impacts on income statement and balance sheet from PPA

4. Measuring WACC for acquisitions

5. Potential accounting risks for large and small acquirers