Published Last Week

1. IP Research: M&A Accounting: Constellation Software, Vitec, Lagercrantz, & Teqnion

2. Serial Acquirers: Purchase Price Accounting

3. Danaher Business System: Kaizen Case Study at Pall

4. Visma: Oima Acquisition Case Study

5. GoEasy: Loan Underwriting Quality

6. Inchcape: Automotive OEM-Distributor Dynamics

7. Wayfair: Demand Forecasting

8. LGI Homes: New Home Sales Process

9. Evolution Gaming: Workings Of A Crypto Casino

10. Evolution Gaming: Europe vs Asian Live Casino Distribution

M&A Accounting: Constellation Software, Vitec, Lagercrantz, & Teqnion

Purchase Price Accounting (PPA) can provide a small but fairly accurate lens into management’s principles. Such accounting policies typically fly under the radar as companies direct investors to EPS or EBITA. PPA can set apart conservative and aggressive companies; those with an eye to massage EPS versus those with rigor. It can also help explain a company’s operational philosophy; the synergies and value-add the parent believes it can add post-acquisition.

Many industrial serial acquirers claim to buy similar niche, family-owned SME businesses with high ROCE, high market share, and at similar <7x EBIT multiples. Yet, the PPA varies significantly.

Is there a credible reason why an acquirer should deploy 100% of the purchase price above book value to goodwill when others buying similar assets allocate 50%?

Can it really not identify any intangibles?

If we were to adjust the PPA of some companies to meet what is supposedly a more conservative, industry standard approach, earnings would decline by 15-20%. Cash flow would be unchanged. In the event of goodwill impairments, those levered serial acquirers could breach solvency covenants with bank lenders. Given the Nordic Industrial PPI is in decline, a recent interview with the Former CFO of Teqnion suggests impairments for some could be imminent:

I believe some companies might have to revisit their goodwill, especially if they've been aggressive with their valuations. For others that might not have overvalued goodwill, they will still have to conduct the PPA differently going forward. This will result in assets that will be depreciated. So, they will need to adopt a new method where they don't put 100% on goodwill, but instead amortize them to move towards the established model. - Former CFO at Teqnion

We share our learnings from multiple conversations with serial acquirer CFOs on PPA methodologies of companies such as Lifco, Teqnion, Lagercrantz and software acquirers such as Constellation, Vitec, and Visma. We focus on the accounting risks and how such policies may provide a lens to understand management’s principles and operating philosophy.

Danaher Business System: Kaizen Case Study at Pall

The Danaher Business System is one of those fascinating but frustrating topics to study; it’s simple to understand but complex to implement. There are so many nuances. DBS has hundreds of simple, common-sense tools like daily sales stand ups or the 5 whys to understand problems. These all make such intuitive sense yet few companies deploy the tools to earn such results as DHR. It requires such a rigorous change in culture that most companies can't implement.

This interview walks through a Kaizen event at Danaher and how DBS was deployed at Pall post-acquisition. If you didn't know DHRs financial results, you would think this was gimmicky:

There are two types of Kaizen There's a President's Kaizen, and then there's the normal Kaizens that are running. So the President's one sets the tone. So the president gives a target, a sensei comes in. A proper Japanese sensei comes in… targets could be reducing defects, increasing savings, or saving time. During the President's Kaizen, five to 10 Kaizens are run in a week. It's a significant event aimed at achieving a major improvement in performance. It's quite theatrical. The Japanese sensei comes in and energetically encourages everyone, even shouting "Banzai" at people. - Former VP, Danaher

Danaher’s PSP becomes part of the daily language once DBS is deployed at acquired companies:

You could pull up that problem-solving form, or PSP, for every problem we had. If you had a red month for one of your metrics, that was acceptable. If you had two, you were expected to have a PSP, and that PSP had to show that you understood why you were in the red. If you continued being in the red for six months, that was acceptable, as long as you forecasted it on the PSP and showed where it was going to turn around. This became part of our daily language. - Former VP, Danaher

This interview further walks through how to run a Kaizen event using Pall as a case study for deploying DBS.

Visma: Oima Acquisition Case Study

Visma's revenue and earnings growth could rival any global software company.

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Unlike CSU or TOI, Visma pays ~3x revenue for faster-growing VMS assets and aims to drive operational improvements and synergies post-acquisition. This is a very different model to CSU; it relies on execution, not harvesting VMS FCF.

This interview with a Founder of a Visma operating company shares more insight into Visma's acquisition process and post-acquisition operational strategy:

We wanted to grow and needed the support to do so. Visma was an attractive choice not only for us but also for our employees who continue to work in the company. As a strategic buyer, Visma sees the benefits and synergies with their other areas of business. This is more appealing than working with a VC fund. I have founded three startups and understand what private equity and VC do. They are necessary for market growth, but there is another side to it. Visma is known for letting the companies they acquire operate as they are, as long as they are profitable and fit into their product portfolio. - Founder of Visma Operating Company

GoEasy: Loan Underwriting Quality

It seems like an internal conflict of interests exists within GoEasy's loan application process: on one end, the front line Financial Service Representative is incentivized to send as many loans as possible for approval, on the other end, one of the underwriter's tasks is to ensure that loans have the lowest possible risk of default.

if you have a human on one end, you need a human on the other. FSRs are salespeople who earn commissions and bonuses based on their sales. If every customer in a branch suddenly qualifies for a $50,000 loan because they're making a million dollars a month, it's likely the system is being manipulated. It's much harder to manipulate a human. - Former Manager of Secured Underwriting at GoEasy

In this interview, a former Manager of Secured Underwriting at GoEasy sheds light on the quality of the company's underwriting process.

Inchcape: Automotive OEM-Distributor Dynamics

One of the major challenges for automotive distributors like Inchacape arises whenever they wish to sign new OEMs. The distributor will witness resistance from the OEMs that are already under contract as they won't like seeing efforts and resources diverted to competitors. This can limit the growth prospects of distributors wishing to add more brands to their catalog:

The challenge arises every time these large distributors attempt to acquire another brand. There's always some pushback from their existing brands, who feel that focus and investment are being diverted from them. So, if we wanted to bring on a new brand, we'd have to consult with Toyota and get Jaguar Land Rover on board, unless we decide otherwise. This is particularly true for the larger brands like Toyota. - Former Director at Inchcape

In this interview, a former Regional Marketing Director at Inchcape Asia sheds further light on the dynamics between automotive OEMs and their distributors.

Wayfair: Demand Forecasting

Our latest survey with Wayfair Suppliers surfaced reasons why suppliers were not forward-placing many SKUs in CastleGate warehouses. One issue surrounded Wayfair's poor demand forecasting algorithm. Some items were trapped in the CastleGate network yet the suppliers continued to pay fulfillment fees.

Given that suppliers on Wayfair are responsible for dictating their wholesale prices and discounts, they must constantly react and adapt to competing products on Wayfair. This complex, real-time pricing challenge is tricky for suppliers and is a problem Wayfair helps to resolve:

Generally, these are the two major factors that many suppliers fail to fully comprehend. They significantly influence customer conversion, and the market is dynamic. The sorting algorithms are dynamic as well. If customers purchase other products that are cheaper and better presented, the ones that are not as well presented or priced will continue to fall in the sort order, even if they are well-positioned. Over time, these products won't experience the expected sales increase because they didn't have the right price or images. In Wayfair's case, suppliers control this. Wayfair can guide the supplier, but ultimately, the suppliers control their destiny. - Former GM at Wayfair

In this interview, the former GM of Global Demand Planning and Inventory Management Strategy at Wayfair sheds light on the complexity of the company's demand forecasting tool.

LGI Homes: New Home Sales Process

A key attribute of LGI Homes' salespeople is their in-depth understanding of the home buyer's financial situation, which they use to run them down the mortgage structure to the penny, This helps build a strong rapport between the salesperson and the home buyer, increasing the chances of closing a deal on the first visit.

And then after they understand how they're qualified, we break down in detail their monthly income versus their monthly bills, where their credit report is, we go into great detail so they understand exactly how they're going to qualify for this home. Most of the time, once we're done with that, they'll say, "No one's ever done this for me. And the realtors don't do this." They say, "It makes so much sense now that you explain it this way. And no one's ever done it for me, not even my lender, who I got pre-qualified with. They didn't even explain it this way." So then we'll get up, start walking towards the door - everybody's always amazed or shocked that we do this, but before we go out the door - we hand them a "SOLD" sign. - Former Sales Manager at LGI Homes

In this interview, a former Sales Manager at LGI Homes sheds light on the company's new home sale process.

Evolution Gaming: Crypto Casinos & the APAC Market

We're finalising our work on EVO's APAC business and plan to publish our learnings next week in a longer written piece of research. This week, we published two interviews covering how crypto casinos work and the APAC Live Casino value chain relative to Europe

A former Ezugi BD executive explains how unlicensed operators change the playing in Asia.

However, there are many completely unlicensed operators who do not care about obtaining a license.They continue their operations regardless. These operators can often be quite large, but Evolution cannot engage with them due to their lack of license. However, if they sign with a licensed aggregator and use the reseller model, they can claim ignorance about where the games end up - Former Business Development Director at Ezugi

In Asia, the prevalence of unlicensed operators that collectively control a significant portion of the market changes how EVO approaches distribution. This determines the B2B Aggregation mix in the region relative to Europe and the underlying profitability and bargaining power across the value chain.