Diploma PLC, Versace & Capri Holdings, Danaher, Sartorius, Alpha Group

Content Published Last Week

1. Diploma PLC: Leadership and M&A from Bruce to Johnny (ENTERPRISE)

2. Danaher, Sartorius, & an Overview of The Bioprocessing Environment

3. Versace: Impact of Capri Holdings

4. Alpha Group: History, Culture & International Expansion

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Diploma PLC: Leadership and M&A from Bruce to Johnny

Over the last 2 months, we’ve conducted over 5 hours of interviews internally with Former Diploma PLC (DPLM) executives who worked closely with Bruce Thompson, the Former CEO and pioneer of DPLM, and current CEO Johnny Thomson at corporate headquarters.

This analysis curates our learnings on Johnny’s character and how the business and M&A strategy has evolved from Bruce to Johnny’s leadership. We also share insights on the quality and nature of DPLM’s value-add across segments.

Diploma is now at a run-rate of ~£1.4bn revenue. As we’ve previously discussed, scale isn’t the friend of holdcos. There is a fine balance between deploying higher dollar amounts of FCF and maintaining high ROIC’s. Companies tend to evolve from a lean corporate HQ to increased layers of management to help scale acquisitions and operations.

From Bruce to Johnny’s leadership, DPLM’s HQ has grown from <10 FTE’s to over ~40 today. We estimate DPLM’s HQ cost is a ~10% drag on EBITA. It’s hard to evaluate the incremental value created for every incremental $1 of HQ expense. Comparing DPLM to Swedish acquirers like Lifco or Indutrade highlights how 'decentralisation' exists on a fairly wide spectrum: Lifco owns over 200 companies with 4 FTE's at its parent:

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Diploma seems to be following a similar org structure evolution as Halma, just without Halma’s operating margins. In this Research Analysis piece, we discuss how DPLM’s org structure is evolving under Johnny in more detail.

This is the first piece of research in a series on Diploma. Over the next few months, we plan to cover Windy City Wire and TIE, two large recent acquisitions by the new CEO in more detail after DPLM’s Investor Seminar this month.

Danaher, Sartorius, & an Overview of The Bioprocessing Environment

With the merger of Pall and Cytiva, Danaher has created a true leader in bioprocessing. The company has seen demand in its end-market slow materially. This former Pall Sales VP discusses the competitive landscape in bioprocessing, demand trends and the opportunities the Pall / Cytiva merger could bring:

The available capacity today compared to a year ago is quite drastic. I don't have exact numbers, but I suspect that where people were close to capacity, now only about 70% is utilized. I think demand for future builds will drop a bit until we know more about the recession or non-recession. From what I've heard, funding is not as readily available, and people with ideas have to justify their business plans, with VCs being more disciplined in their decision-making. - Former VP of Sales, Pall Corp

The current demand slowdown can be attributed to capacity expansion during the pandemic, supply chain disruptions, and declining investment in biotechnology start-ups.This data originally from Pitchbook shows the slowdown in biotech funding compared to prior years.

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According to a Former VP at Pall, pre-commercial stages account for almost half of demand.

For single-use spending, I think research accounts for under 10%, maybe 5%. The clinical portion is around 35% to 40%, and commercial makes up 55% to 60% of the spending. - Former VP of Sales, Pall Corp

Amid a challenging funding environment for biotechnology, the executive expects a normalization in industry growth in 2025 as manufacturers work through their inventory.

The big players are working on reducing lead times, but they're still over 12 weeks. I think that inventory will be worked down in the next two years. What they received last year will start expiring in 2024, and so the buying will start picking up then. That's why I see a step up next year. As the orders that they had last year get fulfilled this year, that will put some pressure on purchasing towards the end of next year. That's why I think 2025 becomes more of a normal expectation for growth. - Former VP of Sales, Pall Corp

Despite these medium term challenges, this interview explores the longer-term outlook for the industry and the positioning of leaders such as Danaher and Sartorius Stedim Biotech.

Versace: Impact of Capri Holdings

This interview with a Former CFO of Versace explores how the acquisition by Michael Kors and ownership within Capri has impacted the brand. There are questions on how Capri has positioned and distributed product and the long-term impact on Versace's brand equity:

Versace changed some of its manufacturers, especially in the leather goods area. The quality isn't the same anymore, and the margins are up, but the quality has suffered...One of the reasons for the operating margin issues is the number of outlet stores opened across the United States, China, and Europe. The business has already transitioned towards the outlet business, which improved margins but created a major issue for the brand's image. Once you destroy the brand, you can't sell at full price and you start selling at markdown prices, which is a significant risk. - Former CFO at Versace

Michael Kors' operational philosophy and that imposed on Versace seems a far stretch from the loyalty created by Hermes or Chanel, for example:

This kind of loyalty exists only when you walk into a Chanel store and buy Chanel or go to Hermès. For the rest, it's going to be difficult. People buy what they like and want, not necessarily staying with the same brand for years. There's simply too much competition. - Former CFO at Versace

This interview further explores how Versace was managed under Capri, growth challenges, and Versace's positioning versus higher-end brands.

Alpha Group: History, Culture & International Expansion

Last week, a fund services provider laid out how Alpha Group provides services traditional banks have shied away from. In this interview, Alpha Group's former CFO discusses the history, culture and opportunites that have enabled the company to grow in Europe. For example, the company runs unique comp schemes for key personnel in satellite offices:

Alpha has two types of share schemes. One is called the eight times multiple, which is publicly available information. We realized early on, when we first brought the funds team on board, that we wanted to incentivize them to grow the business and provide an exit route. We did this by awarding share schemes in a subsidiary company, making them equity owners in that company. There would be a predefined agreement stating that Alpha would buy back those shares at an eight times multiple after three years. - Former CFO at Alpha Group

Employees at Alpha's local companies can participate in this scheme where Alpha Group buys back shares awarded at an 8x multiple of profit after tax for the local subsidiary. This has helped Alpha Group recruit and maintain talent in these new growth markets while aligning their interest with the wider group.