Lifco vs Halma, LKQ, Brown & Brown, Procore, ALGN, Agilon, MONRO, PETS, MNDY

Published Last Week

1. IP Research: Lifco vs Halma: Org Structure & Opco Incentives

2. Halma, Avire, & History of the Elevator Sensor Market

3. Brown & Brown, Orchid Insurance & MGA Economics

4. Procore Technologies: Owner Opportunity

5. Align Technology: Growth of the DSO Channel

6. Agilon Health: US Physician Enablement Market Dynamics

7. Pets At Home: CMA Investigation & UK Vet Practices

8. MONRO: EV Threat to US Auto Repair Shops

9. LKQ & US Auto Recycling: Salvage Operations

10. Monday.com: Partner Channel & Platform Usage Patterns

Halma vs Lifco Org Structure & OpCo Incentives

We’re close followers of companies that deploy M&A as a key driver of value-creation. Not M&A in the form of large mergers or multi-billion dollar acquisitions, but regular, smaller, programmatic transactions. M&A that can be repeated tens or even hundreds of times over decades. Companies that follow a strategy similar to Lifco and Halma, two companies each worth ~£10bn and with top quintile 20-year TSR in Sweden and the UK, respectively.

Both companies acquire niche, leading SME industrial companies with proprietary technology, low but stable organic growth, high margins, and low capex requirements. For such acquirers, aligning incentives between the parent and subsidiary companies is critical.

How do you incentivise opco CEOs?

What is the bonus structure between inorganic and organic growth?

How do you balance margin and revenue growth whilst also reinvesting in subsidiaries?

Halma and Lifco are of similar size and margin profile but operate very differently.

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They have a different definition of decentralization. Lifco’s org structure is highly decentralized:

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HLMA has extra layers of management in the form of Sector and Divisional Teams:

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This research builds on our previous research on the org structure and scalability of serial acquirers. We compare Halma and Lifco’s incentive and remuneration policies for subsidiary managers to better understand the underlying operations and drivers of organic growth for each company.

This research piece is the first in a new series to understand how incentives and the org structure influences the scalability and organic growth of serial acquirers. Next, we will be exploring M&A incentives and pay across top acquirers.

Brown & Brown, Orchid Insurance & MGA Economics

Brown & Brown’s National Programs Division is the Group’s most profitable business line and has the fastest organic growth over the last few years.

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We interviewed a Former EVP at BRO to explore the value of owning MGAs, drivers of underlying economics, and potential to capture greater underwriting profits. We use Orchid Insurance, a recent BRO acquisition, as a case study to understand the MGA and MGU business:

typical compensation is where the insurer, the carrier partner like Canopius in London, will pay 23 to 24 points on gross premium. Out of that, Orchid has to pay the agent, which is about seven or 10 points, to the retailer. They also need to run their business and make some money for themselves. When I was at QBE, as the carrier, I told them one of the reasons they should choose us was because we wouldn't pay 23%, we would only pay 20%. Everyone appreciated that. I added that we would pay an additional 7% for a total of 27% if the loss ratio was less than 40%. In other words, if you make money for us, we will give something back to you. - Former EVP at Brown and Brown

The interview goes on to discuss BROs edge vs other brokers, advantages of wholesale brokerage and MGA internally, and risks for MGAs.

Procore Technologies: Owner Opportunity

As part of our Procore coverage, we explore how PCOR drove adoption of owners such as Facebook and Amazon and how they would use the platform when building a new data center:

Companies like Facebook, and others who are building, generally don't create each building from scratch. They have a general framework and understand the processes that need to be executed. An advantage of having Procore is that we can take the templates, workflows, budget, and timing from Project 6 and copy them into Project 7. We already have 80% of our forecast on time and budget and what needs to be done, which limits our risk of things going wrong. Owners care about reviewing project documents and schedules to forecast the direction of a project. Without something like Procore, they would have to rely solely on the advice of the GC. This is similar to the level of knowledge that would benefit an insurance person. However, a GC might not disclose certain challenges because they aim to achieve the lowest insurance costs. If an owner has visibility into these challenges, they can better forecast their schedule and costs. - Former VP, Procore

Align Technology: Growth of the DSO Channel

A Former Sales Director at ALGN walks through the DSO sales channel, how it differs from selling to other customers, and the competitive environment.

But I think Align is too proud, like any big company, they're very hungry, they're very money-driven. They have certain numbers they have to hit for growth, but I think it's going to get tougher and tougher. I don't think it's going to get easier per se. Align does have a much bigger advantage because a lot of big DSOs, a lot of big retail doctors are doing significant Invisalign volume. So for them to entirely switch, it's not going to happen. But as you see some of the new doctors coming out of residency school, some of the new DSOs being formed, some of these new competitive companies really developing and pitching the value, I can see an uphill challenge for Align - Former Sales Director at ALGN

A key part of our upcoming research will be to understand how Spark and Angel Align have scaled and the competitive threat to ALGN.

Agilon Health: US Physician Enablement Market Dynamics

In this interview, a Former Executive Director at Agilon Health sheds light on the physician enablement market dynamics in the US.

Think about it this way. You could bring on a medical group in a market, say, 50 physicians, who have been a medical group and performed well in a market for a long time, all employed. Your initial relationship in a market might be with that medical group, and because it's a group with some experience and longevity, all the things we've talked about that are markers of higher performance, that first cohort is going to perform pretty well. But then, they look for other opportunities to grow that market with other relationships. Maybe the next one they bring in is a large IPA. Generally, the IPA is not going to perform as well. It doesn't have the leadership structure or the infrastructure. So, that second cohort comes in and performs a lot worse. I think that's what's happening with these guys. They're bringing in different types of organizations into a market, and then they're giving you a medical margin number for that market. The first cohort does well, the second cohort does horribly. It looks like the market is doing worse rather than better. The trick for them is trying to figure out how to bring in cohorts that are performing well to begin with. - Former Executive Director at Agilon Health

Pets At Home: CMA Investigation & UK Vet Practices

The CMA launched an investigation into the UK Vet Practices sector after years of consolidation by corporate practice owners negatively impacting consumer choice and pricing. This interview with a Former Head of Legal at PETS explores context and potential ramifications of the investigation:

What I can say is that there has been a feeling in the vet sector that the CMA has been increasingly likely to start an investigation like this over the last five years. The internal view is that this is really about ensuring transparency and consumer choice so that consumers can make effective decisions based on transparent information. It's not necessarily about thinking that costs are too high, but about ensuring consumers can easily access information to make conscious decisions. It's not only about pricing but also about making consumers aware of the difference between a truly independent vet practice and one that might appear independent but is actually corporately owned. That's where I think they're coming from. - Former Head of Legal at Pets at Home

The CMA's priority is to ensure transparency and a better experience vis-a-vis the consumer. Vets4Pets, owned by Pets at Home, might also be at risk:

Interestingly, for Pets, it works the opposite way. Consumers might enter a Vets4Pets location, which is branded consistently across the country, and expect it to be a corporate entity. They might say, "I'm in a different location; I've forgotten my worming tablets. Can you just pull up a prescription and get it for me?" or expect the pricing to be the same because they assume it's a corporate entity. Then, they're told, "No, we're not a corporate; we can't access your records. We charge differently," and that causes consumer discomfort. So, it works in the opposite way for Vets4Pets. - Former Head of Legal at Pets at Home

MONRO: EV Threat to US Auto Repair Shops

MONRO, the $750m US-listed auto repair shop, has been an area of coverage to better understand how EVs are changing the economics of the auto aftermarket.

MONROs model centres on low-cost labour. As vehicles become more sophisticated and complex to service, repair shops need to hire skilled staff and invest in technology. This may impact margins:

We were essentially the farm team for the larger dealers. The farm team is where players start to gain their experience before they receive a contract and move on. Our stores' average tenure for a technician is eight to 11 months. After gaining experience, they might interview next door at the Ford dealer and say, "I've been working at Monro for two and a half years and would like to move up." The Ford dealer would then rub his hands together and make an offer, possibly $18 an hour. For a technician making $12, that's a significant increase in income. - Former Store Manager at MONRO

In this interview, a former store manager at MONRO explores about the EV threat on the US auto repair shop market as well as role or insurance companies in the value chain. In the coming weeks, we will be interviewing executives across servicing divisions at franchise dealers and OEMs to better understand their EV distribution strategy.

LKQ & US Auto Recycling: Salvage Operations

In this interview, a Former Operations Manager at LKQ sheds light on the evolution of the company's salvage operations. As mom-and-pop auto repair shops are consolidated, insurers seem to gain power. This risks shifting the market from service-oriented to price-focused, hurting sub-scale operators.

So, what happens is John Doe decides to sell his body shop to a national account, let's just call it National Repair. National Repair is driven more by the bottom line because John Doe doesn't care as much; it's his business. Once you have a national company, you have stakeholders. Suddenly, every penny is scrutinized. The insurance company thinks, 'I can save 10% on all my orders.' We have great deals with rental companies, for example. So, I don't care if Mr Smith has to sit for a week and a half waiting for his car to get repaired because it's not costing me more money. Whereas, when you have a corporation with stakeholders, those decisions drive your business. When I own the business myself, as John Doe's with his body shop, I have more control over those choices, and I choose customer service over price sometimes. - Former Operations Manager at LKQ

Monday.com: Partner Channel & Platform Usage Patterns

Monday.com is a product-led organization and has historically relied on their partner ecosystem. This Monday.com Channel Partner raises concerns about declining margins for partners working with the company.

Because Monday is perceived as a solution that is easy to customize and build, companies and clients don't see any value in paying someone to do it. They just say, 'Oh, we'll watch a YouTube video ourselves. We have an internal IT team and we'll do it ourselves.' Margins in terms of our commissions have also been declining because Monday has just revised their terms and conditions with the partners. - Current Monday Channel Partner