Oxford Cryosystems: Selling to Judges Scientific PLC

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Richard, can you share some context to when and how Oxford Cryosystems was founded?

The project that led to it started in the mid-1980s. A confession at this point, it was actually between my father who was a university academic, physicist at Oxford, and a colleague of his. A particular challenge that my father had, that he needed to solve and needed help with; something that his scientific colleagues around the world were trying to solve. It was an instrumentation question; how to do something more simply. He sought the help of a colleague who was running the cryogenics group of the Clarendon Laboratory in Oxford at the time and they worked with him on a project, came up with a solution, turned out to be a bit of a 'eureka' moment.

It started as a small basement project with the university. This was in the days before universities really started getting their act together commercially, so very much in-house, in the physics department, building them in the basement, and it slowly grew. More and more people found out about it and that was the beginning of it. Up until about 1993, my father was an academic who never gave up his role at the university, but his colleague decided to step down from his role at the university and decided there is something in this. They together decided that John would then begin running the business commercially so they went out into a business park and went from there.

What were the problems they were solving?

The device and the product that the company is still very much centered around is a device that is designed to cool microscopic-sized crystals. Crystals on the end of a pin and micro in size, they are very small, in an open flow stream of gas, at that time, -170 degrees, so it is 100 Kelvin and it is a particularly difficult thing to do because you are looking to study this crystal with x-rays. It's a technique called x-ray diffraction, spraying cold gas in the air, at any surface, would lead to the moisture in the air freezing out quite easily. And of course, ice in itself is a crystal, therefore contaminator.

At the time that people wanted to do this experiment for days, weeks and months at a time, 24/7, the technology was such that it took that long to do. Low consumption of liquid nitrogen, be able to refill your supply of liquid easily without disturbing the experiment, do it ice-free, stably, with a range of temperature and temperature control. What would have existed before was typically very Heath Robinson and really, really difficult to use, often made of glass. For the scientists doing this work, their interest is in the materials they're studying and the x-ray system that they've got in their laboratory that is used to fire x-rays at the device, produce images, and then do the necessary work to bond those images to determine the structure of the material. That's their interest. Cooling it; really nice but it's so difficult to do.

The problem had never really been handled by anybody on the outside of that world. Just the fortunate 'eureka' moment between my father, and more importantly John who was the engineer to come up with solutions because he was on the outside of all of this. He wasn't part of that world and I think it allowed him to come at it with fresh eyes. That was the problem they solved and I quote this: it was a dustpan and brush to Dyson vacuum cleaner, made in one jump, without anything else in between. Customers in the beginning couldn't quite believe it and then it was just a very profitable, easy sell.

What was the hard part of the problem to solve then?

Typically, what you do in a situation is take a vessel containing liquid, and you pressurize that. Imagine just a hose pipe, a syphon type of effect. You control the pressure in the vessel, and then liquid gas would come out and try some way to ensure that turned to gas, control it at a certain temperature, and then continuously produce the stream. What happens when the liquid nitrogen runs out is the pressure then drops. If you can try and refill it, the pressure is going to vary, or the flow will vary, and then the temperature stability is gone. There were people who understood it and could try and make it work very well, or make it work. But its base temperatures weren't very good, they were unstable.

The cryostream that was developed was 10 times more stable, consumption levels were a third or quarter of what everybody else was using. The way that was done, primarily, was to suck the liquid out of the vessel. The vessel went in between a large bucket effectively, and you draw the liquid out using a pump, you suck it out, you then convert it to gas, warm the gas up, because it has to go through the pump, and then wind it back in through a series of heat exchangers and you have your flow of gas. It meant you could refill the vessel without any effect on flow and you could control the flow more easily. There is a lot of software work they've done in-house. My partner at Oxford is a very, very capable software engineer and, very early on, got involved developing good control software. It was all very specific to that application. The one item led to all the approvals.

The product that you were selling, is it just hardware or is it hardware and some recurring revenue from software?

We're going back to the late 80s, into the 90s and even to the late 90s. This device was treated very much like the light switch in the lab. They come in, turn it on, while the lights are on, the system was working and the screen would say 100 Kelvin, or whatever temperature you picked. All they had to do was glance at it, they'd do all their work, at the end of it, they would finish all the collecting of the data and all the science, they could press 'stop' and turn the lights off. It wasn't a system that needed to be controlled; it controlled itself.

Obviously, time goes on and then there is, like everything, a bit more computer connection. But essentially, it's only because they can see it on the screen and hit 'go'. Within these systems as well, most customers would pick a temperature and that would be the work they're doing. There are other customers, if the materials that they're looking at have temperature-related properties, they might vary the temperature and see how the property has changed and carefully step through it. We have software that would allow that to happen. They just go through different physical phases, ramping up to a certain temperature, holding it, cooling down slowly, seeing what happens to your material. But the majority of it was, for most people, turn it on, set it to your temperature and at the end of experiment, turn it off.

It's one sale of hardware or one system sale and you get paid for that. There's no consumable revenue or ongoing revenue or maintenance.

That's right. It was very much a hardware capital expense, there wasn't any extra. The other great thing about it was, back at that period in the 80s, 90s where physicists or people doing physical sciences, even amongst the biologists, a lot of them were very, very practical people. You had tool belts; you didn't have funding for extra. It was really easy for them to look after it; it was a very low-cost system to maintain, which again, made it very, very popular.

How has the machines or systems changed today?

It remains the capital sale because the drivers haven't changed particularly, and I suspect this applies to any industry; people don't expect to pay for software. It applied in ours to have the conversation with our OEM partners in the x-ray companies. If something improved your systems, you could sell capital equipment, but in the end, people expected good software and expected it to be included. It was never something that we could then ever lean on or we felt we could lean on. The question was always, what am I getting? They weren't really looking any further, anything from software control. We did manage to leverage that.

When you say the drivers are the same, what do you mean by that, exactly?

With respect to the software?

I think you mean the sales drivers.

They weren't around software, was my point. They wanted a device that was stable, reliable, they could forget about. It would be a bit like offering a software interface. I could have said this 10 years ago, but people have these now, a software interface for your lights. You currently turn the lights on and at the end of the day you turn them off, why do I need it? Today, we have apps that do it but back then, it wasn't something people really felt they were getting any value from because it wasn't necessarily their focus. Their focus was collecting data, making sure that was done reliably, good quality data, which they could then number crunch to get their solution.

When you say turn the lights on, is it literally that crucial to the labs functioning that it has to be running all the time?

The light analogy was around the idea of the simplicity of something they could rely on. They needed it, but we'd set the bar. We've massively set the bar for a very unreliable technology. I remember having a conversation very early on in my time there with an Indian chap from Bangalore, my first Indian customer who told me that he spent two weeks sleeping in his lab, with a sleeping bag using a previous technology in order to keep the experiment going. He had a little camping stove. As I said, we got to the point where you just come in, press 'go' and forget about it. So that was the bar and that's what people expected.

How much roughly are the machines?

£35,000 all in, I think was the typical end user price. Maybe more than that now, but it's that sort of order.

What's the lifetime of the systems, roughly?

This is another very good question, because you could argue that they would just last forever, other than the pump, which you could replace. It became an investor's nightmare, as you can imagine. Having said that, you can argue that, as with all technology that does exist, what you do is you go aspirational. What else you can do to make it slightly better, and create a new one. And even scientists are susceptible to just 'new'. Actually, you could argue it suffered from not being a device that needed replacing very much. That was very much where we sat at the beginning. But the world moves on.

Typically, a department at a university, scientific physical science department, biological science department of a university, many years ago, in terms of funding, you had to get money to keep equipment going forever, like all aspects of business and within academia, or within the university structure. We initially felt that this asset cycle became about 10 years. Regardless of whether they could keep it going, the financial people at the university would say, we need this replaced now. We appreciated it very much; what's new? 10 years later, new x-ray system, and therefore, new cryo-system with it. That was very much the cycle that became the normal; people would be looking to replace their systems every 10 years or more for financial reasons.

What about customers and other regions outside the US? Would they run them longer than 10 years or look to sweat those assets for longer?

That logic has spread everywhere. The normal scenario would be that the x-ray companies, the companies making the x-ray diffraction systems, would develop technology, you'd need detectors, software, and obviously bundle those packages to get the SOP, it wouldn't necessarily just be every 10 years, it might be something in between. But eventually they'd have a whole new system and it would be quicker and all the rest of it. Our job was to make sure we could hitch on that bandwagon. The last thing we needed was to say, well, actually, our system is still the same, it still works. You've got to have something that is new and that's the cycle that we got into, is to ensure that we updated it, that there were new parts and justified as part of that entire lab expenditure.

How much did Oxford’s technology actually change versus the x-ray companies just driving that refurbishment?

Not enormously, because it was very, very good at the beginning. We made changes; there were some very, very significant improvements. But principally, it was very, very similar because it's a stream of cold gas, and it worked. And it did it continuously. Yes, you could go colder. In fact, we could get as cold as you could go before it turned to liquid. But people said, I don't really need that. I'll just carry on doing what I'm doing. Temperature control was a big change for us. We upgraded temperature controllers, touchscreen interface and so on. There’s a bit more of that going on, whereas before it was much more old fashioned. But principally, at the end of the nozzle, things were fairly similar.

How did you think about reinvesting in the business then, to keep ahead of the curve?

This is a key question. For us, we were always fairly competitive. Yes, it took a long time for what we would perceive as business-changing competitors to appear, with respect to them. They were good companies and we had competitive situations. For us, our market share initially grew very quickly, creating the gold standard, then it got chipped away, and then it came back again. But of course, from our perspective and the long-term objectives of a business in opposition, we needed growth that existed without reliance on a single product.

You've got a big system or capital sale of a system. Most of the innovation somewhat is driven by the OEMs that deal with the x-ray, firmware inside the system and their 10-year life cycle. How do you think about reinvesting in the business, innovating to stay ahead of the curve with those dynamics?

For us, it was obviously just parking that product for now. As I said, we had innovation cycle around new technology that could be used for temperature controllers, upgrade touchscreen, all that sort of stuff. Those are important and it meant that we would then be able to follow those lab upgrades. The next question is growing and securing the business. We were very top heavy with that product. That was very risky, if you look at that from the outside, as an investor wanting to see some diversification. We had a range of other products but within the same area, so we had devices that would go colder still. Again, bigger, more expensive pieces of equipment, much more specialized. We had technologies that work slightly differently that would go colder using different technologies, that would use liquids, gases instead, when you're working out healing temperatures, where you're going below 80 Kelvin colder.

We were then working to diversify; we had a software range of products that we had for a while. We did software consultancy with a Japanese company, and then a Dutch company for a long time. That was very successful. In more recent years, we had acquired a product range from a firm in Israel, that was a cooler technology. Within coolings, providing cold, your choices are typically liquid nitrogen and if you wanted to go colder, liquid helium. But it's something that we don't get involved in because it's much more dangerous and expensive. Or you do it mechanically with very advanced mechanical refrigerators that would allow you to cool down to various temperatures where you could go very, very, very cold. These mechanical devices are closed systems. Now helium within them, when it's closed, helium, like freon in a refrigerator, would have a pump, a mechanical compressor, which would use principles of gas expansion to then give you essentially a cold finger. From that cold finger, you could either directly cool the sample or you could blow gas in the heat exchanger around it which would then cool down and give you an alternative technology. That was one of the big products that we also developed in parallel to our existing liquid system.

We had a non-liquid equivalent. Very much driven in the late 90s, early 2000s, was a desire to get away from liquid nitrogen. Inconvenient, it could run out. Students would forget to fill up vessels and that sort of stuff because invariably, it came in big tanks. There were disadvantages there, although it was the norm. The government companies developed non-liquid equivalents which had big advantages not involving liquid so they can just run, you could forget about them but they were mechanical, much more expensive, much more expensive to maintain.

What's the split roughly in sales between sales to corporate or commercial versus university?

It started very academic and then and then in the early 2000s, maybe slightly before, there was a big swing within the large pharma companies to bring this sort of technology in-house. It had become advanced enough, software was good enough, reliable enough that actually, you could take academics and performance within R&D facilities within the big pharmas, Pfizer, whatever it might be, however they consolidated over that period. That went through a cycle for a long time, but it was still only a fraction, so a few percent compared to the academic world. Then actually, that began to ebb away again, as the pharma organizations decided, we can outsource this and we'll do this within university environments. But it was dominated by academic institutions, so universities, charitable organizations, the Wellcome Trust, those sorts of things. And then you have facilities like synchrotrons, central research facilities, but all government or mainly government-backed in some form or charity-backed by some funding or Trust.

What's the biggest challenge in selling to those university-type customers?

For any organization, it's having proven technology and we were very fortunate. In our situation, we created very decisively, because the people who started the business were academics. It wasn't a commercial push; it was a genuine discovery. There was no attempt to sell. You said, look what we've done, and everyone said, we've got to have one of those. Most organizations that we work with, our OEM partners, all inherently had academic origins as employees. It was a very niche market. If you have technology and can prove you have technology, you're answering a question that has been asked, then you had a foot in the door. If you looked at it strictly from the outside, even if big organizations and one of our competitors, in the end were very large companies in this sector, but not necessarily directly in science, but also directly in that in that market, their job was much more sales driven because that wasn't their niche area.

We grew up in that area of diffraction and so for us, the product was easy to sell, it wasn't very difficult. But if you're on the outside, it can be a difficult nut to crack. The diffraction crystallography market is a very, very, very niche technology and very niche market. Everybody's very small, everyone knows each other. It creates challenges when you're looking at trying to grow your business, because you're deep down a cul-de-sac of private people in a little world. If you say, I'm going to do something new, for the mainstream, on the main road, you have almost got to start again. You've almost got to say, with this money in the bank, do we acquire something else?

We were in a position where we took on some new technology so it meant that we were then developing that further in-house, and that introduced new areas, and also Cryosystems ended up being involved in radio astronomy. Our Cryocoolers are being used within a big project being done in South Africa, the Square Kilometer Array in Australia; massive, big international project that I believe is still ongoing. That's how our business could then develop but it really did require something very new. A big step, we needed to take a big risk. That came in our direction; we were quite fortunate to end up in that area.

Do you need those kinds of step changes in direction or strategy to get that longer term growth?

We did very well organically. What was going on around the world, inevitably, is you get countries developing. Like everything in technology in this area, you then start to look east; Middle East, India, and China, Australia, and those markets have grown enormously and obviously, China is a huge market. As countries develop, and they are developing their own universities and funding is available and so that's where a lot of the growth has come. It's come geographically. Looking at the countries and all the rest of it, all those other ones, they're all coming on board and that's helped the growth within the products we already have. If it's not that, then it's taking risk on new products in new markets, which obviously is the riskier one, especially for a small company like ours.

What was the biggest challenge just to grow the core product organically?

I think, for us, it was ensuring that we had the relationships with the x-ray companies. There was only a handful that existed, so we needed to ensure we could provide a reliable product, provide the support to ensure that you're in new sectors and that customers in those areas, the distributors for the OEMs, were happy. That's where we put most of our sales effort into. A very small fraction, 25% to 30% of our business, was direct to end users; it would be the most profitable because there's no discounts involved. However, we never played that game. For us, it was supporting our OEM partners, they were our customers, to ensure that they had everything they needed to fulfil the requirements, as their sales teams went into labs to sell their equipment and ours with it.

60% to 70% of your business would go via the OEMs into the lab?

Absolutely. That was very clear to us from the beginning. Our product is just an attachment. On its own, it worked but it was there for a purpose for another experiment that was taking place. It's equivalent to buying a steering wheel for a car; it's not like the rest of the equipment. And that's where we were. We were making sure that our products were integrated or universal even, within all those x-ray systems, that they could fit to any type, making sure that we did any adaptation that was needed as best we could. Keep the product universal and fit on each one. And just provide those OEMs with the drivers that they were being given from their end users. They were the key customers.

{audio 0:26:50} Why wouldn't the x-ray company use Oxford, for example?

We went through that entire profile. When the business first started, a lot of those companies – let's say there were three or four of them – had their own in-house devices. But again, it wasn't really core to them and how much time and effort were they going to put in? Then we arrived and, reluctantly to start with, but driven by the end user they'd say, we've got to have an Oxford. We would then have contracts with them, they then go away and decide, we're going to go around again, because we're not making money from you. Suddenly, our number one customers would go up against us. It wasn't a good feeling. But actually, we managed to get through that, took on other OEMs as well. By about 2012, we were partnering with everybody. And we've been through all of that. I had the 'what if?' questions in the past, then the 'what if's' happened. And we came out the other side so we were quite fortunate.

The biggest competitors were actually your customers?

One or two of them were. But don't forget, the three or four that existed, they were only supplying themselves. You still have the others, so if there was an effect, we had competition. Our biggest competition externally came from Oxford Instruments. The guy who started that, Martin Woods, was the predecessor to the guy who started our company at Oxford. He left to start Oxford Instruments and they then decided they wanted part of our business, which we obviously found a bit of a shame. We competed for them for many years. Their business moved on and eventually moved away and he gave up on it, but we were competitive.

Why did they give up?

In organizations like that, people come and go. There were various iterations of their product, to the point where they iterated it one more time, unsuccessfully. Because it's a very niche area of very tiny part of their business, the support structures weren't there. They have sales offices, say in East Coast, in the West Coast, those people will change. They didn't know what the need was, support was pretty poor. And that's something that's really difficult in an organization like that, to maintain well, when you've got a lot of churn. Eventually, they just decided they got it wrong with an iteration and just said, we've got other things to do. Good luck, guys. We're going to do something else. They continue to be a fantastic company. We were just a small team, plugged well into our big OEM partners but we were only focused on that stuff. We focused on cores.

Just because it was a small market, small opportunity, and also it's dependent on the expertise of the people and they come and go and therefore it's not top of mind for these bigger companies.

They had good people; people perfectly capable of doing it. And they did. But then of course, their bosses say, you're good, let's go get you on something else. And that's natural. I don't know how big companies ever deal with it because it's a real challenge.

It's part of the advantage of what Judges do. They look for those companies that are operating in really small niches. What is the biggest competitive risk for Oxford, in your opinion?

If you'd asked me 2000 or before, it would have been somebody copies it. Somebody that does the same thing, does it successfully. Manages to tick all boxes. We were confident they wouldn't, but we weren't patent protected; it was a published project. That didn't happen. There are a number of reasons why it would become a very difficult thing to enter, for a large company for a small amount of money. Why would they bother? Probably the returns wouldn't be there for the amount of development required. Ongoing, I suppose it's obsolescence of technology; are there other ways of doing this science?

What's happened in our sector of crystallography is that there are other techniques. You might have heard that cryo-EM has had a massive impact on science, and has had an effect on our sector. So you can do it, doing something other technique. Resolution is not as good; the data is not as clear for a lot of systems. For some systems, it worked extremely well and there's been a lot of uptake there, a lot of investment there. But if you need very good resolution data, for the materials you're looking at, then it doesn't work.

You could argue the unknown unknown, something comes up that we don't yet know about that will make something like the need to cool obsolete. There's lots of physical reasons as to why and I'm struggling as to what that might look like. But there are a number of techniques going on. Free-electron laser is another one where work can be done. Other techniques, resolutions become better. It is limited by physics in the end, to a point. The upside to those concerns is that it's not anything that would happen overnight. So that provides an opportunity for an organization like ours, time to develop other things, to see where we would have a role in that sort of advancement. I don't think the product would become obsolete overnight, if at all, and I don't think whatever affected it would happen quickly and that suddenly there's a new product launched tomorrow that is better and half price. I just don't think that is going to happen. But I think whatever happens, the company has the time to be able to create a business plan for something new.

I'm just looking at the rough sales numbers. Obviously, you can't get the full revenue numbers. But I think in the early 2000s, the revenue was somewhat similar to what the revenue number is today at £4 million roughly.

It's higher than that now. Back then, that would have been probably the entire market; probably slightly less, but maybe £3 million. I think we had probably £2m of revenue at that point. Maybe even less than £3 million.

1999 revenue I had from when the sale happened. £2.16 million in 1999. And then now it's £4.4 million. 20-year growth, roughly 3% per year. But then from the time Judges purchased in 2017, £4.3 million, now it's £4.4 million so hasn't really grown in the last five years.

I don't know what your latest figures are. I know where it was when I left.

That's just from Companies House.

Recently?

No, from 2020. But my broader question is, 3% revenue growth over 20 years, we spoke about the challenges of growth. What would you say would be the real challenges in driving high organic growth for such a business?

New product; it exists across all of Judges' businesses. NPD is what it's all about. And it's finding a product, understanding what technologies and knowledge you have in-house and being prepared to take the risk. When you're dealing with a bunch of scientists and engineers – and I put myself in that category, although not the greatest by any means – we're fairly risk averse. For us being in that sector, you've got to have really good people and people to take risks and do things well and for us it was going to be entering new markets. There was no doubt. The refrigerators I talked about, the Cryocoolers that we acquired, provided an opportunity because it was a standard technology; it was something that was needed across a variety of science-based applications.

Everything from vacuum to radio telescopes, even in our world. Can that be leveraged? Do we have the sales people, the knowledge, the technology? Although what we had wasn't necessarily cutting edge – there were firms out there doing better – a bit of 'me too', can go a long way. But obviously, there's a lot to get right in that. And that's the path I'm sure now Oxford are on and maybe other things as well. But that at least provided an opening to do what other people are doing. It was very difficult for us; we were a business always driven by doing something new, which is not always the best approach, and I always find it quite tough because if every new idea was successful, we'd have a world full of garage inventors and they would all be massively successful. So actually, sometimes a bit of 'me too', what is everybody else doing? Let's just go and do what they're doing and maybe do it in our own way. Whatever it is, but what was going to have to drive the growth at Oxford, was new product development.

This is one of the questions I have for many of Judges businesses, where they obviously find great products, originally with great niches for highly profitable, slow growing, but because they're so niche, they require such an expertise, like your father starting it, and people like yourself that spend 20 decades in a game. What's the next step, when these people with the expertise leave?

There are two aspects to that, there is the ongoing running of the business and it was disciplines that I was always very eager to try and enforce or undertake, which is ensuring that drawings, engineering knowledge is transferable. It could all be written down beautifully. Same thing goes for software, but you equally know that that doesn't necessarily take you forward. It's about taking the right people that are humble enough to understand that this is a very successful business, why it's successful, and what they can bring to it.

Those are really difficult balances to strike. Find decent engineers, they're like everybody. They're there to be creative. They don't really want to sweep stuff aside, but they want to say, look what I can do. That's the way we're wired. It's creating that team of people who respect what's there already, how can it be improved upon and what else can be done? If you are looking at new markets, you're then also talking about not just development teams, you're talking about sales people or marketing people with experience in whatever area that might be. Therefore, investment becomes significant.

That's difficult to understand if you're spending that wisely.

There's a lot of questions that have to be answered. These aren't catalogue businesses; these are capital equipment businesses, where if you're in the world of building custom equipment, that requires a particular style. Everything's different with ours; ours are absolute standard products. Box up the same thing every day, and then go out. If you had a catalogue business where, if you're selling consumables, it becomes a bit easier. You ask the guy what he wants next, and you make it quick and easy and have the classic "you smell what sells" and go with it. The challenge with businesses like ours, and in capital equipment, is the development cycle is very, very long, or it can be. How can you improve that as well? If you're being creative, I still have this tug of war with my colleagues, I'd be used to saying, I want things quickly. At the same time, they'd be saying, we have to innovate; these things take time.

There is a balance to be struck, but in the end, what I used to find is that none of us would really be confident in sticking our head above the parapet over what next to do, because obviously the development cycle is so long. The investment therefore, is so long, you're worried you make a mistake. You think, okay, if we can do many things more quickly, if we can develop the systems and the processes and the agile or whatever they call it in project development, we'll do five and if two work, great. If two fail, one is average, then great. But then again, that's easy to say. They are the challenges, I would argue, within businesses like Judges and sure as hell mine.

Because that feedback loop is very slow in spending, in R&D and feedback from customers.

We're not copying people. Let's say, we're going to make a laptop. You can go out and buy a whole load of them and say, we've got our starting point. We were doing stuff that was original, so it took time.

How hit-driven is the business? You really have to hit the next product lifecycle. You mentioned 10 years on average. For example, do you have to really nail that next evolution of the product, or you'd lose that business to someone else?

When we started realizing that we needed to, we weren't. We had to catch up to make sure we were doing it. it wasn't an enormous. We were being told by our own partners, I just got into a lab to sell them a new x-ray system and because you don't have anything new to replace the one you've already got, they've just taken your old one and moved it across to the new one. But obviously, they catch up fairly quickly, so it wasn't a big problem.

Was that in the early 2000s? Was it when Ferraris bought the business, it seems sales declined roughly in the early 2000s, potentially?

What happened there was the timing, the Ferraris acquisition coincided with the arrival of competition. I mentioned we had two things at that point, I think Oxford Instruments were already around, but one of our main customers decided to do their own thing. And he was our biggest customer at the time. They would still offer ours, but obviously they're going to have their own. Yes, the timing for Ferraris was pretty dreadful. It was disproportionately profitable. You're talking about somewhere close to 50% net, it was insane. Anybody within their right mind would have appreciated that it wasn't going to last and they paid for that. So it was very quick that they realized that; it was a public company and pressure built fairly fast. My father and his partner, they sold at a particularly good time, when that inevitable dip came.

That was competition from Oxford Instruments, like an outside party, but also one your customers which was saying, wait a minute, we're paying a fortune for some of these parts or systems, and therefore we're going try ourself.

They'd been there before, slightly.

You're saying it took you a couple of years to catch up and spend the money on R&D and roll out a new system and really compete?

Actually, at that time, I think we just launched a new one. So it wasn't that we didn't, it's just that the sector just had turned his back. Competitors had just turned their back on us, regardless of what we'd done. They were in a face-saving exercise as well. And that's no disrespect to what they did. But we could see fairly quickly that their product had flaws. In fact, it was all the problems that we solved. We knew what the problems were. But obviously, their salespeople were going in and pushing their own product. It was only if the customer really, really pushed back and said they had to have ours, would ours get bought. We had a significant drop. One of the other x-ray companies was also competitive as well. It all went, not badly, but it just stifled things really badly for us at that time.

How did you eventually come out of it or regain market share?

The customer, the OEM turned around and just said, we’re going to come back; yours is better. End of. It's not core for us. We're not going to do that anymore. We need to focus on detectors and software, all the rest of it. That brought us back a long way for a long time. There was another OEM organization which had connection to Oxford Instruments, they eventually got sold. So therefore, the connection to Oxford Instruments wasn't there anymore. That was the product they were buying, so they were happier to come and see us as well; the allegiance with Oxford Instruments wasn't there anymore. That helped grow the business and put us on a better footing.

Which really gets to the heart of why these businesses are so attractive right away. It's non-core for the bigger OEMs or bigger businesses. If an external party comes in, it's not big enough for them to really pay attention to the Oxford Instruments, for example.

That's where we got to, realizing that we were in a very niche space; whoever was going to do it would have had a huge uphill struggle. Even if the guy could have created it tomorrow, you have still got to penetrate the market. At that point it's international so it would have been difficult.

How difficult is it to grow abroad? You mentioned India and the Middle East; what are the big challenges there?

Surprisingly not, compared to imagining any other business where you have a domestic market and then you want to try and sell abroad. For us, because it was science, and it's one planet that are all interconnected, science is across. For me, selling to University of Manchester was no different to me selling to Perth. The university would do all the work, they were used to importing so they just place an order, and we'd stick it in a box and out it went and a freight forwarder would deal with it. For us, we'd attend all the key international conferences, or local conferences – Asian, European, international, American – and you'd meet people who, by their very nature, were all interconnected; scientists and science is interconnected. It was never something that had to be dealt with, it really wasn't.

Did you have a big sales team? Or was it mainly through the OEMs?

Yes, we outsourced our sales to the OEMs. We had one person with support for technical support and their job was very much an OEM marketing job. We outsourced our sales exercise to our OEM friends.

That must have been relatively few employees, to run the business.

I think 20 of us; we didn't need many. We didn't manufacture either. We did design, and we worked locally, I'd say to you, we did that because we supported businesses in Oxfordshire, but we had no choice because we were a small business. We weren't going to start using machine shops in Glasgow. It wasn't efficient. And we have very good partnership with a small organization nearby, that dealt with a lot of our key manufacturing. We had very good network locally; we were very lucky.

You mentioned how in the late 90s, or early 2000s, when it was sold to Ferraris the net margin was 50% or so. I think in 2020, according to Companies House, it was 20% to 24% net margin, which is still obviously fantastic. What do you think caused that decline or halving of that?

OEM margin pressure and competition. Most of what we were doing back then was a very high margin product. Some discounting, but the discounts have just gone up. Pressure on sales prices, pressure on margins, for materials. They are the main squeeze. I know the guys put a lot of work into reducing costs as much as possible while maintaining the product, by whatever means. But it was typically pressure on sales price, pressure on OEM discounts, and materials costs. When you start becoming competitive – and there are other options available – Ferraris got hit by all those things.

How much power do the OEMs have to continue to put pressure on Oxford?

These days, it’s spread across a few and that's great. There were times in the past where it might have been slightly more lopsided and we would have been more worried. But actually, it's fairly well distributed. It did feel like in the past, what if they choose to do it again and copy, that we'd be more concerned. But I feel these days, the relationships are good. They concentrate on what they concentrate on. Frankly, it's very consistent with price and reliability.

What was the rationale to sell to Ferraris in the 2000s?

They went on a trip to actually visit an OEM and I think by the time they got on the plane to come home, they decided, maybe it's time. I think some comment had been made about the OEM wanting to be exclusive and the response was, if you're going to be that, then control our company. The business was growing, and they were very much controlling it. It's what they wanted to do. They weren't ones for delegation; it wasn't really something that actually they wanted to do. It was their baby. It was a partnership before they sold it, it wasn't a limited company. Is there ever the right time? They just decided between them that that was it. It took them quite a while. It's a niche thing to do and so it took a while to actually sign and sell it. That was the motivation. It just got to a point, a size and profitability and they got the price they wanted. They did extremely well, by achieving what they did.

I think they got £6.75 million according to the old announcement, which was a good price they achieved?

They compared very well to their other offers; I think Ferraris had a habit of doing that.

Why did Ferraris sell later in 2010?

Very quickly, they realized what they hadn't bought. It was a little bit of a purchase based on a new CEO wanting to do a deal; here's something we can do. They were in the area, they perceived it to be vacuum technology, it wasn't really that. It took a few years before they realized it wasn't core to them. The margin question and drop off in sales, I think hurt them a lot. By 2003, 2004, we were on the market again. At the beginning of 2001, I went to the States for a year and then opened an office, came back, they had a new Managing Director at that point. They brought in someone internally, from one of the other businesses. He hung around for a year. I then replaced him and then very quickly, it felt as if I was being marched around corporate finance offices and banks and being paraded and asked to go along with any offers that might be made for the business. That was very stressful and it went on all the way up to when we bought it. I did six years of that. I was very experienced in sitting in boardrooms, giving presentations on cryo and structural biology and getting a lot of very blank looks.

How did you orchestrate an MBO? Was it 2010, eventually?

Just taking a step back, why didn't the business sell? Management were neutral to it. And of course, we were core to it, but we were neutral to it financially. So it wasn't going to be a very good thing for management, particularly.

Because you'd sold your stake?

I didn't have any. I didn't own it. I never owned any of it; I was just an employee with no financial interest at all in the business other than its success, and obviously, our salaries. That was our motive, but of course, therefore being sold was something that we were very concerned about and I think that people smelled that. There was a series of the usual questions you get asked such as, are either of the partners interested in coming back in? I said, no; they have been successful, they've made their positions clear. They're quite happy with what they've done and it was for us to carry on. That question was asked a lot, and I've never actually understood what the question meant, until we came to them at Warwick. But the question meant, do the previous owners trust the business or is there other issues here? Of course, my answer was, no, they don't trust the business, because they're not coming back in. And that's how it was read and I wasn't aware, of course, I was too naive to realize that.

I then got a phone call from my father saying, I'm retiring and the accountant says that I need to do something, so can you come along and see the CF guy? We sat down with a corporate finance guy from the accountants and I was fairly cynical. I just held my hand up, and said, I'm not happy; we've been here so many times. I always get the same answers, but let me try. I simply said, go and try whatever doesn't cost us anything. He didn't have much success and said, do you know anybody? I whipped out a card of one venture capitalist that I remember presenting to who said, I don't know why, I've been brought in by the sellers. I should be on your side of the table, looking to acquire it, so if you ever you want acquire it, call me. He came along, sat in the boardroom, we did the spiel full of information. He said, I do remember you guys. In fact, I went back to our filing cabinet and took out the original IM, opened it and I compared to the numbers you just put on the screen. You've done exactly what you said you were going to do; there's no better judge of whether what you say is true than that. They had just done a deal with Co-Op Bank who were actually local and this was before everything went wrong for them. Between Co-Op and the venture capitalist and a bit from dad, that was the box ticked. We put an offer in around April. We thought we were getting away with daylight robbery as far as we would generate a lot of cash during that period.

But I actually look back historically and think that the previous owners were probably just saying, look, guys, enjoy yourselves. They were sitting on a much bigger business and they just wanted us gone. By that time, Ferraris was down to two companies. We didn't buy from Ferraris; we bought from a company called Bionostics, so it was a Bionostics operation and us. We were opposite ends of the Ferraris portfolio of businesses. It wasn't suited; we were just a boil, just be gone. They were great once it was done. See you later and congratulations. So yes, we entered a relationship with a pretty good venture capitalist in the bank, and while we were still trying to complete the deal, we took on the final OEM, so they decided to drop their product. We achieved our three-year business plan; we were on it within about six months, if not less. People get very scared of venture capitalists; mine was like a puppy. They were lovely; really great.

You ran that for seven years? Did you steadily grow that from the time you took over to eventually selling to Judges?

We had our step up and it allowed us to focus on our new product. We redeveloped the system, markets were good. It was a buoyant time economically worldwide, between the crash and then Covid. Obviously, we're in a boom period. You compare those two numbers; it was fairly flat up until we bought it and then it started to improve. We experienced a lot of growth during that time. That window of ownership had us take on a bigger market share and then the market was growing as well, so it was a good time.

When did you first come across Judges?

We came across Judges years before we bought it, I went down with my colleague Alex, in London we met David, who obviously started it and we were very positive. And we just got to a point in 2008, where we thought, actually, if we're going to have to be bought, be employees for somebody else, why not them. He put time into it and actually, it was very good. But then they decided not to go ahead; I think they were financing their own thing.

At that point, Judges was very small and so decided not to go ahead, fine. So then obviously, when we collectively went with the venture capitalist chose to look to sell, they were on our list. We thought they would be ideal; they were in that sector. But that actually didn't happen. That was 2015. We didn't sell at that point. The way that David was organized, it didn't suit us at the time so we chose not to. We were looking at the structure of the deal at that point, and we'd had a couple of situations like this where he was looking to set up a new company, where Judges would own half and management would own the other half and we'd done that and we just didn't want to do it again, so it wasn't really ideal. Based on the levels of numbers being quoted, it perhaps wasn't ideal for us either.

Like an earn out or you mean that they wanted to spin it into a newco, with Judges owning half?

Just not enough up front. It was acquiring 50% of it, effectively. It was more of the same. And we'd had another conversation with another organization who acquire businesses who said the same thing. It was obviously something that was being gone through at the time. We needed a buy-out with the help of NatWest at that point, so bought out the venture capitalist and then, a couple of years later, we decided to exit, went back to Judges as part of that and they'd abandoned the previous model, and were quite happy for 100% acquisition.

I know these things are stressful for organizations, but if you want to be sold to anybody, you're an easy transaction. They were fantastic; no attempt to chip off. It could have fallen down for brutal reasons, something fundamental, but absolutely no attempt to chip. You could argue that maybe, if there'd been other people around or many others, we could have upped the price a little bit and to quote that phrase, they're probably bottom feeders. That's not meant to be derogatory; they go for low price businesses, which is fine. That's their model and the transaction went very well because we'd done a management buy-out, and we tried to sell and I'd been through the mill prior to buying it so many times. We have data rooms; we were well organized and it's something that I've learned backwards. Documentation, contracts, everything was flawless. And in fact, we ended up waiting for their lawyers after being told that they'd be waiting on us so it transacted in July 2017.

How did David come across when he first looked to your business? You mentioned he was really impressed with the presentation that you had with. The first time he tried to buy or was interested in buying Oxford, what really came across that was different about Judges and David?

He took the time to talk to us, took the time to realize that we needed motivation. We were mature in our business by that point; we had been there a long time and we felt that the people within it were central. He was the only one who, in advance of making a deal, was prepared to sit down with the staff and the management team and just say, here's something for you, if you come with me. No one else had ever done that. In fact, the opposite. We'd only ever had veiled threats from Ferraris; if we didn't go along with it, we'd be out. That was the big difference. David primarily is an engineer and I think he just got it, and then no expectation either. The expectation was, carry on doing what you're doing.

You mean he offered the team an incentive, like an earn out?

No. Essentially, it was a crude option scheme. At that point, nobody had known anything. Once he'd acquired us there'd be some sort of option incentive. That's essentially how that worked.

What do you think David saw in Oxford that interested Judges?

I think his model. Again, I don't want to pre-judge entirely but I sense that he's looking for mature businesses, with strong market share, profitable, reliable and have a good relationship with the bank. Then it's just a numbers exercise and not a product thing. If he's got good teams, nice people, and he can just say, get on with it. Ferraris were, how can we save money and economize? When Ferraris bought the company, buildings were immediately sold. David's model was, just carry on doing what you're doing. It was wonderfully refreshing and nothing but supportive and the team he has there now keeps it lean and just helpful.

There's no attempt to try and say, do this, do that and it was very unusual. But when you're dealing with organizations like the businesses within Ferraris, you're dealing with people who don't want to be told what to do. That isn't how you get the best out of them. Dare I say this, but it was a better home for Oxford Cryosystems than even when we owned it. In that situation, the mirror is being held up regularly. It's just a healthier environment to have that external ownership from people who just said, tell us what you can do. I'm really proud that we ended up with Judges in our field. For everybody there, it's a really good home. And they're a really, really great business.

During the due diligence phase, does David actually get involved and come in and speak to you and do his own due diligence, or is it mainly his team like Mark and the other guys?

I think we were acquired before Mark arrived; he came slightly afterwards. Most of it for him is done externally. Obviously, David had absolutely his own measures and I'm sure he could tick those off very easily. He'd come and sit and talk, make sure that he knew that I'm not some idiot monster, and the team are all competent, and being technical himself, it was easy for him to ask questions and get answers that he felt meant that we knew what we were talking about, and that he was happy with it. And as I said, we had some really, really good DD feedback. A firm was appointed to do the commercial stuff, which we were really worried about, because you don't know the market. But actually, some of the feedback we got was so good, so I wouldn't have expected anything else to be honest.

Negotiating the price, was that done ahead of time. How did that conversation go?

When we first tried to sell with along with the VC, the VC very much wanted to appoint a corporate finance house. So we signed up to somebody, but it didn't work. We were told all sorts of stories, earnings per share, and all that sort of stuff. It's all complete nonsense as far as we can work out in our sector. We knew where we'd be based on multiples of earnings. In a mature business, we knew where we'd be. We weren't sitting on some goose with a golden egg and David wasn't looking for business like that. We knew what we bought it for, we knew how much we'd grown. We did suffer from that management ownership view that because we own it, it's worth more. Obviously, that was complete nonsense as well. It wasn't an enormously complicated negotiation at all. We had a little bit of a kicker which was to complete the financial year to where we said we were going to be, which we did, which was quite surprising.

Wasn’t it an earnout? It was £4.5 million in payouts?

Exactly. There wasn't anything long. We sold in July, and that was just until the end of the year. In fact, we didn't expect to do it. But as we came towards end of the year business, we managed to hit our numbers.

Is that just quite annoying for you, as a seller, when you have an earnout. Do you, typically, just want to get rid of it?

It depends, I suppose, where you are in your cycle – emotionally as well – and if you're sitting on some new technology or what you're being offered is sufficient on the table at the beginning. I didn't want that situation based on the fact that, by the time we came to sell to them, I'd been doing it for 16 years, running the place. I just didn't need that. And I think David understood that. He wasn't doing that anymore; he was doing deals and buying. I remember him telling stories about how, pre-Judges, he got his fingers burnt on a project and he made sure everything was watertight as far as the deal was concerned, as far as he was concerned. I don't want to second guess him but he doesn't go around looking for somebody to tell him they're sitting on some goldmine. That isn't the way he approached it. He just wants to see something steady, with a product development plan where he knows that there is growth there that's logical and sensible to get the returns he expects.

How do you think about the management changes of businesses like Oxford within Judges, given the expertise of the management team. How do you think about that as a potential risk for Judges?

Yes, it's a risk in any business where you haven't got a particularly big tie-in and David, especially for senior management, wasn't being unreasonable. I think it comes down to understanding. Is it a mature product, with an established market or relying on key people? If you are still relying on that, then David probably wouldn't choose to buy it. We had a lot of experience, but also we were fairly entrenched in the markets we're in, and I hope that would exist with the other businesses he acquired as well. If the relationships in teams are good, if the whole lot go, that would be a bit of a shame. But that's not normally how it works. I was there for a while. My sales manager had reasons to move on. But most of the team is still there so the knowledge is there. They were disappointed, I think, that I've chosen to go, but it's maybe the right time for me. But if you're buying businesses that are absolutely reliant on people, then you're taking a risk, and I don't think that's his style. Or if you are, then you're looking at the management team and seeing how strong they are. How long have they been there? How much experience do they have? What relationships do they have within it, if it's operational or sales?

How do you look at the biggest risks to Judges in terms of their business model in buying small companies like Oxford; mature, slow-grown, profitable?

I think, for me, it's the best strategy. You almost flipped the question, because the way you describe it, it provides an extremely stable base. Potentially, too many small businesses; managing them all but they leave it up to the teams to manage. Integrated systems maybe. They're absolutely against any of that. Do they have to grow to manage more and more of them? Can they do that? Can they create divisions? Depending on how you wish to grow, if you can do it by acquisition, if that's the main driver, eventually, you're going to need to think about how managing individual businesses work. But if it's via organic, then again, you need good people. It's having good management teams. Mark has got a long history – businesses that he came from – who have been very, very successful with instrumentation organizations and done very well. I suppose, Judges has to grow itself slightly. But from my perspective, I feel the positives within their strategy are much greater. Their approach to acquisition and types of businesses is very sound and I'm very proud that we're part of that, because it says to me, they're the right place for us. That's the sort of parent company that I want to be part of.

An interesting point you've made throughout this chat has been that the key to driving organic growth in these types of businesses is new product development, which relies on quality management and high-quality people, and also just spending back into the business in sales and expertise to go and enter into somewhat new or adjacent markets to drive organic growth.

The connection between your customers and NPD is really, really important. I felt for us, because we were an OEM related business, although our contact with our customers was good, there weren't the product development opportunities within our market for an organization like us; we needed to go elsewhere. Whereas for a lot of the other Judges businesses, there are opportunities within their existing markets. Yes, there are OEM relationships, I'm sure a lot of them do have that. But if you're in touch with your customer, and there is demand and requirement and competition, and therefore you've got to do this, it provides.

We were massive market share in a very, very niche business, where there were a number of labs I walked into, and silence when it comes to things that we could be doing to help them because it's a very specific little application. Our risks were greater because we'd have to go out and acquire people in sector. Again, from a management perspective, I'd shy away from that. It's not a strength, I feel, taking someone from an unknown market. I'd have to do a lot of homework first. If they've got businesses there that have opportunities within a market, it's always growing, new technologies needed and the customer says, you could be doing this, could be doing that software, then yes, having that connection is very important.