Interview Transcript

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.

Mike, can you just share a bit of context on the original founding story of SDI?

SDI, or Scientific Digital Imaging as it was then, was founded in 2008. It had two subsidiaries underneath it which were Atik Cameras and Synoptics. It went to the market in December 2008. The intention was not to raise to any money, but to use the AIM market as vehicle to do M&A. That was prior to me joining.

Of course, things went wrong after flotation. They put forecasts into the marketplace they were never going to achieve. They didn’t have a pipeline of companies to buy. To be honest, that market probably costs you a minimum of £300,000 a year, in terms of broker fees, NEDs and so on. As I said to you before, it wasn’t achieving its forecast. When you don’t achieve your forecast, you get profits warnings, so the share price dropped. It floated at 12.5 pence, at £5 million market cap, and dropped to £2.5 to £3 million and that’s when I joined, after two profits warnings. I was the finance director.

The CEO decided to retire and then I took on the position of interim CEO and I am still CEO. There was a stage, for six years, where I was the only executive director and it was really involved in a turnaround. In 2014, we went back to the mission statement of M&A and we acquired our first business in February 2014, which was Opus Instruments. That is really a quick background of where we’re at.

The original management team and founder are not around anymore?

No; that was the CEO. The chairman left. Ken Ford was a non-executive director then he took on the chairmanship role. Ken and I have worked together for about 10 or 11 years, in growing it. Today, we’ve bought 15 businesses, either through bank debt, cash or share placing. It’s a mixture of all three.

The original management had the right idea?

But execution was poor.

What did you learn about that period, in terms of why the execution struggled?

Nothing really, to tell you the truth. I only joined the business to save my marriage; I came back from Newcastle to Cambridge. That failed. I like challenges so, for me, it was two or three years of turning the business around. It was taking pay cuts and just trying to survive. A lot of people said, why don’t you own more shares in the business? At the time, it was just survival. Little did we know it was going to go from a 2.5 million market cap to 170 million market cap business. Hindsight is a wonderful thing; I could have been very rich, but it doesn’t happen like that. But I still enjoy my job.

How do you think about owning shares, personally?

I’m not bothered. I’m not overly concerned about what salary I earn. It might be a bit farcical to say it, but my job is to create value added for the shareholders. I don’t think a lot of CEOs think like that; they think it’s their business. If I can’t use the cash generated wisely, I have to give it back to the shareholders, in the way of dividends or something else. It’s not my business. I own a small percentage of it but, at the end of the day, I report to them; that’s my job in life.

Do you not want to own more?

I’m not that bothered. Personally, I am not money oriented. I ride other people’s horses, play tennis and enjoy what I do. I don’t drive fast cars. I just like working and trying to create value. Maybe it’s a bit corny saying that, but that’s what I’ve been doing for the last 10 years.

Horses are pretty expensive.

I ride ex-racehorses at Newmarket; they’re not mine. I haven’t got time to look after one.

If money doesn’t motivate you, what really does motivate you?

Working. At the end of the day, myself and all the management teams have created a wonderful business. That is why I am here today, because people are interested in what we have created. There were a couple of models we looked; one was Halma, in the early days, and then there was Judges, and I know David Cicurel reasonably well. We talk and have a cup of tea occasionally. It’s just fun; I like working. I’ve been involved in turnarounds as a finance director, for many years, and this is the first role I’ve had as a CEO and I’m enjoying it.

There are two roles for me, in this. One is M&A and the other one is operational. I spend four days a week going round all the subsidiaries. We have 13 business units in the UK and then they’ve got some offshoots. One in Scotland, one in Lisbon, where I am at today, and then we’ve got one in the US and I go round all of them.

Just on this point of your motivation, because I think it is particularly interesting, given you are pretty much allocating all the capital, you are driving around to see the businesses and buying new businesses and it’s, obviously, a different ownership structure. If you look at Constellation Software, or even Judges, for example, both founder-led, how do you think about that, where you are slightly different, where you are still motivated but you don’t actually own equity; you own a bit, but not as much as a founder-led business of this type.

I think they are the same as me. I know David and, at the end of the day, he is not motivated by money for himself, personally. He is not that bothered. He is in his 70s and he still likes doing deals, the same as the guy from Constellation. Look at Warren Buffett; he still lives in the same house he’s been living in for years and he’s very, very rich. I don’t think that’s the issue. I think that people doing M&As – particularly me and probably David and the guy from Constellation – are not personally motivated by money for themselves; it’s just doing deals, creating value for the shareholders. That’s it. It’s not for your own personal wealth. I don’t think any of these guys think like that otherwise you wouldn’t be doing this job. That’s my view.

Do you feel like you are the owner of the business or is it the shareholders who own it?

The shareholders own it. I’ve just been on a call with another institutional investor today and he said, my sort of train of thought is different from a lot of CEOs. I thought that was a big strange but, ultimately, I report to the shareholders; it is their business. As I said to you right at the start, my job is to create value for the shareholders.

I think a lot of people that look at Judges, or any founder-led business, like the fact that they are, potentially, sitting beside the founder, who is also an owner. Whereas you are saying, you actually act like you serve the owners and you don’t have to be an owner to serve them?

No, I don’t, at all. That’s my job. We have everyone in our 13 business units. At the end of the day, they don’t own the business units; SDI owns them, and in turn, the shareholders, but they create value. I think everyone can understand that. They’re paid handsomely, they get bonuses, they get share options, the same as me. You don’t have to be greedy. A lot of CEOs in companies are greedy and say, I want a massive salary and big LTIPs. Ultimately, it’s a cash burn business, so why do that? When times are hard here, I took a pay cut. When my first CFO, John, joined, he wanted more money than I was earning; the same as the CFO now. It was a bit of a wake-up call and that’s why I am not that bothered about salaries; it doesn’t really worry me.

Your compensation is, obviously, salary plus you get LTIPs and share options, over time. Your bonus is based mainly on total shareholder return.

Yes, it is. We only introduced the bonus scheme three or four years ago, for the subs. We have to put a structure in place for the bonus scheme. It is currently a finger in the wind, for me, for the subsidiaries, for how they do. It has to be self-funded, out of budget and then it’s up to the board as to whether they want to pay me a bonus or not. With a bonus, for the past couple of years, I’ve actually been buying my shares out. I haven’t been taking it and spending it, but I’ve been buying my options out. The shareholders can see that I’ve actually been buying shares in the marketplace, or buying my options out.

Didn’t you sell a chunk last year?

The only reason I actually did that was because Danske Bank wanted to get in and wanted a 5% stake. Nobody wanted to sell their shares, there is no liquidity so my chairman asked me if I could sell-down, so I did. The money is just sitting there so I’m not that bothered about it. They thought it was worthwhile Danske Bank getting in and I was the only one who had enough shares to sell.

It’s interesting, but you do think in a unique way, just from my experience of speaking to people that are running these businesses. They either want to own more and more shares, to increase their stake, or they care about being paid cash and higher bonuses.

I’m not that bothered; it’s strange, really, isn’t it? I came from a reasonably poor background, didn’t go to university; you start with nothing and you end with nothing. I just enjoy my job. If my CFO comes along and says, I’m better than you, then bye-bye, I go. I don’t mind; I’ll do something else.

What would you do if you left?

I don’t know; I haven’t really thought about it. Somebody just asked me that today; I haven’t got a clue. My wife’s business is growing – she’s in IT – so I’m trying to help her out in that at the moment. I’m from an Irish navvy background; I’ll do houses up, that sort of thing.

What motivates you? You wake up in the morning, you’re driving around the UK meeting the subsidiaries and you probably spend three or four days out of the office, in the car. What motivates you to do that?

I like talking to people. We’ve got 450 staff; everybody has got my mobile number and everybody has got my email address. I was just saying to somebody the other day, I will speak to anybody. How I am speaking at the moment is the same as I will speak to the institutional investors; I wear a pair of jeans, a t-shirt or shirt and I’ll speak to anybody, whether it’s a semi-skilled laborer or a director’s board meeting. The way I talk doesn’t change, at all. If I don’t actually go to a sub within six weeks, somebody on the shop floor will send me a WhatsApp saying they haven’t seen me for a while. I can speak to people about Netflix, football or anything else. We just talk and that’s how I work. A lot of people have made it up to the top of the tree and they will only speak to one or two levels below. For me, it’s not like that. I will drive up there and will talk to anybody. I think that’s what I enjoy most, to tell you the truth.

Also, on the M&A side. I think the best M&A I did was at Chell, in December 2019. The business was for sale so the employees knew about it. They had nowhere to put me so they put me in the canteen. By the end of my due diligence process, I knew everybody in that building. Now, they expect to see me. I was there Monday and I just went round the site, speaking to people. That is what it is all about. They are the ones who create value. We do, in a way, by investing in those businesses but, on a day-to-day basis, they run it.

Is there a risk that you might leave?

There is always a risk, isn’t there? If you have a look at these businesses, they are all run autonomously as standalone units. If you look to any of these 13 units, they’ve all got their own accounting systems; they’ve all got their own management structure. Myself and Ami, the new CFO, are directors but we don’t get involved in that side of the day-to-day business. We, at head office, will consolidate the accounts but they’ve, pretty much, got their own operating systems. We have no centralized accounting systems. If I got run over by a bus, they’d be fine. The main thing would be the M&A. At the end of the day, Ami is from a FTSE 250 company and he has been involved in Ultra Electronics, which is an M&A company so I’m sure somebody could take it on.

I think, for me, where it may be a bit complicated is, as we acquire more businesses, I’m out on the road three or four days a week, and then I won’t be able to handle it. I will probably need another operational person if the CFO or financial controller doesn’t want to carry out that role with me. It may be a different role, but I think we would probably need another resource, just to help me out on that, just like Judges did, with David. He brought in Mark Lavelle, from Halma and he is out on the road. David still does the deals, still likes doing the deals, but he said he can’t do it anymore. David is exactly the same as me; we had exactly the same model. But basically, he just said, I’m in my 70s, I can’t do this driving round the country anymore. I just hire a cheap hire car and drive round.

I can’t imagine you are driving a Ferrari round to these subsidiaries.

I drive a pick-up truck, an L200 Barbarian. But at 45p a mile, I will lose money on it, especially with diesel being at just under £2 a liter, at the moment. We worked out that it is not efficient for me to have a company car. Electric cars are too expensive and I’m tight, because I need one with a big battery as my round trips are over 200 miles. The cheapest thing to do is to hire a little petrol car at £45 or £50 a day. I’m not into cars anyway, so it doesn’t bother me.

If you found a Mark, from Halma, for example, could you see yourself doing this, like David, into your 70s?

I don’t know; I haven’t really thought about it. I suppose so. David and I actually spoke about this a couple of months ago. He said, what does he do? A lot of people retire and then just drop dead because they are doing nothing. You have to do something. There are only so many days you can do a bit of gardening or play tennis or ride horses. As David said, he’s got a lot of expertise, from over the years, so why not still bring that to the party. Ken Ford, my chairman, is in his 70s; he’ll do it for another few years. I could never be an NED, by the way.

You don’t strike me as one. How much is Ken involved in M&A, with you?

It used to be quite a bit in the early days, because I was the only executive director. He and I used to work on that quite a lot. But nowadays, every deal we do, in the early stages, he will come and kick the tires. He will come out to the site, speak to the founders. We’ve never yet had a disagreement in all the deals we’ve done and we’ve done 15 deals. John was recruited just over four years ago, and that’s when he handed the baton over to John. John and I do the deals, but Ken does still get involved in them. John has now left, as of yesterday, and Ami will do the deals.

Does the CFO do the financial DD?

No; I do it all. I’m an accountant, by training. I will do the DD. I think Ami will become more involved than John was. When we do an acquisition, we buy it at multiple of PBT, plus net assets. Usually between four and six; it could be higher or it could be lower. That is roughly the average over the last 15 deals. Then we buy the net assets. The net assets are usually 30 days after we sign the SPA, because you need to get a balance sheet together. I used to do that but now I’ve handed it over to my two accountants. They will tick the boxes and then we write a check out for the net assets.

With that revenue recognition, do you only recognize that from the date the acquisition closes?

We do; as soon as we sign the SPA, it’s our business. This is just trying to get together a balance sheet because we do like to have a closing balance sheet and it takes time for the accountants to do that. They’re never audited. Out of the 15 businesses we’ve acquired, we’ve only bought one business that had audited accounts and that was LTE, the recent one. All the rest have been unaudited; all done by chartered accountants, so they are pretty clean.

When we actually do a deal, it’s very easy to agree a goodwill figure. We never actually piss about with it; we never mess around with a multiple. We’ll either walk away or everybody accepts it. The only area I say up front, to the founders, is the balance sheet. When you actually look at the balance sheet, if they are unaudited accounts, there is going to be some crap in it, such as obsolete stock, debtors over 90 days who are not being paid, so we have to make provisions for that, which they have never done before. That is a bit of an eye-opener for them. If you can be fully open with people, from the outset, everybody is happy with it.

I’ve studied many different roll ups and acquisition models, in the past, and obviously, the accounting can get quite tricky when you are acquiring and merging. What do you think is the biggest risk in missing anything in the accounts or the accounting for these types of models?

I don’t think it’s the accounting side; I think it’s the trading side. We’re buying businesses that have been around for 15 or 20 years so there is a lot of history behind it and there are a lot of accounts. These guys run lean, mean businesses. Therefore, taking costs out is very difficult. People think you can do, but you can’t because the founders want to generate as much profit – cash – and as little tax as possible and they’ve been doing this for years.

When we acquire businesses, we say, you are making a million or half a million a year; how do we get it to a million or one and a half million? We say, we want to invest in that. They are happy making that return, but we want to take the net fixed cost approach and invest in those businesses, which we did with Sentek and, more recently, with Graticules, where we are completing refurbishing and refitting the unit out. That seems to work for us.

Can we take a step back and look at the life sciences or scientific instrumentation business or industry, as a whole? It seems as if SDI has moved from imaging to more sensors and controls?

When I joined as the finance director, my background is M&A and they said, we’ve floated the business, on AIM, and we want to look at acquiring digital imaging businesses. In my first three to six months – roughly the same time as the profits warning – I found out that there was bugger all in digital imaging. After the CEO left, Ken and I just looked at it and said, why don’t we just open it up and buy anything. For us, early days, it’s financial engineering. We were buying at four to six times PBT; we were trading at 10 or 15. We just bought anything that was science or technology based but, more importantly, we’re involved in manufacturing, as well. You have more control over your margins.

Then we recruited David Tilston, a very smart accountant, and we set about organic growth. As you grow, people say, you are doing financial engineering, but where is the organic growth? Where are you investing? That’s what do. As we go through the due diligence process, we have to say, where can we create value added on these businesses. That is all part of the due diligence process. In the early days, it wasn’t. But when you have got a market cap of £2, £3 or £4 million and you are growing it, who gives a shit, to tell you the truth. But as you grow, I’m speaking to the likes of you and lots of investors, talking about organic growth.

Are there any unit economical differences between sensors and controls and imaging, in terms of recurring revenue or the visibility of revenue?

To be honest with you, I don’t actually look at digital imaging and sensors and controls, anyway. My job is to look at all 13 businesses. When I look at the businesses, I look at them individually. The reason that split was made was because we have to share to more and more information in the annual reports. We actually operate at pretty high margins. We’re at over 60% gross margin on material costs, so it’s quite high. I don’t want to show all the information about subsidiaries in the marketplace, so that’s why it was like that.

Repeat business wise, it may be easier to go through some of the subs. If you look at Atik Cameras, that is capital expenditure; Synoptics is capital expenditure. If you look at Graticules, that is repeat business; what we are doing is chemical etching. We are etching onto a microscope slide or something like that. You are doing chemical etching onto a substrate, using sulfuric acid and cyanide. Then you go through sensors and controls and you have Astles Control Systems; they make dosing equipment. 50% of their revenue used to be service, so it’s quite high, and also selling sensors, within that. Sentek is sensors and that is repeat business.

You have LTE, which is capital equipment, but we do servicing. Safelab is capital equipment, but we do servicing; Monmouth is capital equipment, but we do servicing. As you go through, it is a mixture. A lot of it is capital equipment but what we’re trying to do is, as with ATC, again, capital equipment and servicing.

In the last earnings, John mentioned that 35% or 40%, roughly, is recurring. That includes the OEM business.

Yes; that is repeat business and that includes servicing. We actually say, consumables and servicing combined is about 35%, which is good for us. In the early days, when I first started, it was nothing.

Do you feel as if you have decent visibility on future revenue?

It all depends on what business.

As a group?

We don’t look at it as a group; we actually look at it as individual businesses. You have to. We’re not across one sector; we are across so many different sectors in the marketplace. We have rolling forecasts in place but, in a lot of businesses, you probably only get two or three months visibility. We get long-term contracts, as you well know, with the Chinese camera company, but we have very limited visibility.

I think one that has long-term visibility is Sentek, with their sensors, which is consumables, so we can actually lock into long-term order books for these guys. But a lot of it is short term. We have prospects and probabilities out there but, with capital equipment, it’s limited visibility. But the managers know these businesses. I’ve been involved with it for 10 years and these people understand it. When they put their forecasts out there, it’s pretty good. They can actually either achieve it, or nearly achieve it, and if they don’t, we know quite quickly why that is the case.

I think the main thing for us is that not many of our businesses are seasonal. August is usually a bad month because there are shutdowns for holidays and so on, but generally, it’s pretty flat.

How do you understand the technology of such niche manufacturing companies you are acquiring?

I don’t. You have to go to the founders but also, we got a lot of expertise in the group. I am an accountant; I’ve done a lot of deals. You understand what they are trying to achieve but, also, more importantly, if you want expertise, you pull in somebody from one of the subsidiaries. A good example is Peter Astles; he’s an engineer by training. He will come out with me and just kick the tires. He probably doesn’t know the intricacies of the business but he understands the engineering behind it. Over the years, we’ve bought a lot of expertise into that business so I can pull in other people.

But no one knows it like the founder?

That’s true, but a lot of the founders want to stay on with the business. They want to make sure the business survives, for their staff. They are going to walk away with their millions but they don’t really want to walk away into the sunset; they still want to continue with the business. They will usually take a few shares – not a lot of shares – but they want to make sure that it still survives and grows. They want us to invest in that business.

For you, personally, when you are doing the M&A, you’re not engineer so it’s going to be impossible for you to really deeply understand these niche areas. Do you even need to look at that? Don’t you just have to look at the historical financials and the organic growth?

No; we have to know what we’re buying, roughly. But you can get it wrong. We’re buying business and, sometimes, through the DD process, you find out it’s wrong. A good example is Thermal Exchange. We bought Thermal Exchange – a chiller business – we did all the due diligence, looked at the product portfolio and it all looked very nice. We signed the SPA and then we bought the business and then looked at how they sold their products. The sales director used to go out and see a customer with a blank sheet of paper and said, what do you want? Therefore, all their products were ad hoc products which causes a bit of a problem for Robert, who is the MD of ATC and Thermal Exchange, and our R&D people.

We had to look at all these hundreds of ad hoc products and put them into categories. It took us some while but that is one that stood out. It was a short-term issue, but you have to have a certain amount of belief in the business you are buying and get underneath it. I think that is whereby it’s good to actually do the DD yourself. The classic case of getting it wrong is HP and Autonomy. Consultants bought the business on behalf of HP and found out it wasn’t what it was. There is a certain amount of trust because, generally, these guys are still going to remain with the business.

What percentage of the founders are still there from the 15 or 16 businesses you have bought?

About 70%. Let’s go with the ones that are retired. Fistreem was just a four-person operation in Loughborough and we knew they wanted to run away into the sunset, so we integrated that into Synoptics and it was done very well. Opus was the first one we did, in February 2014. That was a camera business and he actually did it in a shed, in his garden. We knew he was going to run away so we integrated that into Atik Cameras. It was a similar sort of thing for QSI. That was a business base in Mississippi that was closing down, so we bought the assets of that and integrated that.

With Thermal Exchange, we knew he wanted to retire from the outset, so we integrated that into ATC. The surprise was Monmouth, with David Pomeroy. We thought he would stay on but he decided, through personal circumstances, that he wanted to retire. We found an excellent CEO in Alan Holcombe.

Those guys that stay on, how do you incentivize them?

They get an arm’s length salary; they get a bonus. But they still want to work, to tell you the truth. Ken Petrie is the founder of Sentek and he works two or three days a week. When we do due diligence, we have to find out that succession planning is in place. If we buy a business and all the founders say, we’re all going to buy boats and go and sail in the Med and there is no succession planning, we have to walk away from it and say, there is only three of us in head office and we know nothing about this business. A lot of them stay on. Also, if they are going to retire in three, four or five years’ time, we have to make sure that there is somebody to take the helm.

Astles was the same thing. Peter is still around for a couple of days a week but Hal now runs it. We knew that was going to take place so we had to make sure that there are bodies taking over.

What is the most difficult thing about succession planning?

I don’t think there is anything. I think you have to be honest. I think the founders have to be honest with us to say they are going to retire. I think David was the one that was a bit of a problem but we made sure there was a crossover between him and somebody else coming on board. Right the way through the due diligence process there has to be honesty from both the buyer and the seller. Ultimately, they want their staff to have continuation of employment; the senior staff are motivated with share options, so they want to make sure the business does well.


Yes, they get share options in SDI. As soon as we acquire businesses, we go through to the founders and ask them who their key staff are who we need to throw options at.

How do you compare SDI and Judges buying niche manufacturing businesses, to a company like Constellation Software, that are rolling up vertical market software companies?

It’s a completely different business. This is a question I often get asked. Constellation have probably bought 150 businesses, but it’s software. You are getting an intangible asset and you can integrate it anywhere. David and I are buying manufacturing sites. We buy raw materials and make them into widgets, tangible assets. That is the difference, for us. We’re buying bricks and mortar; these other guys are not.

They can easily merge them?

Halma is exactly the same as us.

How do you compare SDI to Halma?

Halma was the first business I looked at. Halma started exactly the same as us and the same as David did in the 1980s. I came along and it was like going into a sweet shop. I said, I’ll have that, that and that and just kept buying these businesses at multiples. We used city money, a bit of cash and a bit of debt. They started getting bigger and bigger, buying bigger businesses. Then they started putting divisions and then managers and CEOs over the divisions. That is a structure that you do – I’m sure we will do it and David will do it – as you grow the businesses. What you don’t want to do is put a structure in place, at head office – which I’ve seen many times – where you say, now we’re going to buy the business; it kills it. These businesses run autonomously.

In Covid, we bought three businesses but we’ve tried to bring the businesses together through the strategy today; in Covid, we couldn’t do that. As soon as Covid finished, in September, we had a meet and greet that I organized in Cambridge. We had everybody around the table for dinner, drinks, overnight and bugger off the following day. No strategy, no agenda. After that, I sent an email to all the subsidiary managers to say, what do you expect from head office? They said, what you’ve got at the moment. What we do is, we consolidate the management accounts and we do operational reports. We provide those operational reports to the board at the board meeting and are sent out to all the subsidiaries, so there’s a flat structure. They receive the same information as the board. We do group insurance and we invest in the businesses at head office level.

We provide HR through a consultant. The only thing we didn’t actually do is to provide health and safety and that sort of thing, but we found a consultant that does that. What they didn’t want was to have a big head office structure which kills businesses. We don’t want to put a big ERP system over the top and everybody fills boxes in. I’ve worked for businesses like that and I just bugger off.

If you read The Snowball, Warren Buffett’s book, he says that straightaway. Leave these businesses to run themselves. We’re there to invest in them; we’re an investment vehicle. That’s it.

I know you don’t look at it by segment, and obviously, you report with digital imaging and sensors and control; Judges reports with vacuum and material sciences. Do you see those as different segments, as part of the scientific instrumentation industry?

No, I don’t. I look at all 13 businesses. When I get the monthly management accounts, it’s 13 businesses; P&Ls, balance sheets. If you look at our board pack, you will get the CFO’s report, operational report, consolidated accounts.

Would you look at the businesses like Judges, though, in terms of material sciences?

I look at David; everybody does. You get an idea of how to write your CEO’s report in the annual statement. But for me, for my businesses, we have 13 businesses and I look at every P&L and balance sheet against budget. We get 13 operational reports of no more than two pages. I look at them all individually.

Do you think they are different? He’s got about 20 businesses and various different instrumentations, maybe heavy businesses that could be really expensive with £50K, 60K, 70K instruments. Are they very different from you?

We’re in a different sector. I think he is more on high-end, sophisticated instrumentation. We are now, with SVS. But look at ours; there are no waterfalls, no flags outside buildings, no directors parking. These are industrial units that we operate in. If you look at our head office, I think the rent is £7,000 or £8,000 a year; it’s a little serviced office. There is nothing flash in the businesses and we don’t expect it from any of the businesses. Ours are good, niche manufacturing businesses.

Look at Sentek Sensors; it still operates with a Bunsen burner and a tube. Why? It produces quality sensors which you cannot get out of automation. That is how we operate our businesses. We’ve now got Uniform Engineering, 6,000 square foot building which has welders. They are good, high-quality manufacturing businesses.

Why has SDI grown so much quicker than Judges?

Has it? I don’t know.

You’ve acquired 15 or 16 businesses in, basically, half the time that Judges have. Is there any reason for that?

I don’t know. I’ve never asked David that. He’s probably more picky than me. I’ll ask him next time I see him. He acquired a really big one recently.

Yes, huge; Geotek.

Absolutely huge. Before then, he hasn’t acquired that many. I don’t know whether his expectations are higher than ours. That was a big deal for him. We’re still at the £500,000, £1 million profit line. This was a £6 million deal. That sort of figure would worry me.

Yes; they paid £45 million for that.

Yes, but there is an earn-out attached to that, as well.

£60 million including earnout.

Correct; it’s a big number. We’re doing well just doing what we do; buying businesses at £5 or £6 million a deal. It is becoming more expensive because now we’re actually buying the property as well. It’s a bit strange, but on two occasions, which was Safelab and LTE, they just didn’t want the property.

You could do a sale and leaseback with that if you wanted to?

We could do, if we needed to, but we don’t need to. We’re talking to the banks and we have a mortgage against it because we have a ringfenced £20 million plus £10 million loan with HSBC to acquire businesses. I’m actually saying now, properties shouldn’t be part of that; we should do something, on the side, with the property and not drain our acquisition money to buy the properties. That’s another day, really.

Back to the acquisition cadence, it seems as if David is operating in a higher, more expensive, premium area. Highly engineered and more complex, obviously. Would you say you can acquire two or three businesses in your field per year consistently, in your space?

I think we can. If you look at the history of businesses, Sentek Sensors have been around for 25 years, making sensors. Astles has been around for the same length of time making dosing equipment for the canning industry. Ours are not really highly sophisticated products or weren't. We are moving into that field, internally, through R&D. If you look at Synoptics with their AutoCOL brand, it's a highly sophisticated, automated colony counter, so we are actually pushing the boundaries now, but that's only internally. We're not out buying highly sophisticated businesses, but we want to invest in that going forward. And that's what we do.

Do you ever see David when bidding for businesses?

We're both honest with each other. We both bid once, for Chell.

You obviously bid more.

No, we didn't. We weren't the biggest bidder. The biggest bidders were private equity, so we were told.

They're coming down that low then compete for Chell?

They did, because if you look at its three-year average profits – it's in the broker’s report – I think it's £756,000 on the three-year average, and they can go that low. We were told seven private equity, who knows? Could be corporate finance. There were 10 businesses bidding for Chell, so we were told. Whether it's true or not, I don't know. But actually, the biggest problem with private equity, for any of these other businesses, is you're not going to get all the cash in a suitcase. At the end of the day, you're going to get half now, half is in low notes. There'll be debt on the balance sheet. If you want to still stay on with the business and invest in it and you're in your 40s or 50s, it may be the right vehicle. Someone coming up to retirement age doesn't want that. They want to get out completely clean and that's a good thing about myself and David; we can actually operate that right to check out.

Why did Chell sell to you?

I think they liked our work. At the end of the day, I'm not politician. I speak my mind and probably speak my mind too much. I don't think sometimes, before I open my mouth. You see what you get.

You got on with the guy.

That's it. That's what it's all about. It's a rapport. I was at Chell on Monday; there’s a rapport. You have to speak to these guys on a day-to-day basis. We're there. We buy the business; we invest in those businesses and we try to support them. My job is to go around and see if they need any help. I'm at Lisbon tonight and Atik. You talk to the staff; any person can chat to me and they know they can.

You mentioned Judges and SDI almost move in different segments. Maybe Judges could buy SDI?

I haven't really thought about it, to tell you the truth. I think the problem is M&A companies, if you look at the breakup value, it's less than the market cap for M&A companies because we're buying at four to six. If you actually go back down to that level, it's difficult to put a valuation on those visitors. I've never really thought about it, and I'm sure David hasn't. It must be quite difficult to say, how do you actually put a value on SDI or on Judges on a breakup value? How do you value it? He's on a multiple of 35 to 40; we’re on a multiple of about 16. Is that the true value of the business, because we're buying at four to six.

Yes, but individually, these businesses are not worth much, because they're riskier in terms of volatility and key man risk. Obviously, the advantage is, you diversify as a group, as you know.

Yes, I know synergy is a wonderful word, but we are actually creating it with the businesses. It's difficult in the early days to do it, but we are actually doing that.

Just by consolidating, you diversify the business?

Yes, that's true. A good example is LTE Scientific. The customer base is very similar to Monmouth and Safelab. The biggest challenge we've actually got is finding service engineers. Now we're actually looking to say, can we actually share service engineers around the country between the three or four businesses, because you just can't get the staff? That's the biggest problem we have. I think it's all businesses; number one is finding staff, and number two is finding components.

Let's just run through an acquisition, typical DD. Take Safelab, who you recently acquired; what did you like about Safelab?

{audio:45:23} It was similar to Monmouth. We acquired Monmouth and they're only about 17 miles away from each other, and through an intermediary, we got in contact with Roger. We talked to him and his accountants or financial consultants about that business. He was interested in selling, he still wanted to stay on with the business. He's got two siblings who are involved in the business – Penny and Oliver – but they weren't at the stage to take on the business, but he just wanted to release the equity, and that's what people want to do. We're a good buyer of those businesses. We agreed a price on the business and then it's due diligence. Roger has got his hands on that business, everything on that business. So for me, it's actually quite straightforward. I actually moved down to Weston-Super-Mare for a week, sat with Roger, went through the due diligence exercise, which is quite a lengthy checklist. It looks overwhelming when you first see it but as you work your way through, it's not that bad.

What's on the checklist?

It's an 18-point thing; you go through financials, trading, employees, IP, Data Protection Act and so on. You just go through this, build up a file and then, at the same time in parallel, you run a sale and purchase agreement and service agreements with the directors who are going to stay with it. We've done 15 acquisitions using either Mills & Reeve or Birketts, in Cambridge, and that hasn't changed over the years.

Were there any other bidders for Safelab?

No, not at all, and it's very straightforward.

It seemed more expensive than usual?

We bought the property, that's why.

You paid £7.7 million?

Yes, but that includes the net assets. We paid 5.6 times, PBT; we had to buy the property as well. Also when you look at it, we put that we buy the cash. We buy the cash on one hand and then give it back, so you have to take those out. By the time you take the assets out and the cash, it's lower. Somebody else actually asked me that this week. LTE is the same; the multiple looks quite high. But I purely looking at it at PBT level; the multiples at the PBT levels haven't changed; they're still between four and six. As you acquire properties, the multiple gets expensive because what you're doing is adding a higher value of net assets on the business. Also, what we're actually doing is, for cap gains tax purposes, we'll buy in the cash.

Effectively, you're paying £7.7 million, but it's £1.2 million in property value.

And the cash.

I thought that was net of cash, wasn't it?

I don't know. I can't remember now. I need to look at what the net assets are on that, but I'm purely looking at it as a multiple of profits.

I think you mentioned in the announcement, there was £900K adjusted EBIT, but £700k reported EBIT. Would you assume you can get rid of £200k in costs, with Safelab?

Yes, I think so.

So you’re doing £7.7 million minus £1.2 million and you can net out and receive cash for that, over the adjusted EBIT that you're assuming. How much can you pay and still earn a good return on these assets?

The biggest problem we're getting, as I said before, is we're buying the property. When we do return on capital employed, you're looking at 20% to 25%, probably a bit more, on return on capital employed, which is a good figure. But that reduces dramatically if you actually add the property in because really, all you're doing is looking at a yield and probably getting 6% to 7% yield on a property. Now the business model is changing somewhat, because you have to take out the property on that and this is what we're talking to the banks about at the moment. We’re saying, we're buying the businesses; we've got £20 million funds from you with a £10 million accordion on top of that, but we're buying the properties and we actually should ringfence that, because that shouldn't be part of M&A. I've just been on the phone to an angel investor and he basically agreed with that.

At the end of the day, if we want to do a deal, we want to buy a nice profitable business. We don't want to walk away because there's a freehold property attached to it. The ideal scenario for me would be, it's leased, or the founders have got the property in a SIPP, and it's an investment vehicle for them. On these two occasions, they didn't want that. They just wanted to walk away with the property. Banks like property, for some unknown reason; I don't know why. But we need to make sure that that's actually taken out of our acquisition vehicle, and also out of our figures. We're just talking about it at the moment, so it's early days, because these are the most recent acquisitions, and it's skewing the figures, just like it is with you. You're asking in these questions.

I'm looking at it now. If you net out, you paid £5.5 million; £5.3 in cash, £200k in stock. What does the earnout include?

There's no earn out; that's just paying for the net assets after we've got the completion balance sheet. First of all, there's two tranches of payment. There's one for the goodwill, which is a multiple of PBT, which is agreed, and then the next one is upon receipt of completion accounts.

For the multiple your calculators use, say you pay £5.5 over 0.9, with an adjusted EBIT which is £900k, which is about 6.1 times PBT?

I need to look at it, to tell you the truth. In my calculation, we paid 5.6 times. I need to look at the brokers note again, because somebody else has raised that.

Do you have a hurdle rate of acquisitions? Do you have a cash-on-cash return in your head that you're looking at?

No, not at all. All we know is, when we look at the business, we have to look at it saying, is there going to be organic growth, because that's what our institutional investors want. They never used to, but they do now. These businesses when we buy them, don't even do forecasts. They do a rough budget but they're very, very naive on the financial reporting. So that's the sort of structure we have to put in place, as soon as we take these guys on board. We're not buying big companies with all the structures in place.

You focus on a multiple basis and organic growth?

Correct, and then we have to find out what we need to do to actually attain that organic growth. Like I said, we have historical data and we can actually see the trends in the business and then we speak to the founders. Also if the senior management are involved, then we say, how can we actually grow this business? Because at the end of the day, we like to take that gamble. For a founder, they think we're making half a million or million pounds a year doing four or five days a week. It could increase with an investment, but they don't want to go to that next hurdle.

When does it normally go wrong in acquisitions?

I think I've already mentioned that with Thermal Exchange, whereby you get behind the selling technique, and you find out that it's not what you thought it was.

Just not fully understanding the business when you can miss a couple of things.

You miss a couple of things and say, can we get it right? You're always going to get problems with a business as it grows. A good example is Covid hit us; we didn't know what's going to happen when Covid hit us in March 2020. I've been involved with crisis management or turnarounds before in businesses. What you actually do, is draw the money down off the bank, because you don't know how or if it's going to survive. You do weekly financial cash flow reports, or John did at that stage. We get a paragraph operational report from every subsidiary to say how you're doing in the early days. Within six weeks to eight weeks, we realized this business is thriving, as you see from our figures. We actually did very well with three or four businesses through Covid. We actually stopped that crisis management and then focused on saying, how do we grow this business through the Covid period, which we did.

For some businesses, it’s fairly difficult. ATC found it difficult through Covid, same as Chell, but these businesses are well-run businesses. What we don't want to do is to say, cut your cost base; they're lean, mean businesses, they're going to get out of it. As a group, we were throwing a lot of cash off, and what I'm there to do is to support them and say, okay, take furlough. Do what you ever need to do, but you'll come out of it. Classic case was with ATC; it's come out of Covid and it's absolutely flying. It's doing better than it's ever done before, because we supported them. That's what we're there for.

Debt versus equity, how do you think about using more debt, potentially, in financing acquisitions?

That's a question I get many times. Me personally, I like to sleep at night. So for me, it's one and a half times EBITDA; our covenants go up to two and a half; we beat them easily. I don't want an overly geared company. When I was the only executive director, and we were going to the market or trying to raise debt, which was very easy for us in the early days, I went to my shareholders, to say, what level of comfort would you have with me doing debt instead of going to the market?

People like Katie Potts, from Herald, helped me and gave me certain advice. We can go back to the market to raise shares, but it becomes very expensive. As long as we can actually keep to one and a half, probably two, we’re okay. The only problem is we don't know where the world's going to at the moment, we really don't. The last thing I want to do is to be highly geared again, because you can guarantee those bloody banks are going to take the money away from you within 24 hours, then you're scuppered so you have to go to the city to raise money at a shitty share price, and it's a spiral. I just want to make sure I sleep at night and my shareholders are safe; that we're actually running a clean, nice, clean, well-financed business.

You've got a bit of room to use a bit more?

I agree, we have. We generate £10 to £12 million a year in cash. We can use that as well, but we have to make sure it's right. What we don't want to do is to borrow and we get it wrong. At the end of the day, I think at a lot of M&A companies, the CEO thinks he can walk on water. He's done 15 deals, and he thinks, I know what I can do, I'll buy this mega company. Then you find out that you've cocked it up. I don't want that to happen so I stick to this policy.

How many can you reasonably actually acquire in a year, given you're doing all the work?


Four, you think max, you can do?

Well, John and I did four in one year. The shareholders did say to me, how many do you want to do in a year? There isn't a number. At the end of the day, I don't really look at the share price, I don't look at the blogs, but somebody raised it to me to say, you haven't done any acquisitions in this calendar year. I hadn't, but I did two in the financial year. So I knew I had two on the go within the financial year.

Can you hire someone to actually allocate capital? Halma has obviously delegated down to the sectors. Can you hire someone to help you?

I've got CFO, I've got a financial controller, but you have to look at it. What I'm dead against, is putting a head office structure in place, and then wait for the deals. I've got 14 or 15 deals on the go at the moment. Live deals, we're talking probably three deals. I can handle that with a CFO. If you look at David, in Judges, which is bigger than us, he's got him, he's got a COO. He's got Brad, and Brad's now got two assistants, mainly because of ESG.

They only do one through; they only do one transaction a year, on average.

I’ll know when I need assistance, but I don't want to actually increase the head office costs just for the sake of it, and somebody's sitting around doing a deal.

In terms of the acquisitions, you can do three to four with your CFO, reasonably. Is the new CFO going to be on the road as much? I know, John wasn't doing that, I believe.

I think Ami is. I think he's going do one a week or something like that. He's got to go to site visits. I think he'll be out more than John. But all due respect to John, he was absolutely magic on the detail on the numbers. He really was.

It is hard to find someone in terms of someone who, like you, is willing to get up and drive a truck around.

I don't think there is anybody. There's not many people are doing it. There is nobody; we looked at CFOs and it was very difficult. The NEDs went through the recruitment process, and I saw the shortlist, but the shortlist was two. There's nobody around to do that. We're paying good money for a CFO, but there's none. But then again, does somebody want to go out on the road for four or five days a week? I'm in Lisbon today. I'm here till Friday evening. Do they want to do that? Well, no, not really; they want a life.

But is that going to burn you out at some point?

I've been doing it for years. No, not at all. I try to do Fridays at home, so I can either ride a horse or play tennis, and also get home. That's my job. I enjoy doing it. It's not going to change. I think people want to see me. I love it. I'm in Lisbon now for three days. I think next week I haven't got so many visits, but then I'm back out on the road in October. But also we're trying to pull together all the subsidiaries on the 20th and 21st of October for a strategy day. We're back to doing strategy meetings again, now that Covid is over. We've got 13 businesses and I think it's about 30 people we're trying to organize to say, where do we go? It's new for these guys. It's new for us. For the little businesses to say, we don't want to know about the P&L and balance sheet or anything like that but what do you envision for this business in three to five years so we can make sure we can allocate cash for these businesses. I think people are looking forward to it.

Organic growth, I noticed you mentioned it a few times. What do you think is the biggest challenge?

Target organic growth, for us, is high single digit.

What's the challenge in hitting that?

It's on a business-by-business basis, really. It's not up to me, it's up to the businesses that think they can do it. We've had a pretty easy ride with the Chinese camera business. Covid was fantastic for MPB and for Monmouth. Now we're getting to some sort of a normality in the world and it's not going to last. The camera business is going to end at the end of this year and we'll get back to some normality and that's why we need this strategy day back on again to say, where are the businesses going to go? We can see that ATC and Synoptics are doing very well. There's a lot of business doing really well.

Judges and SDI’s organic growth is consistently mid to high single digit; they're just niche market, strong businesses, big market share.

They're niche. I think that's the main thing. As you get bigger, it just won't turn over £50 to £60 million if it's just one business making widgets; it's difficult to achieve that. I've got 13 small businesses. We've got two exhibitions for our businesses, main exhibitions. If you chat to one or two of our customers who are generating a half a million or £1 million a year, that is good organic growth for these little businesses. You can't do that with one business. But if you've got 13 businesses doing half a million, an increase of half a million an order, it soon adds up. Then you get to your £6 million and 10% organic growth.

At what point will you need to run the Halma model and have sectors and management?

That's going to fall out. When I decide that I can't get around all the businesses in four to six weeks, or we've got six or seven deals on the go.

Could you imagine being like Andrew Williams, for example, at Halma? Obviously, it's very different because it's a different job, than what you're doing?

It is. If I can't do it, then I have to hold your hands up and say, okay, get a CEO from an ivory tower. I have to be honest, because at the end of the day, I have to report to the shareholders and create value. If I can't do that, then I'll have to hand it over to somebody else. I'm honest with everybody about it. If the day is done to say, I've done my job, then fine, I'll do something else. But I think we've got a few years left on that. Look at David. David is still around, my friend David. He's around in his 70s still doing it. The guy from Constellation is still doing it.

He's acquired 700 businesses at Constellation. It's insane. That's 100 a year now.

Yes, but if you look at these businesses, they're not making any more than a half a million profit. They're just buying software, so it's a similar model. But for us, it's more difficult because we have got bricks and mortar and we're making a tangible asset.

Could you not buy software?

Maybe; we're looking at it. We have software in all our products; firmware, and we write software. I don't know. It hasn't come on the radar at the moment, I'm sure it will do. But nothing like Constellation.

Are you likely to move from imaging to controllers and sensors?

No; the only way you can actually do it is if it's enhancing to the equipment. Ultimately, we're a manufacturing business making equipment. But if you can provide a smart piece of software, attach that product, maybe. That's all I can think of off the top of my head at the moment. But to get into software, that's a different field for us all together. That's where my wife is; a different field altogether to get your head round. I like manufacturing businesses. Software always worries me. You do due diligence behind software, but you can never find out what's underneath it and what bugs are there. With a manufacturing business, I can touch it, feel it. You can't with a piece of software.

What keeps you up at night, if anything?

I'll be honest with you. A lot of people are saying, not a lot, but I think recently it is staffing because we're trying to get so many staff; software engineers, hardware engineers, service engineers. It's difficult, we're getting people leaving. I think that's the biggest issue. Components, we can get round; we can re-engineer. Our customers are still understanding how the world is and if we have delays in products, they're actually okay with it. But it's mainly staffing. Trying to get staff in this environment at the moment, I was at Chell the other day, we wanted an engineer, he didn't even turn up for the interview. It happens all the time, in businesses at all levels. They just don't turn up. You think, bloody hell, what's going on in this world?

My last question, looking at what motivates you, as we discussed earlier, you seem to be a rare breed of CEO; not necessarily motivated by owning more stock or don't feel you have to be deeply aligned with shareholders in that sense, to behave in a certain way. But could you see yourself doing this for another 20 to 30 years?

I'll be dead by then. I don't look at it, to tell you the truth. At the end of the day, you say, well, what's the five-year plan? It's difficult forecasting a year. In strategy days, we can actually look at top line, look at sales roughly. But it's so difficult, especially in this climate we're in at the moment with a war, recession. It's so bloody difficult.

As long as you enjoy it.

Day by day.