Boreo – a Finnish serial acquirer drawing inspiration from Sweden

Gustaf: Hi Kari, what’s your background, and how did you become CEO of publicly listed Boreo?

Kari Nerg: Gustaf, I’m a 37-year-old father of three and an enthusiastic sportsman, mostly doing cross-country skiing and mountain biking.

I started at a Helsinki-based M&A advisory boutique. And after selling a business to the listed turnaround PE firm Mutares and advising Mutares on another assignment, I ended up joining them. I built their Nordic team and was in parallel assigned to build up their UK practice.

In early 2020, I accidentally bumped into Simon Hallqvist, whom I had met a few times before. The meeting coincided with YE’s (Boreo’s former name) acquisition of Machinery, which was the first step of Boreo becoming a serial acquirer.

Simon, Boreo’s chairman and majority owner, was looking for someone who could build a pioneer Finnish compounder. We quickly found common ground, and Simon was bold enough to put his trust in someone with little management experience.

For me, joining Boreo was a lot about Simon, teaming up with someone who thinks of the world in similar ways.

And I was very interested in becoming part of a long-term journey, letting relationships compound, and making a sizeable monetary investment in it. During my years in finance, I always enjoyed entrepreneurial work and interacting with great entrepreneurs.

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Gustaf: What was Boreo when you joined? What Swedish firms most resemble what you’re building?

Kari: I joined Boreo in April 2020. At the time, Boreo was comprised of YE (a value-add distributor of electronic components in five countries) and Machinery (a traditional technical trade house in Finland).

Preato Capital (Simon’s majority-owned investment company) bought a majority stake in YE in 2019, and then YE acquired Machinery in early 2020. The ‘serial acquirer idea’ was already there during the Machinery acquisition.

But when COVID hit, we first needed to figure out how we would tackle the turmoil before focusing on the new strategy.

The completed reorganisations were tough but proved successful. We could start forming a new core team and working on deals. And our first acquisition was announced in September 2020.

We have studied our Swedish and US peers extensively and gotten inspiration from many of them. And we have become convinced that the only right way is our own way. You can do this in many ways, but you must be clear on what your own way looks like.

I think there is no Swedish firm that is exactly like us. But I am a fan of Lifco [interview with Lifco's previous CEO]. I love their simplicity, the solid financial characteristics of their portfolio, and the discipline they’ve operated with over a long time. More recently, I’ve also studied Teqnion [Teqnion interview]. And I like their approach regarding culture and people.

Our clear ambition is to gear the portfolio's profitability upwards and do it with attractive returns on capital. If we succeed and at the same time maintain our great team spirit, I believe our people and shareholders will be happy.

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Gustaf: How do you see the Finnish opportunity?

Kari: I see an excellent opportunity for us in Finland. We are the only Swedish-style serial acquirer on the Helsinki stock exchange. And we have a strong and constantly growing pipeline of new opportunities.

We have an advantage in many of our deals simply by being Finns. Serial acquirers are not that known as potential owners in Finland, although Swedish peers have successfully bought and owned companies here.

Sweden has a more developed ownership scheme for small private companies compared to Finland. And Swedes have had a more empathetic approach to trust-based structures, whereas Finnish leaders generally have been more top-down.

And that is an opportunity for Boreo. I believe we are a very welcome solution for many entrepreneurs wanting to find a good long-term home for their companies.

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Gustaf: How’s your acquisition pipeline?

Kari: The pipeline looks good and is the best we’ve had in the last two years. I believe this stems from us becoming more recognised in the market and our systematic internal sourcing starting to bear fruit.

We are in total eight professionals at HQ and the business area levels who actively work with M&A. Also, people in our businesses have started to really ‘think M&A’, which yields internal deal flow. Roughly half of the deals have been sourced internally during my era.

We have just recently started working more methodically with hurdle rates, including a focus on cash yields. And that has improved the way we select the deals to work with.

Most of our opportunities are in Finland, but we are eager to grow internationally too, although mainly through the businesses we already own. I’m not a fan of expanding geographically through auction processes.

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‍Gustaf: At what valuations do you acquire targets?

Kari: Since 2020, we have made 13 acquisitions and deployed close to €60m of enterprise value into them. Of these, c. €26m was for the Machinery transaction with a multiple of around 6.5x EV/EBITDA. The smaller deals were valued at c. 4x EV/EBITDA excluding earn-outs and c. 4.5x including them.

I expect that we will mainly operate within this 4-6x range. However, we have the ambition to improve Boreo’s financial profile, as we’ve already done with the completed acquisitions. And I see that we might acquire high-quality companies at higher valuations if the expected cash-based returns are attractive enough.

Still, that does not mean that we would start paying double-digit multiples.

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‍Gustaf: How do you work with subsidiaries?

Kari: Decentralisation is the core pillar of our management philosophy. Our businesses operate with high levels of autonomy and get support from HQ, business area heads, and controllers.

We prepare a ‘Game Plan’ together with the subsidiaries. This plan, together with an annual plan and meeting the set targets, forms the basis of autonomous operations.

Additionally, a simple operating structure for our MDs is critical for us. The company MDs have monthly business reviews that take 30 minutes, three board meetings a year, and two physical Boreo Academy Offsites. These meetings form what we call the ‘Boreo clock’, making it transparent for managers what is expected of them.

I am a believer in a culture built on trust with clear accountability. And I see Boreo as an owner that cares deeply for its businesses and is there to support them when needed. That likely works best when we have a lean staff at HQ with simply no time for messing around with operations! 😉

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Gustaf: How do you incentivise managers?

Kari: Manager compensation is comprised of a fixed salary, short-term incentive plans (based on individual company performance), and Boreo share-based incentivisation.

That was not so much the case when I joined; we have changed our compensation structures to become more variable. Initially, people emphasised sales growth, but we are also gradually shifting to a model favouring earnings growth while sustaining good returns on capital.

In 2022, we completed a personnel share issue in which our employees (mainly in key positions) invested €1.5m. Prior to this, the management team, other key employees, and I invested large sums of our money in the company.

We have also made small equity issues as part of acquisitions to provide the opportunity for entrepreneurs to reinvest in Boreo. As a result, over 8% of the stock is owned by employees. I am very happy about that, as it enforces an owner mindset.

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Gustaf: How can investors and business owners get in contact with you?

Kari: My phone number is on our website, and I’m always open for discussion!

If you’re interested in learning more about us, you can join our Capital Markets Day on 27/9 at 13:00 EET. The webinar link is: https://tinyurl.com/BoreoCMD22