SDI Group Interview – Early days of the Halma model

Gustaf: Hey Mike! It's a pleasure to dig into your story and SDI Group. In what state was SDI Group plc [formerly Scientific Digital Imaging plc] when you joined?

Mike Creedon: SDI was a basket case. It should never have been floated. They should have just sold it as a trade sell, and I should have stayed in my other job.

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Gustaf: How did you become CEO, and what is the history behind the company?

Mike: SDI was floated on AIM in 2008 at 12.5p, translating into a market cap of c. £5 million. No monies were raised. They just wanted to use the paper for a buy and build strategy. Initially, the strategy was to be an acquirer in the digital imaging sector, but there were very few companies to acquire in this sector.

SDI, when I joined, consisted of two trading entities, Atik Cameras and Synoptics, with a holding company, SDI, on top.

I joined the board in 2010 as CFO and realised that we would never make the market forecasts. The board of directors, under my guidance on the poor trading profits, issued two profit warnings within the financial year. As a result, the share price dropped to about 7.5p – a market cap of about 3 million.

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I looked at the situation, thinking, "Why the bloody hell am I here?"

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The CEO and I shared a small office in Synoptics. After one of the profit warnings, I didn't see him again. After 2-3 weeks, the Chairman came to me and said that the CEO had resigned.

I asked, "Okay, who's running it?" He said, "You are but also with a 10% pay cut." So, I became the interim CEO in parallel with the CFO role. This was supposed to be an interim role, but it ran for six years with me being the only executive director.

After two years of keeping our heads down in the financial markets, SDI started to turn around. Note that during this period we were never a cash burn business, therefore survival was never an issue. Growth was the issue. SDI started to revisit the financial markets and use the markets for fundraising to buy businesses. We are now in a position that with our internal cash generation and bank debt, we are able to acquire businesses without dilution of our shareholders through share placings.

Over the years, we have attained good consistent growth both by acquisitions and organically. Our internal target for organic growth has been high single-digit growth, but in the last few years, we have beaten this with ease.

We have acquired 16 businesses since 2014 and still have a healthy pipeline of companies that may join the SDI Group.

We operate a federated structure where acquired businesses retain their independence, brands, and culture. And from us they receive strong financial support, access to specialist resources, and knowledge sharing within the group.

Our portfolio consists of stable cash-generative and profitable businesses in science and technology with a manufacturing bias. We are not reliant on a single region or sector and, therefore, able to smooth out any peaks and troughs in trading.

My target valuation of businesses to acquire has been 4x to 6x EBIT, which we have successfully kept within for the 16 acquisitions, but I have to keep an open mind as this range could change as we acquire more profitable companies, therefore entering a market with competing acquirers.

The challenge is ensuring we continue buying quality businesses with good founders.

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Gustaf: How did the acquisition target focus evolve?

Mike: The acquisitive strategy was initially focused on digital imaging. I was brought for my M&A skills, but as I have already mentioned, there were limited targets within this sector.

We decided to expand our market and acquire any business with a science and technology angle, but mainly firms with manufacturing bias. If you can operate a niche business that makes its own products, you are able to control your gross margins.

Initially, it was financial engineering by acquiring businesses at multiples of 4x to 6x EBIT. We were trading at (say) 10 times, therefore, I suppose it is arbitrage where the market valuation of SDI will increase at a level higher than the consideration paid for the acquired business.

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Gustaf: How do you DD businesses?

Mike: DD is carried out by myself with the support of the CFO.

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Gustaf: Why not use third-party professional advisors?

Mike: You can only get under the skin of the business by talking to the staff and reviewing all the business operations using internal resources.

For example, Chell Instruments had nowhere to put me, therefore they put me in the canteen. As a result, by the time I finished the week, I knew everybody in that business.

You can get to understand the people and the culture. And find out if it's going to be a good fit for the SDI Group.

The process to acquire a business does not change, no matter the size of the business. We have a very detailed in-house due diligence process that we adhere to. The only advisors we employ are lawyers. The sale and purchase agreement has had very little change over the years, and we find that there are very few contentious issues.

During the due diligence, we are fully open with the sellers on our findings. The only areas of contention are usually the aged debtors and stock obsolescence which we will discuss and have always agreed a level of provisioning if required.

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Gustaf: Why do the business owners sell to you?

Mike: We are a good acquirer and offer an exit to the seller but of equal importance is a ‘good home’ for the employees. This can be proven after acquiring 16 businesses in 8 years. We offer the potential seller as a reference a meeting with the owners of businesses who have sold to SDI over the years.

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Gustaf: What's your organisation structure like?

Mike: We operate a flat structure in our businesses. All businesses are run autonomously with their own management teams. Every month we request monthly accounts together with an operational report.

We include all this information together with the consolidated accounts into a board pack. It is important to stress that this pack is sent to the SDI board and all the subsidiary directors. It is very important to me that this sharing of information continues as we acquire further businesses.

My role is twofold. Firstly, acquiring business to add into the group but of equal importance is to visit the subsidiaries every 4-6 weeks in an operational capacity.

As the group has grown, we have introduced two sectors – Digital Imaging and Sensors & Control to provide the investors with in-depth financial information.

But when I monitor the businesses, I review them individually. I will look at every one of the 13 different business units against budget and forecast.

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Gustaf: What is your thinking on the recent LTE Scientific acquisition? And how does that tie into your buy-and-build strategy?

Mike: LTE is a business that historically generated sales of £6m and profits of £0.4m. Synergy is a wonderful word, but in this case, we consider that this could be achieved by sharing information across the businesses within this sector. Companies included in the cross-share of information would include Monmouth Scientific, Safelab Systems, Applied Thermal Control and Synoptics.

Examples that come to mind are (1) LTE would like to enter the US market. Synoptics has a sales and marketing office established in the US; (2) LTE purchases chillers for their environmental chambers from a third party. We make chillers at Applied Thermal Control (ATC), therefore a move to ATC will increase Group margin; and (3) We can offer a broader range of products to our customer base.

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Gustaf: How do you source and incentivise managers?

Mike: We want the founders to stay with the business. And they usually do. For example, with Sentek, the owner wanted to release the equity. He still wanted to come to work a few days a week but move away from the MD role to develop the product. As part of the due diligence process we review succession planning. In this instance, Paul Cook, the sales manager was identified as a successor to the founder. He is now the MD of Sentek.

During the due diligence process we identify key personnel as per the example above. At completion, we offer these members of staff stock options in SDI. We also incentivise management by giving them up to 50% of their salary as a bonus, but that's on the achievement over budget. So, of course, it's self-funding.

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Gustaf: How do you set budgets?

Mike: The subsidiary management teams set their budgets. As autonomous units, we give ownership of the budgets to the subsidiary directors, which is key to our success.

These are then consolidated at head office.

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Gustaf: How do you find businesses?

Mike: There are a number of routes (1) Use an intermediary who is paid a commission on success; (2) Ask internally who we should buy next. For example, Monmouth Scientific gave us Uniform Engineering; and (3) We are known as a good acquirer, therefore, we work with corporate financiers.

We are always looking for new acquisitions which fit our acquisition criteria:

1.     Scientific / technical instruments / manufacturing sector

2.     Strong exporters within their niche sector

3.     Profitable and cash generative

4.     Strong trading track record

5.     Strong local management team

6.     Available at a fair price – recent acquisitions have been priced at 4–6 times EBIT

Note: SDI has a reputation of being honourable and never changing the deal terms.

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Gustaf: Have you increased your sourcing activities outside the UK?

Mike: I think we have. I was close to buying a business in France, and that was just before Covid. That would have sat very nicely alongside Graticules Optics. But Covid closed everything down, and then they sold it internally to a French organisation.

The other one I looked at recently was in the US, again in the same field as Graticules Optics.

Over the years, we have found many businesses in the UK that fit our acquisition criteria, but I have an open mind to expanding our portfolio overseas. Note: Atik Cameras has a manufacturing site in Lisbon, and as already mentioned, Synoptics has a sales and marketing office in the US, therefore, we are used to running overseas operations.

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Gustaf: What are some common levers you pull after acquisition?

Mike: We let the businesses run autonomously. In a number of businesses, they may require stronger financial controls, which we introduce. Our focus is on the medium to long term strategy, which is a new concept to the sellers. Finally, we create an environment for the businesses to grow and develop with investment if required.

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Gustaf: Do you think you will be able to deploy most of the cash you generate into acquisitions also five years out?

Mike: Yes, I can't see why not. If not, then I need to return the cash to the shareholders.

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Gustaf: Do you have any worries or concerns?

Mike: Yes, not to think after 16 successful acquisitions, ‘I can walk on water’. There will be an acquisition that will not fit the acquisition criteria, therefore, we need to take action to bring the acquisition in line quickly.

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Gustaf: Do you have any favourite business books?

Mike: No, I do not really read business books. I think the last ones I read were The Snowball on Warren Buffet and the Letter to Shareholders by Warren Buffet. I mainly read novels, probably 40 to 50 a year.

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

Mike: Feel free to reach out on mike@sdigroup.com or +447872402066