Friday, November 29, 2013

Platform Specialty Products

So, someone commented on another outsider-esque investment idea backed by some billionaires.   Platform Acquisition Holdings is another Martin Franklin - Nicolas Burggruen SPAC (special purpose acquisition corporation, otherwise known as a blank check company).   Bill Ackman also owns a stake.

I think this is Ackman's second investment with Franklin - Burggruen.   The first was in Justice Holdings, which ended up buying Burger King and is now listed on the NYSE (and Ackman still owns).  He was a co-founder of Justice, but at Platform he is just an investor; after the relisting on the NYSE, Pershing Square will have a representative on the board.

This is certainly not Twitter, but a new listing to take a look at.

Liberty and Freedom
Franklin - Burggruen had some other SPACs too in the past.  Two of them were U.S. listed; Liberty Acquisition which I suppose we can call a disaster and Freedom Acquisition.  The other one, Liberty Acquisition International was listed (like Justice and Platform) in Europe, so I am not too familiar with that one.

I only looked at the two U.S. listed ones (at the time);  Liberty Acquisition merged with Prisa; I remember reading about it at the time and I wasn't comfortable at all with it as it was an entity in Europe and I had no familiarity with it.  Freedom Acquisition acquired (or merged with) GLG, a hedge fund manager.  I looked at that too and wasn't particularly interested in GLG.

I don't know much about Nicolas Burggruen other than what I read in the press; that he is a homeless billionaire (living in hotel rooms), so I can't say anything about his style or philosophy.

Anyway, I suppose someone might have done an IRR on the above SPACs, but I don't have those handy with me  (But as you will see, even though that is important, I am sort of interested in what Platform just bought).

Martin Franklin is well-known to U.S. investors because of his work at Jarden Corp (JAH).  He sort of does fit the outsider CEO mold (prudent acquisition driven growth).  JAH is certainly a candidate for a post here on this theme I seem to be on here these days.

Martin Franklin took over JAH as Chairman and CEO in September 2001 and now is executive chairman (gave up CEO post in 2011).

For those who don't know him, check this out:

Jarden Corp Stock Price Performance Since September 2001

Returns since September 2001:
JAH:                           +33.5%/year  (total return)
S&P 500 index:          +4.6%/year  (excluding dividends)
Berkshire Hathaway:  +7.8%/year

Ackman's interest in investing with Martin Franklin is clearly due to his performance at JAH (that's exactly what he said).

Platform Specialty Products
So anyway, the fact that PAH (Platform Acquisition Holdings, listed in London but trading halted due to deal) is a SPAC started by Martin Franklin and Nicolas Burggruen is enough to be interesting.  But I generally don't invest in SPACs, even with reputable founders.  There was a time when it was a free call option; you can buy them at book or a discount and then vote either way on an acquisition; if it is voted down (or you choose to), you can get your cash back.  If not and the acquisition is sweet, then you make money on the pop.  

In fact, the Special Opportunities Fund (SPE) owns a basket of SPACs and SPAC warrants as a sort of cheap option on good acquistions.  It's certainly a good idea, but for me, I just tended to think that this SPAC trade was a sort of pre-crisis thing.   Since it was basically an arbitrage between private market values and public market values, maybe this trade is getting more interesting again; public market valuations are up a lot in the last couple of years.  So maybe this 'pop' will start to come back.  In the past few years, public market prices tended to look cheap and private market prices seems to have gone up due to the private equity boom.

Crumbs and American Apparel are two SPACs that come to mind that have been disasters. I'm sure there have been some great ones, but I'll leave that game to others.  I'm too lazy to find things that pop; I want to find long term places to put my money (of course, owning SPE will give you some of that exposure!).

In any case I did have Platform Acquisition at the back of my mind but it wasn't really a priority for me to look at.  But thanks to a commentor in the POST post (no pun intended), I had to front-burner this because:

The business Platform Acquisition bought might be an outsider CEO company. 

Platform Acquisition, in October (closed in November), bought MacDermid, a specialty chemical company.  They will change the name of Platform Acquisition to Platform Specialty Products and relist on a U.S. stock exchange.

MacDermid an Outsider CEO Company?
MacDermid  was a publicly traded company until 2007 when there was a managment buyout.   The MBO happened at $1.3 billion, or around 9x EV/EBITDA.  The Platform acquisition happened at 10x adjusted EBITDA (at $1.8 billion).  So the valuation looks more or less in line with what management thought it was worth back in 2007 (OK, 9 is not 10, but close enough for the blogoshpere!).

But first, let's look at what raised my eyebrows.  MacDermid is run (and has been run since 1990) by Daniel Leever (65 years old so not young, but not too old either!). 

On the investor conference call when the acquistion was announced, they said that during Daniel Leever's tenure, MacDermid increased revenues five times.  He has been with MacDermid for 34 years and has been CEO for 24 years.  I assume his "tenure" is the time he was CEO.  That's a modest 7%/year in revenue growth; 5x in 24 years = 7%/year. 

They said he increased the value of the company from $80 million to the current $1.8 billion through those years.  So that's +13.9%/year since 1990.  Not bad at all.   I think they said he increased market cap or equity value 30x during his tenure.  Assuming that means 1990-now, that's +15%/year.  This growth includes acquisitions, but no equity raises.

Although pretty good, it's not quite up to par of the original "outsiders".  Here, look:

1.  Tom Murphy (Capital Cities Broadcasting):
    +19.9%/year over 29 years versus +10.1%/year for the S&P 500 index
2.  Henry Singleton (Teledyne):
    +20.3%/year over 27 years versus +8.0%/year for the S&P 500 index
3.  Bill Anders (General Dynamics)
    +23.3%/year over 17 years versus +8.9%/year for the S&P 500 index
4.  John Malone (TCI)
    +30.3%/year over 25 years (up to ATT acquisition) versus +14.3%/year for the S&P 500 index
5.  Katharine Graham (The Washington Post)
    +22.3%/year over 22 years (since IPO) versus 7.4%/year for the S&P 500 index
6.  Bill Stiritz (Ralston Purina)
    +20.0%/year over 19 years versus +14.7%/year for the S&P 500 index
7.  Dick Smith (General Cinema)
    +16.1%/year over 43 years versus +9%/year for the S&P 500 index
8.  Warren Buffett (Berkshire Hathaway)
    +20.7%/year over 46 years (through 2011) versus 9.3% for the S&P 500 index

But then again, these guys are really special.   You're not going to find a lot of these lying around. 

Let's take a quick look at valuation.

The MBO of MacDermid happened at around 9x EV/EBITDA.  Since MacDermid was a publicly listed company, you can go to and get 10-k's and other filings including the MBO merger proxy from 2007.  I was going to use that proxy for valuation, but there is a more recent proxy from the Solutia acquisition by Eastman in early 2012.  There is probably a more recent acquisition/merger, but this is good enough for comparative transaction analysis.   Since this is not a Conde Naste publication and I don't have free interns working for me, I will do the comparative company analysis myself.

Anyway, here is some info from the Solutia merger proxy (dated May 2012, analysis by Deutche Bank and Moelis):

Total Enterprise
Value ($ billion)
Core Selected Transactions
July 2011
Lonza Group Ltd
Arch Chemicals, Inc.
   Cash    1.4
May 2011
Ashland Inc.
International Specialty Products Inc.
   Cash    3.2
April 2011
Solvay S.A.
Rhodia S.A.
   Cash    7.3
March 2011
Berkshire Hathaway Inc.
The Lubrizol Corporation
   Cash    9.6
July 2008
Ashland Inc.
Hercules Inc.
   Cash and Stock    3.4
April 2004
The Lubrizol Corporation
Noveon International, Inc.
   Cash    1.8
Other Selected Transactions
October 2011
American Securities LLC
Unifrax I LLC
   Cash    0.9
July 2011
Ecolab Inc.
Nalco Holding Company
   Cash or Stock    8.1
June 2010
Cognis Holding GmbH
   Cash    3.2
Ciba Holding AG
   Cash    5.0
July 2008
The Dow Chemical Company
Rohm and Haas Company
   Cash    18.9

Total Enterprise
Value ($ billion)
August 2007
Akzo Nobel N.V.
Imperial Chemical Industries PLC
   Cash    10.7
May 2007
Saudi Basic Industries Corporation
GE Plastics business of General Electric Company
   Cash    11.6
Court Square Capital Partners II, L.P. / Weston Presidio V, L.P. / Management
MacDermid Incorporated
   Cash    1.3
Apollo Management L.P.
GE Advanced Materials business of General
Electric Company
   Cash and Stock    3.8
Construction Chemicals business of Degussa AG
   Cash    3.2
March 2005
Texas Pacific Group
British Vita PLC
   Cash    1.3
March 2005
Crompton Corp.
Great Lakes Chemical Corporation
   Stock    1.8
Cytec Industries Inc.
Surface Specialties business of UCB SA
   Cash    1.8
July 2004
Apollo Management
Borden Chemical Inc.
   Cash    1.1

With respect to each selected transaction and based on publicly available information, Solutia’s financial advisors calculated the multiples of the target’s total enterprise value to its EBITDA for the twelve-month period prior to announcement of the applicable transaction, which is referred to below as “TEV / LTM EBITDA.”

This analysis indicated the following:

Selected Transactions TEV/LTM EBITDA Multiples

   High    Mean    Median    Low
Core Selected Transactions
   9.2x       8.3x       8.7x       6.9x   
Other Selected Transactions
   12.4x       9.3x       9.3x       6.1x   
All Transactions
   12.4x       9.0x       9.0x       6.1x   

So anyway, this analysis includes transactions between 2004 and 2011 so includes a lot of deals.  The core selected group deals were done at a mean of 8.3x EV/LTM EBITDA which looks lower than the current MacDermid deal.  For all transactions, the multiple is 9.0x.  Platform paid 10.0x last twelve months adjusted EBITDA so looks higher than previous deals.

The comparative listed valuations in the 2012 proxy for Solutia is a little dated since the market has done very well since early 2012, so here is my quick update on the listed comps.  I just took the last twelve month figures, EV and things like that from Yahoo Finance.

Publicly Listed Comps (Specialty Chemicals)

This is the same universe of comps that was in the Solutia proxy.  It looks like specialty chemicals trade at around 10x EV/EBITDA, so the deal price is within range of where specialty chemicals trade these days.

But here's the interesting thing.  McDermid is asset-lite and has very little capex; they generate a lot of free cash (sound familiar?).  Here's a slide from their recent presentation:

If they are generating 90 cents of free cash (unlevered, pretax) per $1.00 of EBITDA, then a 10x EV/EBITDA might be pretty cheap.  With 90% cash conversion, then a 10x EV/EBITDA translates into a 11x EV/(EBITDA-Capex).  

The table above shows that EV/(EBITDA-Capex) for specialty chemicals averages 21x.   Average capex to sales is 8% versus less than 2% at MacDermid.   Free cash conversion is only a little over 50% at other specialty chemicals versus over 90% for MacDermid.  So on that basis, it looks like a good deal.

Cumulative Preferreds
MacDermid planned on doing an IPO in 2011 / 2012 so they filed an S1 (and many amendments).  It's a good summary of what MacDermid is about.

One thing jumped out at me that shouldn't be an issue going forward.  As part of the MBO in 2007, they issued payment-in-kind cumulative preferreds shares.  This is from the S1 that shows how much the preferred owners are getting (or accruing):

  Year ended December 31,Three months ended
March 31,
(amounts in thousands)  (unaudited)
Statement of Operations Data:
Net sales
  $728,773  $694,333  $594,153  $182,195  $178,521  
Cost of sales
  388,298  371,223  333,963  95,884  94,980  
Gross profit
  340,475  323,110  260,190  86,311  83,541  
Operating expenses:
Selling, technical and administrative
  185,649  179,786  156,508  45,746  45,629  
Research and development
  22,966  21,005  20,103  6,718  5,359  
  28,578  29,694  29,868  6,655  7,362  
  896  6,234  4,228  114  (181
Impairment charges(2)
  46,438  —    68,692  —    —    
Total operating expenses
  284,527  236,719  279,399  59,233  58,169  
Operating profit (loss)
  55,948  86,391  (19,20927,078  25,372  
Other income (expense):
Interest income
  500  696  458  175  108  
Interest expense(3)
Miscellaneous income (expense)(4)
  9,412  15,106  (5,020(4,353(16,172
Income (loss) from continuing
  11,306  45,997  (84,5119,344  (4,780
Income tax (expense) benefit(3)
  (9,953(21,7236,427  (4,366(1,145
Income (loss) from continuing operations
  1,353  24,274  (78,0844,978  (5,925
(Loss) income from discontinued operations, net of tax(5)
  —    —    (4,448—     —    
Income (loss) from continuing operations
  1,353  24,274  (82,5324,978  (5,925
Less net income attributable to the non-controlling interest
Net income (loss) attributable to MacDermid, Incorporated
  987  23,931  (82,8274,887  (6,013
Accrued payment-in-kind dividend on cumulative preferred shares
Net (loss) attributable to common shares

From the balance sheet:

Stockholders’ Equity
Cumulative preferred shares, 316,000 shares authorized and issued, 315,254 shares outstanding at March 31, 2012 and 315,264 shares outstanding at December 31, 2011, respectively, including cumulative dividends of $175,237 and $164,449 at March 31, 2012 and December 31, 2011, respectively
$491,237  $480,449      
Common shares, 50,000,000 shares authorized and issued, 9,946,140 shares and 9,946,439 shares outstanding at March 31, 2012 and December 31, 2011, respectively
50,000  50,000  314  
Class A Junior shares, 430,000 shares authorized and issued, and 314,245 vested shares and 314,245 vested shares outstanding at March 31, 2012 and December 31, 2011, respectively
—  —  —    
Class B Junior shares, 324,000 shares authorized and issued, and 100,156 vested shares and 49,878 vested shares outstanding at March 31, 2012 and December 31, 2011, respectively
—  —  —    
Additional paid-in capital
2,254  2,156  542,171  
Accumulated deficit
Accumulated other comprehensive income
Common and preferred shares in treasury, 746 preferred shares and 736 preferred shares and 53,860 common shares and 53,561 common shares at March 31, 2012 and December 31, 2011, at cost, respectively
Total Stockholders’ equity
252,865  242,194  252,865  
Equity (deficit) in non-controlling interest
69  (388
Total equity
252,934  241,806  
Total liabilities and equity
$1,232,981  $1,221,418  
See accompanying notes to consolidated financial statements.

This looks really scary and unacceptable, but if the IPO happened, these cumulative preferreds would have been converted to common equity so on a pro-forma basis, those cumulative dividend accruals wouldn't be there (and wouldn't recur in the future).

The recent presentation doesn't include a detailed balance sheet so I don't know if these preferreds are still outstanding.  If they are, I would assume that these preferreds will be converted into common equity. 

The accumulated deficit of $280 million looks very un-outsider CEO-like.   But much of this is MBO related; up until the end of 2006, it looked like a normal company (from their 2006 10-K):

Twelve Months Ended December 31,
Net sales
Earnings from continuing operations before cumulative effect of accounting change
Earnings (loss) from discontinued operations, net of tax
Cumulative effect of accounting change, net of tax
Net earnings
Basic earnings per common share:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
Net earnings
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
Net earnings
Total assets
Long-term debt (including short-term portion)
Shareholders’ Equity
Cash dividends declared per common share

From the balance sheet:

Shareholders’ equity
Common stock, authorized 75,000,000 shares, issued 47,686,761 at December 31, 2006 and 47,131,950 shares at December 31, 2005, at stated value of $1.00 per share
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less—cost of common shares held in treasury, 16,845,198 at December 31, 2006 and 16,546,763 at December 31, 2005
Total shareholders’ equity
Total liabilities and shareholders’ equity

So that's quite normal.  The 2007 MBO was disastrously timed (right before the great recession) so the income statement and balance sheet looks like a total mess. 

But if you look through the capital structure issues and just focus on the operations, it looks fine.

Great Annual Reports
I just read through the annual reports from 1994-2006 which are available at  I wasn't familiar with MacDermid at all when it was listed, but the annual reports are really well-written.  They are inspired by Warren Buffett. 

Here's a snip from the 1998 annual report:

     Nineteen ninety-eight was an eventful year.  After 60 years of
inspirational leadership Harold Leever, our Chairman, has chosen to become
Chairman Emeritus.  He will continue as a Director.  What a ride!  In 1959
Harold, with a number of employees, bought out MacDermid's founder, Archie
MacDermid.  In the early '60s, in what turned out to be a brilliant
strategic move, he led a tiny metal finishing cleaner company into the
electronic chemical business.  This was a huge bet at the time, and we are
still enjoying its fruits today.  Perhaps more importantly, Harold
established the MacDermid Philosophy.  It is printed as usual on the
inside front cover of this report (before the numbers).  Today the "Clan
MacDermid" with over a thousand members in 19 countries around the world
is as focused as ever on the Philosophy's core principles:

focus on the customer                     honesty and integrity
supreme worth of the individual    challenging and demanding environment
entrepreneurship                             teamwork and cooperation

Harold has been our spiritual leader for 60 years and will continue to be
forever.  I hope you can join us to celebrate this milestone with Harold
and Ruth Ann at our annual meeting on July 22.
     Another important event in 1998 was a non-event which we believe
defines who we are as clearly as what did occur.  We entertained acquiring
a fairly large company that would have immediately added to earnings per
share.  But, given our optimism about our internal growth prospects, we felt
the acquisition would dilute per share results several years out and thus
turned it down.  We are focused on building long-term shareholder value. 
While acquisitions can be and have been important, we will issue shares only
when we receive at least as much in business value as we give.  Tomorrow
becomes today rather quickly.  Not only is that our responsibility to you,
but it is in our own self interest.  Your employees, through our investment
plans and options, own 35% of the company.  Many, like myself, have the vast
majority of our net worth invested in the company.

I added the italics.

The shareholders' principles were plagiarized (Leever's term) from Berkshire Hathaway with the permission of Warren Buffett.

     MacDermid  Incorporated  is  in  the international business of researching,
developing,  acquiring,  manufacturing,  marketing,  and  servicing, for optimum
profit to us and our customers, specialty chemicals and systems for the chemical
treatment,  surface  preparation  and  finishing  of  metals, plastics and other
materials  in  accordance  with  accepted  ecological and social considerations.
     We  will  create  an industry image that automatically causes people in the
industries  we  serve  to  think  first  of  MacDermid.
     We  will justify their action by first thinking of the customers' needs ---
what's  right  for  them  makes  it right for MacDermid --- by supplying a total
system  including  processes,  know-how  and services that assist in meeting all
their  needs.
     We  continue  to  believe  in  the  supreme worth of the individual and the
dignity  of  his  or  her  work  for  the  benefit  of  all. We will provide the
opportunity  for  our  people  to  fulfill  satisfactorily  their  own  personal
objectives  and  ambitions  and  reward them in proportion to their contribution
toward  achieving  the  Corporate  objectives.
     We  will  continue to be a place of opportunity where people "have the guts
to  fail."  We  will  encourage  the  entrepreneurs  and  innovators.  We  will
continually  challenge the goals, objectives, organization and all the operating
and  procedural  aspects  of  our  business  and  modify  them  when  needed.
     Our  progress and your progress, our Company's long-term advantage and your
long-term  advantage,  lie  in  our  human resources. Other advantages that come
about  from technological improvements, the opening of new markets, lower costs,
etc., all prove to be relatively short run. So, basically, it is the initiative,
the will and the motivation that people bring to their work on which we rely for
our  survival  and  growth.
     We will continue to try to attract new people who have creative and probing
minds;  people  who  will  at  times  be  disturbing  --  questioning policy and
procedures.  If  we  are wise, we will welcome it, resolve it, put it to work or
forget  it.
     We  will  continue  to  expand  with the best possible talent available and
continue  to  train them, and ourselves, so that we each increase our ability to
contribute  to  the  Company's  progress.
     We  will  each  strive  to  exemplify  the MacDermid Spirit of teamwork and
cooperation  throughout the organization which has been instrumental to our past
and  present  growth  as  a  corporation.
     First and foremost, we expect of you a fundamental honesty --- honesty with
yourself,  with  your Company and with all those with whom you interact, whether
they be associates within our organization, our customers or society in general.
Character  and  strength  have  always been born of honesty and a willingness to
face  up  to  the  truth  of  each  situation  as  it  arises.
     Second,  we  expect  and  insist  on hard work. An easy life, marked by the
absence  of  difficulty, builds neither character nor happiness. We believe that
self-realization of the individual is founded on accomplishment, which implies a
willingness  to  make  the  sacrifices  necessary to get the job done the way it
should  be  done.
     Third,  we  expect  you to accept responsibility. Every assignment you will
have  carries  with  it  a responsibility for accomplishment. Commit yourself to
achievement which you consider beyond the scope of your talents and then program
your  effort  to  translate  it  into  a  reality.
     Fourth,  we  expect  of you a loyalty --- loyalty to yourself, your family,
your  associates,  your  organization  and  our customers. We have always worked
together  as an organization and your own personal achievements will be measured
in  terms  of  the  contribution  you  make  to  our  joint  effort.
     Fifth,  we expect you to demonstrate good judgment. Judgment is essentially
an  ability to appraise facts. Factual knowledge must come before good judgment.
This  means  you  must continually educate yourself on our Company, our products
and  our  industry.  In  this  way,  you will have the material on which a sound
appraisal  of  good  judgment  is  based.
     This  is  what  we  expect  of  you,  and being in an extremely competitive
environment,  we  have  a  real  urgency  in  this  expectancy.
     One,  you  can expect from us the fairest treatment of which we are capable
---  fair  in  respect  to  matters  of compensation, fair in respect to working
conditions  and  fair  in  respect  to  personnel  policies.
     Two,  you can expect from us, as a Company, complete honesty in whatever we
do.  Your assignments will never compromise the principles of honesty and common
decency  which  we  also  expect  you,  as  an  individual,  to  uphold.
     Three, you can expect that we will provide assignments which will represent
challenges  to  you  ---  assignments  which will enable you to grow toward your
professional  and  personal  objectives.
     Four,  you can expect that we will offer opportunities for advancement. Our
desire  is  to  grow  from  within.
     Five, you can expect that we will be a demanding organization --- demanding
of  your  time,  your  talents  and  the best which you as an individual have to
offer.  In  this  way  our  company  will  grow  and  you  will  grow  with  it.
     Perhaps  all  this  can  best  be summarized in these words from an unknown
"Create  mental  pictures of your goals, then work to make those pictures become
Exercise  your  God-given  power to choose your own direction and influence your
own  destiny  and  try  to  decide  wisely  and  well.
Have  the  daring  to  open doors to new experiences and to step boldly forth to
explore  strange  horizons.
Be  unafraid  of  new  ideas,  new  theories  and  new  philosophies.
Have  the  curiosity  to  experimentto  test  and  try  new  ways of living and
Recognize  that  the  only  ceiling  life has is the one you give it and come to
realize  that  you  are  surrounded  by  infinite  possibilities  for  growth
and  achievement.
Keep  your heart young and your expectations high and never allow your dreams to


We believe that the excitement inherent in the culture of ultra high performance
will  differentiate  us from our competitors, who, while fine companies in their
own  right,  simply  will  find  it impossible to keep up with the fighting Clan
Unlike  many  public  companies, our employees and Directors own close to 33% of
the  shares,  so,  we  obviously think as owners. We hope that you consider your
investment  in  MacDermid as being a part owner of a business, much as you would
if  you  owned a small business in partnership with your close friend or family.
You would not be concerned about the evaluation of that small business weekly or
monthly.  Many  employees, including your CEO, have the vast majority of our net
worth  in  MacDermid  stock. We intend to be very long term holders, thinking in
generational  terms.  We  desire  to  partner  with  like-minded individuals and
institutions.  We  will  not  respond  to  short term pressures from the market.
We  define  intrinsic value as the present value of free cash flow, measured per
share.  Cash  flow  will  be  invested in growth opportunities. We will build in
significant  margin  for error in investment assumptions. We have no interest in
top  line growth for growth's sake. Per share cash flow is what counts. Our goal
is  to increase per share intrinsic value by 25% per year. We believe in setting
stretch  targets  even  though  sometimes  we  may  fall  short  of  our  goals.
MacDermid  will  demonstrate  the  highest  standards  of personal and corporate
ethics  and  responsibility,  with  special emphasis on our environment. We take
seriously  our leadership commitment to the communities in which we do business.
We  know  to  build one of the world's greatest industrial companies requires an
unusual partnership with the people charged with making the vision a reality. We
are  guided  by  the  MacDermid  philosophy,  including  our  clear statement of
commitment to our people, and our expectations of their commitment to MacDermid.
We  maintain  policies  that  encourage long, productive service. We avoid short
term  policies like layoffs and restructuring simply to make the current quarter
or  year numbers. That's not to say that we will not have reductions in staffing
based  on  performance,  or  if  we  feel  the  long term health of the business
requires  us  to  do  so. But even then we will do so with great reluctance. Our
people  are our most important asset. We treat them as such by investing heavily
in  training  and  education  and  management  development.
We will aggressively fund sound internal growth opportunities mostly in research
and  market  development  regardless  of  short term impact.  We will fund these
opportunities when the time is right, not necessarily when it is convenient. Our
internal  investment  opportunities  normally  offer  an exceptional return, but
often  require  multi-year  horizons.  We  will  avoid  the stop-start method of
investing,  which  is  typical  of  a  short  term  mentality.
We  know  that  our  ability  to  invest aggressively requires us to have a cost
structure  lower  than our competitors. Investing AND lowering our current costs
constantly  is  a  core  principle  of  our  company.
Growth opportunities will be passed through a margin filter prior to investment.
We  invest  shareholder  funds  in high return assets after a healthy margin for
error.  Bricks  and  mortar  have  no attraction if they will not produce a high
Cost  of  capital  is  an  important  consideration.  Our  ability  to  generate
relatively  high amounts of cash allows us to carry significant debt while still
maintaining  a healthy margin for error. We will issue common stock only when we
receive  at  least  as  much  in  intrinsic  value  as  we  give.
Our  current  dividend  is a result of history. Increasing our dividend is not a
high  priority.  We believe we can better serve shareholders by using internally
generated  funds  to  grow  the  business  or  purchase  shares.
We  will  be candid in our reporting to you. We will tell you the business facts
that  we  would  want to know if the positions were reversed, while safeguarding
information  which  would  aid  our  competitors.
We will be communicating with you in several ways. Through our annual report, we
will  try  to  give  all  shareholders  as  much value - defining information as
possible.  At  our  annual  meeting  we  will spend as much time as necessary to
provide  information  and  answer  questions. The forum section of our web site,,  provides  shareholders  the  opportunity  to  submit  questions
directly  to  the  CEO.  We  will  answer  questions honestly and as promptly as
practicable.  In  all  of  our  communications,  we  try  to  make  sure that no
shareholder gets an edge. Our goal is to have all of our shareholders updated at
the  same  time.
To  the  extent  possible,  we would like each MacDermid shareholder to record a
gain  or  loss  in  market  value  that  is  proportional to the gain or loss in
per-share  intrinsic  value. Obviously we cannot control MacDermid's share price
but  by  our  policies  and  communications, over time we believe, are likely to
attract long term investors who seek to profit strictly from the progress of the

From the 2002 annual report

A  COMMENT  ON  WEIGHING  VS. VOTING:  Many of our shareholders know we are long
time  followers  of  what  I  call "Buffett Principles", taken from the business
philosophies  of  Warren  Buffett.  An  important  Buffett principle is, "In the
short  term  the  stock  market is a voting machine and in the long term it is a
weighing  machine".  This  means  that at any given point in time the market may
overreact  in  it's valuation of a particular stock, either too high or too low.
In  the  case  of  the late 90's bubble it overreacted towards the whole market.
Just  because the market says the dot com is worth so much "per hit", it doesn't
mean it is so - long term.  A business model that generates no cash over time is
valueless.  Further  this  principle holds that over time, financial performance
and market value tend to converge.   This principle is what drives our cash flow
discipline.  Frankly  I wouldn't take great comfort if I thought I had to depend
on  Wall  Street  to  "vote"  on  our relative success.  Our cash flow in effect
allows  us to take matters into our own hands.  Here's an overly simple example.
Say  we  generate $60 million in free cash flow per year for the next ten years.
At  the  end of ten years we would have $600 million in cash in the bank.  Today
our  market  cap  is  a  little  over $600 million.  Do you think all else being
equal,  our  market value would still be $600 million, or equal to only the cash
in  the  bank?  Not  likely.  Regardless of how depressed Mr. Market felt at the
time,  one would assume the more objective 'weighing' would have to take over at
some  point.  Maybe a better way to look at it is as follows.  Assume Mr. Market
was depressed for the whole 10 years, our stock price never moved, and we simply
took  the  cash and bought back our stock each year. In ten years there would be
one  share left that generated $60 million in free cash!  I think Mr. Market, no
matter  how  depressed he was, would offer more than $20 for $60 million in cash
flow!  So,  we believe that it is a mathematical certainty that if we perform we
will  be  rewarded over time.  The end result is called intrinsic value, defined
as  the  total amount of cash that can be taken out of a business over its life,
valued  in  today's  dollars.  The  above  example is admittedly superficial and
overly  simplistic.  However,  we have run detailed and sophisticated models and
firmly  believe  our  future  is  very  bright,  even  using  very  conservative
assumptions.  There  is  simply  no peer company of any size large or small that
comes  anywhere  close  to  our  cash  flow  performance.   If you want proof, I
recommend you spend the money to come to our meeting for interested shareholders
and  investors  in Omaha, Nebraska on May 2.  At this meeting we will go through
the detailed models and attempt to compare relative valuations over time between
our  model  and  a  traditional  model.

SEE  YOU  IN  OMAHA.  As  mentioned  above we will hold a meeting for interested
shareholders  and  investors  in  Omaha,  Nebraska  on May 2, two days after our
normal  annual  shareholders  meeting in Waterbury, Connecticut.  In addition we
will  hold a four day leadership meeting in Omaha at the same time.  One hundred
of our top managers from around the world purchased a $2,000+ share of Berkshire
Hathaway this year in order to attend the meeting.  We will attend the Berkshire
meeting  en  masse  and  then spend a couple of additional days discussing value
creation.  As  much  as  I  respect  Mr.  Buffett  and believe in the "Berkshire
Principles",  the reason we feel so compatible is due to the MacDermid heritage,
most of which was established by my father Harold Leever 50 years ago.  If these
principles  seem  familiar,  it's  because they are the foundation of MacDermid.

So go ahead and check out the annual reports, the letter to shareholders of MacDermid going back.  They are really well-written.

A Look at Some Historical Figures
The key here that grabbed my attention was the high cash flow generating ability of MacDermid.  90% or more of EBITDA becomes free cash flow to them which is very high compared to other specialty chemicals (see above table).  Also, their capex is less than 2% of sales.  I was wondering if this is sustainable, or if it is just starving needed capex. You never really know in these situations.  Sometimes companies will dress things up for a sale or IPO.

So I jotted down some figures from the old filings to see what these figures looked like in the past.  Instead of EBITDA, I just used operating income plus depreciation and amortization (OIBDA) because there was less math to do.  The ROE figure below is what I calculated using beginning and ending shareholders equity so it won't be exactly the same as what MacDermid reported (ROE wasn't always reported so I decided to use my calculation for consistency through time).

What Leever calls owner earnings in the annual reports is cash flow from operations minus net capex with adjustments for working capital changes, but in my table it's just cash flow from operations minus gross capex.   This (owner earnings) wasn't reported consistently throughout the period so I just use my calculation throughout for consistency.

Also, in the recent presentation, they use adjusted EBITDA.  None of my figures below are adjusted.  The EPS figures are adjusted for a split so is consistent throughout the period.

I split the table in two so you don't have to use a magnifying glass to read it:

MacDermid Financials 1994 - 2006 

During this period, sales grew +15.2%/year, net earnings +17%/year, shareholders equity +16.3% and EPS grew +17.4%/year.   But you will notice that a lot of the growth came in the period up to 2000.

One of the key measures we are interested in, capex as a percentage of sales, has in fact been pretty low even going back.  The average for the 1994 - 2006 period is 2.3%, and since 2001 it has been conisistently under 2.0%.  I suppose one can argue that capex was higher when they were growing more pre-2000, but I think a lot of that has to do with the problems they faced in the economy in 2001/2002, restructuring and things like that; they have been recovering since then.

Here is some more detail:

Free Cash Generation 1994 - 2006

First of all, we notice that ROE is pretty decent averaging 21% throughout the period.  But again, the period up to 2000 is clearly much higher than post 2000.  The OI / avg total cap figure is my proxy for return on capital; it's operating income divided by average shareholders equity plus long term debt.  It's a pretax figure, and it shows decent returns.

OIBDA is my EBITDA proxy (less math since it's easier to add operating income, depreciation and amortization than to add earnings, taxes, interest expense, depreciation and amortization).  It seems OIBDA margins were pretty good but are now much higher (EBITDA margins above 20% from the recent presentation).

The column all the way to the right shows my proxy for the cash conversion ratio. Again, my figure is different than what they use (OIBDA versus EBITDA, gross capex versus net capex, net working capital adjustments not included in my calculations etc).

But it does show their cash conversion over the whole period is 85% which is pretty high.  Even during the period of higher growth, returns and margins (before 2000), cash conversion was above 80%.

So it does look like this high free cash flow generative model is sustainable and is not a case of starving capex for the short term.

This post may be jumping the gun a bit since there hasn't even been a filing for the NYSE listing.  I'm sure there will be more detail we need to look at before deciding if this is an interesting investment.  I would love to know the final capital structure and ownership details (would love to see if Leever still owns a lot; I know he will roll over his current equity ownership into the new PSP).

But so far this is very interesting to me as:
  • Management does seem to be outsider CEO-like and even founder/CEO-like as a substantial portion of his net worth was invested in the company.  The current CEO, Daniel Leever's father ran the business for decades so it's sort of a family business in that sense too.  The annual reports are great. 
  • The high free cash flow generative ability and the fact that this model has been sustained over time is very interesting. 
  • This is not a "a bunch of successful rich guys are involved in this so it should work" kind of investment idea, even though that was the catalyst to make me take a look at this.  I wouldn't invest in this just on the reputation of the backers.  But it is obviously a positive factor.
  • So this is like a compound option (a call option on a call option?  Don't ask); you have an outsider CEO (Franklin) buying a company run by another outsider CEO (Leever) backed by a very good stock picker (Ackman).

There are many questions to be resolved, obviously.  I guess the biggest one would be Daniel Leever and his plan for the future.  He is 65 years old now; his father worked until he was 83 years old (but remained Chairman Emeritus) so there is still plenty of room.  But in annual reports in the past he did seem to mention the lack of bench depth.  I wonder what the situation is now in terms of succession plans.  I also wonder if Leever still has most of his wealth tied up in MacDermid.

Leever has said in the past that their goal was to grow per share intrinsic value at 25%/year.  They have come nowhere close to that, which is OK.  It's better to have a high goal and do OK rather than to try too hard to make the goal and blow up AIG-like.   It seems like the growth plans were thrown off with the recession back in the early 2000s, and obviously the MBO was very poorly timed happening in early 2007 right before capitalism jumped off the cliff.

In any case, I have found enough here of interest to "start a file" on it.