Pitstop!
Conversation with the Company
Hello,
Sometimes the investment world brings unexpected things upon us and that is exactly why we love what we do. I have seen lots of unexpected things already, but each time they exceeded the previous ones. Lately, my portfolio holding—being a software company—announced an acquisition and enter into car repair shops. While that might be a red flag for 99% of investors and based on online browsing they consider it a huge red flag, I look at things a bit differently. I see a well run company that had no other choice because of their significant customer concentration and switching costs for their core business. And I also see acquisition of business which is in the core competency of the company even though it does not look like it on the first view.
One thing is certain. This is the most significant transformation in the history of the company, therefore I consider it very important to stay up to date and decided to speak with the CEO to understand better the rationale, financing, competition for deals and ideal seller for the future.
Closer look uncovers that the acquisition of the car repair shop was done at 4-5.6x P/E as the seller was completely burnt out after unfortunate circumstances in the life. What else, the financing was done from cash held on hand and debt, therefore no equity was issued, nor are the plans to do so for further deals. Lastly, the M&A roll-up which is starting to take place is being run on the purely decentralized basis leaving founder in place and supporting them with administrative tasks.
In others words I would describe this situation now as “where others see risk, I see an opportunity”. Lots of people believed that this was diworsification. I do not. Based on my conversation, this was well selected and well executed M&A. Lastly, I believe this deal will be followed by number of more in the future. And if the contract will be extended the company trades at 3.6-3.9x P/E net of cash.
And that is the purpose of this article, to stay up to date on the company I believe I am one of the most knowledgable about out there. And there is no better time now as people are still figuring out how to evaluate this business now. Is it software company or boring car repair shop?
With this I believe the company is moving in its mission altough under quite different business model that if executed flawlessly could become much larger in the future. So all in all, the company had to make this M&A to simply keep moving forward.