Executing Transformative M&A to Change Business Models

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LinkedIn and follow M and A Science. I'm your host and chief M and A scientist, Kisan Patel. Joining me today is Tobias Divistala, head of Group M and A at GEA Group ag, one of the world's largest suppliers of processed technology for the food and beverage and pharmaceutical sectors. Based in Germany, traded on the Frankfurt exchange under G1A. Today we're going to talk about executing transformative M and A to change business models. Tobias, how are you doing today?

Hey Kiesen, Doing well, very well today and thanks for having me.

We're here live in Dusseldorf, Germany. Is this the global headquarters for the company?

Yes, it is.

We're global headquarters for the GEA Group. Yeah, I'm still working my German. I got a hello, Guten Tag.

Yeah, that sounds great. So maybe we can do it in German, this interview maybe, you know, with.

All the AI stuff. Maybe that'll be the thing. Live translations back and forth. Can we kick things off with a little bit about your background?

Yes, sure. 43 years old, married, and have two children. I'm an economist by education. I studied with a focus on international management, corporate finance and corporate valuation. I'm doing M and a for almost 20 years now in different roles and functions. I started my M and A journey in a big four accounting firm and a transaction advisory. But there was a certain point in time when I wanted to learn a little bit more about ma especially strategic aspects. And that was the reason why I then moved to the corporate side. I worked for several companies in Germany. For instance enlisted specialty chemical group in Germany or a listed construction company as well as a large German utility company. Then I had a move back into consulting for a short term. But now I'm here and heading the global M and A responsibilities of GEA Group. Throughout my M and A journey I did a lot of traditional buy side and sell side M and A, well as joint ventures partnerships. But I was also responsible for corporate strategy, heading also corporate development team. So I have a very broad expertise. Not only pure execution M and A, but one of my favorite things in M and A are transformative as well as high complex deals. And I think this is the reason why we're sitting here.

Let's break it down. First of all, that's a pretty versatile background covering M and A. When you said 20 years, I was like you basically were born doing M and A. When we say transformative M and A, what does that actually mean for me?

In the end, it's always coming along with a change in business model or with a change in governance of a company. There are lots of examples. Maybe you take the automotive industry which is facing the pressure to change their business model to electric vehicles, coming from a conventional process and such things where especially great and good companies have to reinvent themselves or come up with creative structures to continue their formal business.

That's a good point. So obviously changing the business model and seems like big part of it's keeping up with times and staying relevant. You mentioned governance as well.

Yeah.

Where does that fit into it?

Imagine a company which is working, working in a very conventional business field and facing certain difficulties to gain financing or new equity due to certain regulations that have been come up in the meantime. Here in European Union we introduced a couple of years ago the so called EU taxonomy, that's definition of certain business areas which are classified as carbon neutral or on the other hand non carbon neutral and especially the latter one definitely has difficulties to act on the market as they are facing regulative pressure and such things have of course influence on the whole governance model of a company.

That's actually really interesting. We'll look forward to chat more about that. Can you tell me about your experience specifically with transformative deals?

Happy to give you. Maybe a war story as an example. Actually indeed very complex one. And it's referring to the time when I was head of corporate development and M and A at a large German utility company. And it turned out that due to several external shocks, especially the German law of exiting coal fired power production, the company went into serious financial crisis. And as part of the restructuring of the group and the refinancing, there was a condition of the financing banks that that time six public shareholders had to sell 100% in their stake the company. The problem was it was a complete integrated group with a high exposure in burning coal to produce power to secure the German power supply. And a lot of that business was, let's call it old economy. But the group had also a lot of interesting businesses in renewable energy fields and service areas. And here comes the aspect I mentioned earlier. Due to the over time increasingly very strict ESG requirements. So environmental, social and governance requirements, especially of investors, but also on the debt markets, company with a huge portion in the conventional power production would neither find an investor due to the fact that investors and even statutes of certain funds are not allowed them to participate in such companies, nor a bank financing such a deal. Not only such a deal, but also not willing to give financing to transition a business model into a new one. So there's a kind of trap you are in with the company because you cannot gain fresh capital to transform the business internally, but you also will have a tough time to find potential investors on the one hand, but even if you have one, they will need certain deal financing. And here we are back again. Banks are usually reluctant to finance such conventional assets. By the way, these ESG requirements have a very strong, strong exposure and consequences not only for financing. You are a company active in conventional businesses which come along with certain CO2 footprint. You even have investment banks or even consultancies who cannot advise you anymore because they have internal policies for restricting businesses with such companies. So it's a very tough environment to be in. We ended up in a situation where we concluded that the only way for making this company executable was a complete separation of the group, especially group businesses. So we come up with an idea to introduce a conventional business arm as well as a green or we call it growth arm with the option to sell only de growth one because that's a clean business where everyone was keen on investing. Especially when talking about Green energy and energy transformation in Germany. In the end, the conventional or coal arm would be a case for a wind up scenario in the end and maybe using some of the proceeds that you gained from the growth business to finance that. So in the end we took the existing holding company which included almost every operation of the group at this point in time, and made it literally empty. So we transferred everything into two legally independent 100% subsidiaries below that holding. So it was a huge company wide mega carve out.

It's interesting because the whole entire business got carved out basically.

Indeed. And twice the conventional one on the one hand and the growth one on the other end.

What did the shareholder distribution look like? Because you start off with the same, but now you have one business that has more accessibility to different capital and investor base.

The intention was in every scenario to sell the company somehow. And therefore we also discussed different structures. And by the structure that we have chosen, we assured that there was no connection between the coal business and the growth business. But it was a complete ring fencing of growth businesses and no potential contingent liabilities between those two individual entities. And everything was set up and prepared to sell the growth business to, I don't know, most likely infrastructure investors and use some, as I said, some kinds of the proceeds to pay off the financing banks on the one hand, but also to use some of the remaining cash to finance the wind up of the conventional. But here certain stakeholders step in. Unfortunately, this concept was not accepted by every stakeholder. There were some stakeholders, like one or the other shareholder, but also employees, representatives, unions and stuff like that who had a strong interest to sell only one part of that group, the growth business. But they wanted the group to be sold as a whole, meaning both subgroups under the umbrella of an empty holding company to keep the group as big and strong as possible and also to avoid a wind up scenario for a business that has more than 80 years history in Germany.

Okay, so I gotta pause and get a couple definitions here. One, ring fencing. Some people, I'm familiar with it, but I like when people explain again, because I get it better. So can we explain ring fencing?

Yeah, here. In this case, ring fencing is the meaning that a company or a group in itself has no liability for another one. In this specific case, the coal and conventional power business or liabilities for the growth business.

And the other way around, completely separate the employees. So nobody's bouncing between the companies or a shared resource. We got ring fenced. Completely separate employees. You mentioned the employee unions. Can you give me a little context? Part of this I'm learning how deals happen in Germany because it sounds like the employee unions got a lot of say in terms of what's happening or influence on this specific example.

Yeah, that's true. Germany, per history has a very strong culture of the unions and employee representation. It's their major interest of course, to get out the best for the employees in every kind of transaction, in every business decision that is made. Major motivation of course is to avoid layoffs, to avoid relocation. The unions in Germany typically have very strong voice and some of them also very strong understanding and entrepreneurial background. In this specific case also in other companies, especially the supervisory board of the companies, are equipped 50% employee representatives and 50% the capital side. And if you want to come to a conclusion or to an approval of a fundamental business decision, that you at least have to have them on your side because otherwise there might be difficulties to gain a mutual understanding and a cooperative together getting deals done.

I feel like 75% of the synergies is laying people off.

Well, I mean it's definitely not the case from a strategic point of view. Of course. Sometimes synergies come along with certain personal decisions. But especially when working for a big corporate. The employees are also one of the key assets you acquire because they have the knowledge, they have the history of the culture of the companies. And those things that are typically part of the synergy case are more or less administrative functions and stuff like that. And also due to natural fluctuation and the aging within the employees, it's not a key to lay off employees when doing transactions.

Fair enough. Especially in this case when it comes to getting the buy in for the employee unions, is there like a lead representation for that group? And I think in my last interview I learned that you sort of have employee representations on your company board.

Yeah, that's true for the supervisory board. And you have several discussions with them, have to offer compromises and try in the end to negotiate a good way forward that respects both sides of the motivation. So you have to keep in mind the best for the employees from their work council's point of view. But you also have to assure and try to explain why certain measures or structural changes are really necessary because otherwise it will harm the whole company. They of course also have to learn, especially when talking about financing and restrictions that come along with a certain business model, which for those sides are something you have to adopt as well, because they are focused very much on the well being of the whole employees and the whole staff, which is good, I think, and has a certain key Role, especially in Germany, but also in other European countries where you have strong union culture. But on the other hand, must be clear that such movements do not harm overall. And so therefore you have to find a compromise.

Yeah, very interesting. Although, let's get back. So take the sidebar off and go back to how did your deal end? Because it sounds like it's a big challenge right there.

Yeah. Going back to the example, the separation of that group into the two independent subgroups in the end helped on the one hand to establish a kind of financing enabler. Because on the one hand you had the conventional business that was more or less financing itself.

You did go through and split up this company into those.

Yeah, we did. Yeah, we did. That decision was clear and was also supported by every stakeholder, but only the transaction perimeter in the end. So what do we sell to whom? And that was the key question. We had to make an adjustment. But due to the established structure, the growth business was standalone and would also always be able to gain certain financing. But on the other hand, we had to find then the solution for the conventional business, which in itself was somehow cash positive. And due to the ongoing cash flow, it was also able to work on it and to live on its own. But as I said, that was not an option to have it separated completely. So the overall arching holding company had to be the transaction vehicle here. In the end, the standalone separation of the growth business helped also to convince certain investment committees and stuff like that to look closer into that transaction. But as you can imagine, when looking into a group which has one business which is very attractive and coming along with a good strategic way forward, but on the other hand, a second group company that is, let's call it dying business model, also investment committees would have the question in their mind, how do I handle that huge coal exposure in that case? And secondly, how do I can I get this financed? And to overcome this trap, we had to develop very clear decommissioning and net zero strategy, including a step plan which laid out a strict way out of the conventional power business. We had to define measures which power plant side can be transferred into a new technology side, which one can be used for maybe other businesses. Second enabling tool that we developed, and that's quite interesting, was a legal optional solution. We call it shareholding as a service. What does that mean? We invented a kind of model which would have enabled any investor immediately after closing the transaction, to transfer the coal business into a kind of trusty solution so that the investor would not have the conventional business on his books anymore. And a third party would have to manage the wind up of that business.

This is super interesting. I like how you coined it as shareholder as a service. Like everything's becoming a subscription these days anyways. And now you found out even becoming a shareholder you got a subscription model out of it where they're getting away from the liabilities. It sounds like in this particular case with this business and the way it's regulated and being unfavorable and now it goes to a third party and they manage the asset, but are they also managing, are they transacting the asset as well? And then they just return that? What does that look like in terms of a fee structure?

In the end it comes with a certain participation in the wind up proceeds. There was a certain way forward how many years the conventional business would need to run so out of that certain operational cash flow that on the one hand used to of course keep the company running, but on the other hand the surplus, all of that would have brought to a kind of escrow account, as if you will. And afterwards there were some subsidiaries in that group which you would be able to sell out throughout the time. And all those proceeds after netting potential decommissioning costs, but also costs of dealing with people. There was a clear mechanism and a clear projection how much will be left in the end. And then a clear mechanism how many or how much of that remaining amount of cash would go to the service provider in the end. A legal service group or lawyer who would do that of service.

Sounds like it's pretty up for negotiation. It's not a common thing that's standardized at this point.

Definitely not. So that was something that we had to negotiate upfront to introduce it to potential investors so that they from day one know what that concept is about, but also what it will cost in the end.

And then on the other side of the business, the renewable side sounds like that's just in a favorable position. It sounds like there's a lot of positive. The shareholder holders have more autonomy of where do you want to participate and not participate. Also they think there's some upside with the valuation that the renewal business, all of a sudden you're capturing the upside of the market. How they look at that as more of a favorable future for that business and not necessarily cluster it with the one that's going out of flavor.

Yeah, that's definitely the case looking into some of the parts valuation. So valuing every part of that group separately of course would have come up with a more favorable valuation for the growth Business because that has a clear going concern perspective, very high exposure in new technologies, favorable business environment and the conventional one. Yeah, with limited time of being active and almost identified cash proceeds for the upcoming years. But on the other hand then coming with certain additional costs, like decommissioning big power plants, which is not always a cheap activity, of course has another valuation than valuing business which is with a clear way forward.

It probably gives the business a better focus and their path forward as well. What was the biggest challenge we mentioned? There's sort of some roof with the shareholders. But in terms of going through this, what do you think were the biggest challenges?

The biggest challenges are on the one hand bringing all stakeholders behind that concept. So to have a mutual understanding and a mutual agreed way how to do that transaction was very key. As it is like in every company multi stakeholder universe. So you're not talking only to one or two parties. You have lots of parties you have to talk to be it shareholders, be it employee representatives, be it political politicians. In the end, because energy company in Germany is always a highly political exposure. You have financing banks, you have customers, you have suppliers. So everyone needs to be introduced to at least that concept that you are intended to do. And that was a very challenging discussion and many amounts of meetings, long hour meetings, which especially the responsible CFO of that company at the time had to do. So to bring everyone on the same level, transparent on the same level and keep them also on the same level was at least I think one of the key challenges.

One of the things that you mentioned to me was that you sold both companies as a whole. Can you talk me through how did you end up doing that? How did you find a buyer that way?

The good thing was obviously that the company itself was a very prominent utility company in Germany, where many infrastructure investors, but also uplay financial sponsors had been keen on taking a look into. So there was always a question of time when that company would come to the market. There was natural interest in the company itself. Then the described separation of the group helped a lot as the growth company was become fundable due to ESG compliant growth business. And this helped a lot from a structure point of view, as for instance acquisition financing would have been able to bring into the green arm, so the growth group. But furthermore, he elaborated shareholding as a service concept as well as the decarbonization strategy, including the CO2 footprint reduction helped a lot to attract further potential bidders to convince also their investment committees that there is a clear way out of the conventional business. Besides that together with the investment bank that we had on that deal, we also developed a kind of remarketing document which was especially focusing on CO2 profile reduction to bring feedback from the market sounding on a basis back into our process. We wanted to gain a view on the appetite of potential investors and to learn what we additionally might need to implement for a successful process. Thankfully, it turned out that we already had a very pretty well prepared process and a very pretty well prepared asset and that everything was very good, developed, set up and explained. So that investor education was quite easy.

After all this work, you did the full reconfiguration essentially restructuring here. Why not sell the businesses separately without.

The support of everyone who has to make a decision in the end, wow.

You didn't have that.

It's a no go.

Then you had to sell it together. But you got the story of a when the company does buy it.

Yeah, because after closing the investor of course can do whatever he wants with that group. But you have overcome that hurdle that an investor is willing to invest its.

Money into that all that stuff pays off because you feel like have that story. You create a lot of value by doing those things. Very cool.

So in the end we're able to attract good amount of investors, brought them to submit an indicative offer, run with few of them into due diligence. The rest turned out to be a successful deal in the end.

Nicely done. Teach me how to do this. You're sort of able to convince anyone anything at this point.

In the end it turned out to have meetings, calls.

Give me the strategy.

Is it?

Hey, I feel like you have such diverse and especially this nature of doing deals in Germany. It's not like I got one other executive I'm dealing with and I read that person. You have stakeholders across the board and you can't just put them all in one phone call because.

Indeed. And that's what I mean. The strategy is to have them all individually educated with the same message. But you have to transport that message also individually because someone resonates different than someone else and someone has a different background than someone else. When talking to financing banks, they have more understanding of what's the deal perimeter, what's the due diligence than talking to maybe a politician. So you have to find other words, how to describe certain things.

There's always a stubborn person. Every deal has got this stubborn person. How do you manage that stakeholder? Do you invite him out for a beer and try to level up with them?

In the end it's simple like that. Maybe you have to talk to him twice, once in a formal atmosphere and once indeed taking him for dinner. Or do it more informal. So you need try to identify which person you have to handle in which way.

Okay, I like that. I like the breaking down formal versus informal. Okay, so that was a big challenge. Is the stakeholder buy in. When you look at this whole process defining success metrics, how do you think about those things?

You can have of course the former process view on that looking into your checklist criteria, like how many employees have I already allocated to company A and company B? How many contracts can I split? How many contracts do I have to transfer? What shall I do with it? License, how do I handle data files which need to be separated assets, stuff like that. Do I have the audit for the covered financials and all those things. Those I think the more formal or process wise formal success criteria.

It's like the mechanics of the deal for this to be defined as examples like splitting those companies up. You have a mechanical definition that you're building these metrics around.

Yeah, that's the case. And you have kind of inventory of all the things that are within a company. And you have to look into each and every category how to deal with that. But in the end it's just hard work doing that. But on the other hand, you also have, let's call it soft measures. You also have to come along with. And this especially goes to the culture of the company. The employees have to imagine was a more than 80 years old traditional German energy company, always integrated in one operational holding. And then you come with a completely new governance and business model. So dividing into two completely different worlds.

Was this public company?

Private?

Okay, private.

Of course you have to. I don't like the expression, but you have to go through very complex change process for the people. Because especially you now have two companies that are completely different from the way of doing business. The one conventional one, which is more or less something in history. You produced power for the German society and the German economy and were just paid by the power prices. But now you have a complete new business which not only building renewable energy assets, but also doing energy services and integrated energy solutions. Not only large scale, but also small scale. You have a complete different way how to approach the market and how to handle customers. You have to generate leads on the customer side. You have to apply for projects, have to constantly talk to potential customers and that is of course a transformative way. Also the employers have to go because they need to learn how to work in the new atmosphere, new setup and with the new challenges, that's where the.

Governance comes in play dramatically changes as well when you're going through this. Indeed, in America we obsess over irr, especially if you're a private company. Is that the same here? When things are said and done, you're communicating to the investors.

Of course, in the end, every transaction can be simplified looking into fewer numbers. And of course, in such a case, it's also one figure that you look into here. In that specific case, there was some kind of specialty as the shareholders of that company were municipalities. So public side because they have certain financial criteria they wanted to see and to achieve. But on the other hand, the sale of that group was somehow a requirement of financing banks. As part of restructuring that group, you were somehow in between. On the one hand, the shareholders had to sell no matter what price. Of course they have the ambition to sell at the highest value. And in the end, due to the disruptions in the energy markets that we saw within the last years. Yeah, it was a good deal I think for everyone in the end, nobody to complain about that.

Yeah, it sounds like that sounds a big part of the pitch to them. Here's a clear financial case on why this transaction makes sense.

Indeed.

This is really interesting in terms of highlighting this example. Are there other transformative deals that you've worked on?

It is my deep conviction that there are large transformative M and A that will dominate the future deals. Because every industry that is facing energy intense environment, so energy intense industries, be it the chemical one or automotive industry or steel industry, they're facing certain challenges because they have to rethink and also reinvent their way of doing business. We see a lot of things in the market where especially traditional industries are facing certain changes that that need to come along. With transformative M and A, for example, there are also industrial company groups in the market that looking to transform a broad product portfolio with diverse markets to develop into active, focused, pure play companies so that they only play in one specific industry or sector. Once acquisitions are identified, that will help to transform the company into the right direction. You can also look into the portfolio itself and try to target into the right direction. Meaning when acquiring a business into your home and industry, you are more flexible maybe to divest certain businesses and companies within your portfolio that are not that core, let's call it like that. But it's not always easy to start with the selling process because you are not able to come up with a certain acquisition target, but you are starting to sell off your portfolio. You can also end up in a situation where you lose too many substance of the group and also maybe become a target for an overall acquisition. So therefore I think the strategic framework and strategic assessment is very, very key.

So there's a couple of themes I extracted from what you just covered. One example you had was like a pretty big carve out example. And then alternatively there's more of like an incremental approach. You just little by little can start transforming through a series of acquisitions and divestitures. And then when we look at the actual strategy of what drives it, there's this customer focus, could be a piece of it. We're selling to consumers now we're going to focus on enterprise. And then there's the industry itself. That could be a shift where here's this old energy, new energy. Is there any other themes I'm missing?

That's mainly it. And the advantage of doing big transformative one one time acquisition for instance, of course is timing always depends on the question how huge is the pressure on my business model. I'm forced to do something on short notice. Might be better to aim for a big transaction. If I have no pressure or more time and want to also develop a little bit different bottom up. I would definitely go for case by case or small piece approach. But here it is clear that yeah, it will take a certain amount of time because especially when acquiring smaller companies, you always facing the risk of being not successful with one of those or they are not in the stage that you are willing to acquire them or they are owned by certain families or entrepreneurs that are not willing to sell.

Playing the long game with long vision. But alternatively I think the bigger, more dramatic, bigger the deal, the more risk you're taking. We're going to do this massive carve out and take this big harder deals to put together. But it just sounds like it's a bigger risk.

At the same time, I think it depends on preparation. In the end, you look from the buy side angle what company is interesting and you definitely consider as a potential target. You typically have a long history of dealing with that potential target. You observe the company when it's publicly listed on income statements, annual reports, capital market days and stuff like that. Do you have a pretty good feeling, I guess from a desktop research what kind of risk is within the group and also should of course know your industry very well so that you also are familiar with the potential risk with customers, projects and stuff like that when doing a bigger deal. On the sell side, same applies. It's all about good preparation. You know, where the weaknesses are of the business you want to sell. You have to address that very transparent and open. Ideally with a potential solution within your selling documents or vendor due diligence documents to give very much comfort to the investors looking into that company.

I think I'm getting inside your German head now. It's about how calculated you can actually get. That's not a clear linear big deals more risk. It is more specific to that deal how calculated you can get and then take your bets accordingly.

Yeah, I don't know if it is a German.

I just like throw that reference in because I'm here in Germany. You have a good German accent. My last interview I tried to pull some German engineering analogies. I'm a huge Porsche fanatic. I try to draw some parallels there. But in some ways I do see that deals are more complicated in Germany, but not, I think from the same engineering intention as you build physical things in certain industries.

That might be the case. Especially when you deal in an industry where you have IP or know how which is driving innovation. And you are competing with companies from other jurisdictions that also do good work, of course, but have a different culture. You sometimes end up in over engineering. That's definitely the case. Of course. I would say the German M and A environment is also characterized by a very risk averse atmosphere. But everyone also in Germany I met who is doing M and A has of course intrinsic motivation also to overcome certain risks and find ways how to deal with that.

Is that why deals take so long in Germany? Because perspective of risk gets considered?

Maybe part of it. But I think the major aspect why deals take so long in Germany is due to the governance structure of a German company. Same applies here. What I told you earlier. You have to bring every stakeholder behind a deal to start within your company. The guy who in the end is responsible for the business and has to deliver on the business case. Then you have to go the ladder up to the executive board. Everyone has to approve that. Then you have to go to the next level and bring it into the supervisory board. Depending on companies. There are companies like ours, for instance, we can be very flexible and on short notice with decisions. But there are also groups in Germany where it's a very formal process. You have to prepare certain documents and hand it in, I don't know, four weeks prior to a meeting. And you have a strict meeting calendar which you have to stick to. And here it gets complicated and time consuming.

Hire good lawyers and get good friends to learn from like you. I want to go back to the strategy piece around Thinking of carve outs and then just free flow conversation. I just want to be opportunistic and I want to learn as much as I can from experience. But if I'm trying to like look at the market and look for opportunities and maybe some of this example, it's like hey, here is a company and they're going in that out of flavor. But then there's parts of the business that maybe could be carved out and stood up or the company itself could be repositioned through acquisitions. Seems like a pretty straightforward. But what about if the company doesn't.

Have any of that?

If we use the coal example and it was just the coal example, there was no renewables, just sell what we can and go put the chips in something else. Is that sort of the angle that's always difficult.

And maybe when looking into the automotive industry as an example and all those combustion driven businesses which not long ago had the impression that it will come to an end sooner or later also the sentiment has changed a little bit from my point of view. But having that in mind, business model that has only limited time to survive. You always see companies in the market that follow a so called last man standing strategy.

So they, yeah, I've seen that they.

Try to consolidate the market with conventional businesses, try to be as much cash generating as possible and use that cash procedure either to enter into new markets or new businesses or if it is just a kind of, let's call it, financial play, they of course use the overall proceeds then to pay out their investors.

Yeah, I'm thinking the newspaper industry basically is that. And that's those type of investors that are just bleed out what you can. And that's your whole investment thesis. That's part of it. Not really transformative there, but it could be. If you start thinking of cash flow and putting in other places. And those are tough ones if you look at a business and it really doesn't have a foothold in anything, that's a pretty bold thing for it to reorganize. What about right now, all the buzz around AI so I'm almost wondering if this is a strategy where there's transformation through acquisition, but there's also organic transformation that companies that adopt and change their ways, which is very different than some of the businesses even where it's like physical things you're building, it's very knowledge oriented. But can you transform that business and adopting that technology, disruptive technology faster? That's kind of another strategy of its own that's still technically transformative.

It is. I would Bring it together under the R and D expression. We at GEA are also looking into potential new business models coming along with big data and artificial intelligence. That's definitely something many companies take a look into and we see huge potential there. But for the time being it's still in a stage where it is not really clear which way to go. There are so many opportunities out there and there are also different standards in the industry. I think it would need some time.

Still speculative. Basically it's not the same driving it through these kind of strategic acquisitions where you sort of have a more defined strategy that you're betting against. You really don't know what about business models, right? Like I'm in software and to me it's always interesting subscription models at a high valuation and I'll look at adjacent software that may not be in a subscription model and the sort of thinking is that one that you could transform into a subscription model. Use the Porsche example. I don't know if they do this in other countries. In the US they recently started renting cars. You can just get rent it for the month or multiple months. I'm thinking about it. It looks like a great deal. Just thinking about that is that when you look at these transformative opportunities in terms of just a pure business model.

Case, definitely something for instance, we are also considering our machineries that we are producing have the ability to be connected to our own cloud and along with that there is certain kind of service portfolio that we intend to offer with that in a subscription business model. So it's definitely something that also we technology and industry, engineering industry are making up our minds. And I mean you mentioned Porsche, but I know that other automotive suppliers also considering to introduce a subscription model for the cars itself. Not of leasing them for months, but if you buy a car, typically you had to configure your car. I want to have air conditioning, I want to have seat heating, I want to have navigation or gps but I don't want to have the big entertainment system. But I learned that automotive companies are now going to a model where they bring everything into the cars and you can on a monthly basis decide, oh, this month I would like to use the big entertainment system. So I pay an additional charge for that. Next week come to the conclusion, oh, it's not sufficient for me. I quit it again. So that's also quite interesting from my point of view because there's a question of profitability for such models. You have to invest into the cars, bring everything into the respective models and if there's someone who is not interested at all in any of those extras and just want to ride the car or drive the car from A to B. For me that would be the question how can it be a profitable business case in the end, but it seems to be at least a case that people are considering.

Yeah, it's interesting. It goes a little bit to that point of is it an incremental change in the industry or is it a really big one? I was thinking about some of these aircraft leases too where now they're for the consumer side that it's becoming. Do you rent your private jet on an app and just pay for point A to point B versus doing the buy in? It's interesting. Other views, you're just open minded here of looking at industries where I'm trying to learn how to be an activist shareholder is. What I'm trying to do is come in and say, hey, we need to change this business. We need to change to put things in a different direction. We should carve this out. And what are some views around that just help me become a better activist shareholder.

In the end, you have to understand the industry itself on the one hand, but also everything, especially the regulational framework and pressure that's coming along with that. Looking for instance at the chemical companies and chemical industry, those big chemical sites, the chemical parks, there's lots of infrastructure on those sites. You have even owned energy production, water, wastewater treatment, you have waste treatment pipes, several things. In the end it's all very energy intense and comes along with a certain CO2 footprint. Looking here again into that, this net zero ambition that nearly everybody is taking into account, you have to ask yourself the question, do I invest my capital into transforming my chemical production site into a green one that it comes along with certain capital needs and capex spending, or do I want to invest my money for growing my business, entering new markets, entering new technologies? If the latter one is the thing I would like to do, I'm again here at a kind of transformative M and A because then I can decide to sell my chemical parkside to an infrastructure investor. It will do the transformation. I have of course to pay certain rent to that to use the site anymore, but somehow avoiding the big bunch investments in local infrastructure so I can use the capital for other things. So it's always a strategic decision which way to go. And the worst case would be I don't want to invest anything at all in that site. I close it down and relocate to another country. Also examples that we see here in Germany sometimes.

So it starts with the vision for the future. And then you work your way backwards.

Yeah, it's often like that.

Tobias, before we wrap up, I got to ask you, what's the craziest thing you've seen in M and A at the moment?

I'm seeing quite a funny thing when talking to potential investors and sellers, especially from the private equity field. They have very good, highly educated, but young private equity analysts on their deals. And these days they are so much surprised that money costs money again and that having interest rates and interest payments in the financial model as a cost component, I mean, for people like myself with very long time doing ma, it's pretty normal that you have to calculate with a certain interest expenditure, your transactions. But especially people who have been educated in the time where interest rates were low or even negative for them, it's a quite surprising event that we have to calculate that into the valuation.

Funny, the old way of doing things is like the new way of doing things now. But if you anticipate valuations to keep going up like they've been, then I guess we're all fine.

Yeah. Indeed. The other thing is not the crazy thing, but for me, every deal is, again, very unique and fascinating. So after 20 years, I'm learning with every deal, new things. And maybe that's also one of the crazy things in M and A. Even with a big track record and lots of deals done, you always get surprised by deal dynamics, by seller or buyer behavior, by negotiation tactics. That's what makes it fun.

Never get bored, right? This has been a great conversation. Thanks for taking the time, helping me become a better M and A scientist today.

Thanks for being here at our headquarters. And yeah, I hope you have the chance to enjoy Germany a little bit more.

I love it. A lot of people don't know this. I grew up in a small town in Nebraska that was actually about 30% German.

Oh, really?

I'm going to bring the Porsche reference here. When I was 13 years old, my dream was to be a Porsche engineer. I took all the German classes in high school and Bischen Deutsch. But then there's not many people to talk German to in Chicago. I love the culture, actually, because you got exposed to it so much and finally did actually get to go buy the Porsche. It is a lot of fun. I don't know if I can get on the Autobahn out here. That's the one thing I got to check off.

Yeah, not far away from here.

Yeah, we'll have to see if we can make that happen. But I am due to go to Stuttgart next.

So new to Porsche.

Oh yeah, yeah, that'll be fun. We'll look forward to that. But no, definitely love every visit opportunity. I get to visit Germany.

Great.

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