July 21, 2021

“The Outsiders” SPAC to Acquire Fire Suppression Company Perimeter

EverArc Holdings, the special purpose acquisition company (SPAC) co-chaired by Nick Howley and Will Thorndike, announced last month it will acquire Perimeter Solutions for $2 billion. Howley founded and led TransDigm, a company which has delivered a >35% IRR since 1993. Thorndike, aside from being the well-known author of The Outsiders, is a founding partner of successful private equity firm Housatonic Partners.

As they write, Perimeter is a "leading global manufacturer of high-quality firefighting products and lubricant additives." Given the success of both Howley and Thorndike in their respective careers, and the acquisition criteria they laid out, Andvari believes EverArc found a quality business.

EverArc Acquisition Criteria

EverArc laid out five criteria they wanted in a business:

  • Recurring and predictable revenue streams
  • Long-term secular growth tailwinds
  • Products or services that account for critical but small portions of larger value streams
  • Significant free cash flow generation with high returns on tangible capital
  • Businesses in industries with potential for opportunistic consolidation

It's hard not to think a business that meets all these criteria would not be the epitome of a great business. Andvari has written about several of these criteria in the past. Flavor and fragrance makers like Robertet Groupe and McCormick are examples of businesses with products that account for critical but small portions of larger value streams. MSA Safety ("A Picks-and-Shovels 100-Bagger") falls into this category as well and also sells products that protect the lives of people like Perimeter. Constellation Software and HEICO are good examples of companies with significant free cash flows operating in industries with high potential for consolidation. 

Revenues: Growing and Recurring 

Andvari believes Perimeter and its Fire Safety segment (which accounts for 80% of total EBITDA) meets EverArc's criteria. Fire Safety revenues are recurring and predictable and the segment has secular growth tailwinds. The following charts are from a recent webinar presentation by Perimeter's CEO Eddie Goldberg

Spending to suppress forest fires has steadily increased over the decades. Acres per fire has steadily increased. The length of the fire season has also increased over time. Andvari then looked at data from California Dep't of Forestry and Fire Protection ("Cal Fire"), a state that has been plagued with costly fires in the last several years. Fire suppression expenditures in California have increased over a hundredfold in the last 40 years.

Small, But Critical Component

With the federal government regularly spending over $1.5 billion a year on suppressing fires, Fire Safety's retardant products are a small but critical component to these efforts. EverArc writes that fire retardant "consistently represents only approximately 2–3% of suppression costs in the US." This feature should allow the Fire Safety segment to operate with above average margins and a greater ability to raise prices.

Attractive Financials

Lo and behold, Perimeter indeed has extremely attractive financials. EBITDA margins are in the 40% range. Capital expenditures as a percent of revenue is ~2%. Even more interesting is EverArc's statement that Perimeter’s products enable value-based pricing. This means Perimeter can price its products based on the economic value it offers to the customer and not just the cost of the product. Nick Howley's TransDigm has expertly used value-based pricing as a way to continually raise prices on the thousands of different aerospace parts they sell to their customers.

Extensive Qualification of Products

Also similar to TransDigm, whose parts must undergo extensive testing and qualification by the Federal Aviation Administration, Perimeter's Fire Safety products must also undergo "extensive performance, safety and environmental testing." The Wildland Fire Chemicals Test Procedures section of the Forest Service website has a very long list of the tests that must be performed. Only after a fire chemical has successfully completed all the required tests will it gain listing on the Forest Service Qualified Products List (QPL). A chemical’s presence on the QPL is what allows federal agencies, states, and others to purchase it. This constitutes an effective barrier to entry for would-be competitors.

Sierra Hotshots Captain directing crew members during a burn operation near Jerseydale; Ferguson Fire, Sierra Nat’l Forest, CA, 2018. (Forest Service Photo by Kari Greer)

Potential for Consolidation?

Andvari does not have a great sense if there is an opportunity to consolidate parts of the fire suppression industry. Whether the industry is fragmented is a question a potential investor will have to answer through their own efforts. However, a good place to start would be looking at the QPLs of the Forest Service.

For example, in the category of long-term retardants, there are only two companies that have qualified. One is Perimeter's Phos-Chek brand and the other is Fortress's product. In fact, Fortress touts that its product is "the only new entrant in over two decades to achieve placement on the USFS Qualified Products List (QPL)." For Perimeter to have such a long-held position in this product category is a strong signal of business quality. However, this might not leave room for consolidation opportunities.

On the other hand, the QPLs for Class A Foams and Water Enhancers have a longer list of products that compete with Perimeter's products. There might be consolidation opportunities in these two categories. There might also be opportunities for Perimeter to acquire makers of equipment used to store, transport, and disperse firefighting foams.

Andvari Takeaway

Perimeter checks off many boxes in terms of business quality. Its products are small, yet critical parts to the end product or service. It has secular growth winds at its back. The financials of the business are excellent. Finally, we believe Co-Chairmen Howley and Thorndike will be excellent stewards of capital. Whenever Perimeter becomes publicly listed in the U.S., Andvari believes it is a company worthy of addition to any investor’s watch list.


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IMPORTANT DISCLOSURE AND DISCLAIMERS

Investment strategies managed by Andvari Associates LLC ("Andvari") may have a position in the securities or assets discussed in this article. Andvari clients do not have currently have positions in EverArc Holdings or Perimeter Solutions. Andvari may re-evaluate its holdings in any mentioned securities and may buy, sell or cover certain positions without notice.

This document and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This document contains information and views as of the date indicated and such information and views are subject to change without notice. Andvari has no duty or obligation to update the information contained herein. Past investment performance is not an indication of future results. Full Disclaimer.

© 2021 Andvari Associates LLC

July 8, 2021

Q2 Letter: Latent Value of Andvari’s Holdings

For the first half of 2021 Andvari is up 2.9% net of fees while the S&P 500 is up 15.3%.[i] Andvari clients, please refer to your reports for your specific performance figures. The table below shows Andvari’s composite performance against two benchmarks while the chart shows the cumulative gains of $100,000 investments.

ANDVARI HOLDINGS

Andvari's largest positions continued to lag the market and remain a drag on performance year to date. The holdings that worked well in 2020 are not working as well so far in 2021. However, just because a company's share price has declined does not mean that the value of its business has also declined. We are extremely bullish on the long-term prospects for our holdings that have lagged the market this year.

LATENT VALUE

Andvari's second largest holding has now lagged the market over the last twelve months and over the last three years. Still, we remain confident there is tremendous potential for the company and its shareholders. There is enormous latent value that has yet to surface.

This is a company with a market cap of $1.4 billion, revenues approaching $150 million, and over $250 million of cash on its balance sheet. Importantly, over the last several years this company has upgraded the quality of its management team and its board of directors. The management team now includes a handful of former Danaher employees. The new directors on the board have experience leading business units with billions of revenues.

It is hard to overstate the significance that the managers of our company have Danaher on their résumés. Danaher is a company that has built enormous wealth for its shareholders over the last 37 years. From 1995 to 2020, Danaher shareholders enjoyed a total cumulative return of 7,801% versus 880% for the S&P 500 index. Danaher did this by using its cashflows to acquire dozens of companies and instituting a culture of continuous improvement.

Knowing what Danaher was able to achieve gives us confidence in the latent value of our investment. It took Danaher eight years (12/31/85 to 12/31/93) to grow revenues from $100 million to $1 billion. During this phase of Danaher's growth, their shareholders vastly outperformed the market. Although nothing is certain, the odds are skewed in our favor that our holding, run by former Danaher managers, can grow quickly over the next decade and deliver outstanding returns to shareholders in the process.

LAUNCHING ANDVARI PARTNERS LP

After starting Andvari in 2011 with just $3.5M of "friends and family" money, it is a pleasure to share some exciting news. Andvari’s first investment fund, Andvari Partners LP, has been launched.

The philosophy underpinning the fund strategy is identical to Andvari's existing approach. We intend to invest in nearly all the same names we currently own. Just fewer of them. Owning fewer names and managing fewer separate accounts is something we have long sought. Our progression towards fewer names has been careful and measured given the significant retirement assets we manage.

We strive to invest in the way we think will lead to the best, long-term outcome. High concentration mixed with our qualitatively-driven selection process and our long holding periods is how we get there. The new structure gives us the increased freedom to make that happen. For more information on Andvari Partners LP, please contact us (info@andvariassociates.com).

ANDVARI TAKEAWAY

Andvari remains steadfast in our investment approach and philosophy. We wrote last quarter about continually looking to be invested in fewer and better companies. These are companies that can compound our wealth at above average rates for decades rather than several years. When the market ignores the latent value of one of our holdings for too long, we usually view this as an opportunity to add to that holding.

This is exactly what we have done over the last six months. We have added to this already sizeable holding. With the effects of the COVID global pandemic subsiding, our holding will find it easier to do business and close new sales. We also expect our holding to put its cash pile to work by announcing a large acquisition in the next 6–12 months. These both will be catalysts for future increases in its share price and the intrinsic value of the business.

As always, I love to hear from clients and interested parties about anything on your mind. Please contact me with your thoughts, comments, or questions.

Sincerely,

Douglas E. Ott, II


DISCLOSURES AND END NOTES

[i] Andvari performance represents actual trading performance of all, actual clients beginning on 4/12/13. Performance from 12/31/12 to 4/12/13 is actual performance of proprietary accounts, namely the accounts of Andvari’s principal, Douglas Ott. Andvari believes including Ott’s performance figures for the first 4 months and 12 days of 2013 is fair as he managed those accounts similarly to Andvari’s first clients. All performance, including the initial proprietary period, are net of management fees (assumed to be 1.25% per annum, paid quarterly, as currently advertised), net of brokerage commissions and expenses, time-weighted, and includes all cash and other securities. Performance includes realized and unrealized returns and excludes the effects of taxes on incurred gains or losses. Andvari does not certify the accuracy of these numbers. Performance data quoted represents past performance and does not guarantee future results.

The indexes are listed as benchmarks and are total return figures and assumes dividends are reinvested. The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. The Russell 2000 Index is an index of 2,000 U.S. small-cap stocks. It is not possible to invest directly in an index. Because Andvari client portfolios are non-diversified, the performance of each holding will have a greater impact on results and may make them more volatile than a more diversified index. Andvari also engages or may engage in strategies not employed by the S&P 500 or the Russell 2000 including, without limitation, the use of leverage.

One may request a list of all securities mentioned or recommended for the preceding year as of the date of this letter. You may contact Andvari using the information below. Actual client results may differ from results depicted in this letter. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the loss of principal.

The discussion of Andvari’s investments and investment strategy (including, but not limited to, current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the views and opinions of Andvari’s portfolio managers and Andvari Associates LLC, the investment adviser, at the time of this report, and can change without notice.

This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of Andvari.

The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Any or all of Andvari’s forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties, and other factors, most of which are beyond Andvari’s control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

June 24, 2021

A Quick Study of Serial Acquirers

To understand the possibilities for new, emerging serial acquirers, Andvari has studied the financial history of the great serial acquirers. The greats are companies like Danaher, Roper, HEICO, and Constellation Software, all of which have acquired dozens of companies over the decades. 

In our small sample size, we focused on how quickly these serial acquirers have been able to grow their revenues. In nearly every case, and in spite of the risks involved with M&A transactions, Andvari found that these companies outperformed the market for each period of their revenue growth.

QUANTIFYING PERIODS OF OUTPERFORMANCE

Our basic question is how quickly have the great serial acquirers grown from $100 million in revenues to $500 million? From $500 million to $1 billion? Below is a table of Andvari’s findings. We chose the first fiscal year end during which a company achieved a particular revenue number as the start or end date as the case may be.

WHAT IS BASELINE GREATNESS?

The findings are instructive as to what is possible. By knowing what is possible, it will be less likely for Andvari to dismiss an emerging serial acquirer on concerns the current valuation multiple might be way too high. 

For example, Danaher took just 2 years to go from 100 million to 500 million in revenues while it took 6–8 years for most of the others. For the longer term view of growing revenues from 100 million to 2 billion, Danaher, Constellation, and Open Text achieved this feat in 11–12 years. Other companies in our list took (or will take) 20 years or more to go from 100 million to 2 billion. 

With a baseline for what is possible for revenue growth, how did shareholders of these companies fare? Any management team can grow their company via acquisitions, but it’s a special management team that doesn’t destroy value along the way in this process. Below we see the returns of each of these well-managed companies compared to the S&P 500 during each phase of their revenue growth.

With few exceptions, shareholders of these serial acquirer companies outperformed the market in all revenue growth phases. The companies that underperformed the market all shared one trait: proximity to the dot com bubble.

  • Roper underperformed in their 100 to 500 million phase. This was from 1993 to 2000.
  • Ametek underperformed in their 500 million to 1 billion phase. This was from 1984 to 2000. 
  • Open Text underperformed in their 100 million to 500 million phase. This was from 2000 to 2007.
  • Watsco underperformed when they grew revenues from 500 million to 1 billion in less than 2 years from 1997 to 1998.

ANDVARI TAKEAWAY

In Andvari’s ongoing quest to outperform the market over the long term, we are always on the hunt for small and mid-sized companies that can become the next great serial acquirer. 

Occasionally, Andvari might find a company we believe to be a nascent serial acquirer and also looks very expensive. Having studied the history of older serial acquirers, we appreciate that growth can come much more quickly than anyone can imagine. We also understand the historical returns shareholders have achieved with these types of companies. 

Armed with an understanding of the range of outcomes a serial acquirer can achieve, Andvari hopes to never immediately dismiss such a company based purely on traditional valuation metrics. The potential returns are hard to ignore.


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IMPORTANT DISCLOSURE AND DISCLAIMERS

Investment strategies managed by Andvari Associates LLC ("Andvari") may have a position in the securities or assets discussed in this article. Andvari clients currently have positions in HEICO and Constellation Software. Andvari may re-evaluate its holdings in any mentioned securities and may buy, sell or cover certain positions without notice.

This document and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This document contains information and views as of the date indicated and such information and views are subject to change without notice. Andvari has no duty or obligation to update the information contained herein. Past investment performance is not an indication of future results. Full Disclaimer.

© 2021 Andvari Associates LLC

June 10, 2021

MSA Safety: A Picks-and-Shovels 100-Bagger

The picks-and-shovels investing theme is a favorite of Andvari’s. The theme takes its name from the California Gold Rush. Prospectors were not guaranteed to find gold but the people selling the picks and shovels earned a good living. Suppliers of goods and services that are essential to the creation of another finished product are fertile grounds for prospective investments. MSA Safety is one company that fits the picks-and-shovels theme—and several others—and has turned into a 100-bagger over the last 33 years.

Originally named Mine Safety Appliances, the company was formed in 1914 after a spate of terrible coal mine explosions. Dozens or even hundreds of miners died in these tragic accidents when an open flame lamp ignited methane gas or coal dust. The Monongah Coal mine was the site of the largest coal mine disaster in U.S. history in 1907 with 362 deaths. Thus, MSA enlisted Thomas Edison to help create an electric cap lamp to replace the open flame lamps used in mines. Over the next 25 years, MSA’s lamps helped reduce mine explosions by 75%.

LIFE SAVING, MISSION CRITICAL PRODUCTS

Although not literally selling picks and shovels, the MSA product range includes breathing apparatus products, fixed gas and flame detection instruments, portable gas detection instruments, and firefighter helmets and apparel. These products are all essential to the safety of miners and others working in hazardous environments. Also, these products are often mandated by government and industry regulations. The life saving, mission critical qualities of MSA's products enables high margins and affords them the ability to more easily raise prices.

EXEMPLARY FINANCIALS

MSA’s financials are quite good despite them being a manufacturer of physical products. This is because MSA’s products are: (1) essential to safety; (2) are highly-engineered; (3) are mandated by regulations; and (4) are a small part of the total costs borne by the end users. MSA’s revenues are also more stable compared to the industries to which they sell. 

MSA Safety Financial Measures

LEADING MARKET POSITIONS AND VALUE-CREATING M&A

There are two other factors contributing to MSA’s success. One is that most of their products occupy the #1 position in their categories. Having the best brands allows MSA to charge more and raise prices more easily. The other factor is MSA’s excellent track record of value-creating acquisitions. Although not quite a serial acquirer like Constellation Software or Halma, from 2010 through 2020 MSA has acquired 5 companies for a total consideration of $716 million. It’s acquisition program has succeeded because MSA has stayed inside its circle of competence. They’ve only acquired manufacturers of mission critical products that help protect the lives of people working in dangerous environments.

ANDVARI TAKEAWAY

Although MSA does sell to cyclical industries Andvari categorically dislikes—mining and oil and gas, for example—it would be wrong to totally dismiss MSA as a potential investment. It has many attractive qualities that we look for. It’s products are highly engineered, have leading positions in highly regulated markets, and are non-discretionary purchases that protect the lives of people. Whether it's miners, firefighters, or chemical plant employees, none of them can do their jobs without products from MSA. This all adds up to a company whose shareholders have enjoyed a 100-fold return since 1988.

Cumulative Returns of MSA Safety

Further Reading

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IMPORTANT DISCLOSURE AND DISCLAIMERS

Investment strategies managed by Andvari Associates LLC ("Andvari") may have a position in the securities or assets discussed in this article. In the instance of MSA Safety, Andvari and its clients have never owned shares prior to publication of this educational blog. Andvari may re-evaluate its holdings in any mentioned securities and may buy, sell or cover certain positions without notice.

This document and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This document contains information and views as of the date indicated and such information and views are subject to change without notice. Andvari has no duty or obligation to update the information contained herein. Past investment performance is not an indication of future results. Full Disclaimer.

© 2021 Andvari Associates LLC

May 13, 2021

A Recipe For Savoury Returns

McCormick, the seasoning and spice company, is an outstanding business with several of the qualitative traits we seek. Spices are a small, but essential part of end products that consumers often grow to love. It has dominant positions in its markets and its CEO is highly aligned with shareholders. The combination of these traits have enabled McCormick shareholders to outperform the S&P 500 over the long term.

SMALL AND ESSENTIAL

According to McCormick, spices are typically 10% or less of the cost of a meal, yet provide 90% of the flavor and satisfaction. Andvari has written about this concept before in “Robertet Groupe: Accounting for Good Taste”. Being a small part of the total cost while also being an essential component gives a company pricing power. This allows the company to more easily raise prices over time, an especially important quality in times of inflation.

MARKET DOMINANCE

Further, the majority of their products and brands are #1 in their respective categories. Market dominance generally leads to higher margins and more stable revenues due to less intense competition. Andvari likes to see this in all companies.

Dominance of McCormick’s type can often come with the price of increased scrutiny from the Federal Trade Commission (FTC). This can be both a good and bad thing. Good because it’s a high-value indicator of a company’s strength but bad because the company may be forced to divest assets to restore market competition (see “The Fertile Ground of Forced Divestitures”).

RELIABLE SIGNALS OF STRENGTH

In the case of McCormick’s proposed $605 million acquisition of Lawry’s and Adolph’s consumer brands in 2007, the FTC alleged McCormick would control 80% of the $100 million U.S. market for branded seasoned salt. To complete the deal, McCormick had to (1) sell it’s Season-All business to Morton and (2) abstain from acquiring another seasoned salt brand for 10 years. Despite the divestiture and 10-year ban, McCormick’s share price continued to produce savoury returns with its consumer segment leading the charge.

VALUE-CREATIVE M&A IN A HIGHLY FRAGMENTED MARKET

McCormick has created value through an effective M&A program. It has acquired dozens of brands and products in the flavors, spices, and condiment categories. It has stuck to acquiring businesses it knows well, one of the key reasons why it's M&A efforts have succeeded (see “M&A Wisdom from the U.K.”).

Despite a robust M&A program, McCormick still only has a 20% market share. A highly fragmented market like this gives a company a very long runway for both organic and inorganic growth. As of 2017, the company’s SVP of Corporate Strategy & Development said they had a list of 1,000 assets it could potentially acquire under the right conditions. Significant opportunities for growth reinvestment are two other qualitative factors Andvari likes to see.

ALIGNED CEO

Finally, McCormick’s current CEO is Lawrence Kurzius. He was CEO and President of Zatarain’s for 12 years when McCormick bought the company in 2003. Since then, Kurzius steadily acquired and retained McCormick shares as he climbed through the ranks of leadership.

In 2016 Kurzius took over as CEO of the entire company and now owns 5.8% of McCormick’s voting class of shares. These shares are worth roughly $100 million. Kurzius has skin in the game, has an excellent track record, and it's highly likely he will continue to maximize his and shareholders’ wealth over the long run.

ANDVARI TAKEAWAY

Whether a company sells spices, software, or rents out space on cell towers, Andvari always seeks out the qualitative factors that increase the likelihood of earning above-average returns over the long run. We like to see a company selling a highly valuable product that’s just a small part of the customer’s total cost. We like market dominance, value-creating M&A, and consolidation of fragmented markets. We like highly aligned CEOs. In the case of McCormick, the returns to shareholders from this recipe have been extremely satisfying.

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IMPORTANT DISCLOSURE AND DISCLAIMERS

Investment strategies managed by Andvari Associates LLC ("Andvari") may have a position in the securities or assets discussed in this article. Andvari may re-evaluate its holdings in such positions and sell or cover certain positions without notice.

This document and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This document contains information and views as of the date indicated and such information and views are subject to change without notice. Andvari has no duty or obligation to update the information contained herein. Past investment performance is not an indication of future results. Full Disclaimer.

© 2021 Andvari Associates LLC

April 28, 2021

M&A Wisdom from the United Kingdom

David Barber is the co-founder and now retired CEO of Halma plc. For the 20 year period preceding David’s 1997 speech on delivering shareholder value, Halma shares had returned 22.5% per annum.

In his speech, Barber described the reasons behind the success of Halma. Although there are several, Andvari focuses on the criteria Halma used in its highly effective M&A program. When nearly everyone agrees most acquisitions destroy value, we can learn much by studying a company with a track record of creating value through M&A (see our prior post, “The ‘Permanent Home’ Advantage”, on the same topic).

Barber’s guidance can be boiled down to four, key recommendations:

#1: USE INTERNALLY GENERATED FUNDS

Barber says the first factor that will improve the odds of an acquisition creating value is whether one funds the deal with surplus cash or by issuing shares. The idea here is if the acquired company was purchased at a fair price and performs well, the value creation will be greater if shareholders weren’t diluted in the process. Simple and logical.

#2: FIND A REPLICA

Next is whether the acquisition target is a “replica” of one already owned by the purchaser. Anyone selling a business likely has more information than the buyer. The owner also wouldn’t be selling unless they thought they could get the better end of the deal. Thus, to reduce the risk stemming from a disparity in information, the buyer should be as much or even more of an expert in the field of the seller. The buyer of businesses should therefore be looking to purchase other businesses that are replicas of the ones they already own.

#3: PURSUE BOLT-ONS

The third way to reduce M&A risk is by seeking to acquire “bolt-ons”. Barber defines a bolt-on company as one that “when purchased can then be readily integrated into an existing Group company.” This necessarily means the target will be of a smaller size, which also usually means lower complexity, both of which increase the odds of generating value.

#4: DO NOT SACRIFICE EARNINGS QUALITY

The last predictor of value creating M&A is if the acquired company will improve the quantity and quality of earnings. From Barber’s perspective, “quality of earnings is paramount” and “you can never pay enough for a good acquisition and never pay too little for a bad one.”

ANDVARI TAKEAWAY

Thanks to the combination of sensible M&A criteria and a focus on quality, niche businesses with high returns on capital, Halma provided extraordinary returns to its shareholders. Furthermore, thanks to Barber cementing the strategy and culture into the business, shareholders have enjoyed great results even after his retirement in 2003.

A great deal of M&A is value destructive, but not always. Companies with excellent management and sensible M&A programs have beaten the odds. HEICO, Constellation Software, Roper, Danaher, Ametek, Teledyne, and Waste Connections are just a few examples of other companies that have similarly successful M&A programs. High-performing, serial acquirers that can compound returns for decades are exactly the sort of companies for which Andvari is continually on the hunt.

Further Reading

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IMPORTANT DISCLOSURE AND DISCLAIMERS

Investment strategies managed by Andvari Associates LLC ("Andvari") may have a position in the securities or assets discussed in this article. Andvari may re-evaluate its holdings in such positions and sell or cover certain positions without notice.

This document and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This document contains information and views as of the date indicated and such information and views are subject to change without notice. Andvari has no duty or obligation to update the information contained herein. Past investment performance is not an indication of future results. Full Disclaimer.

© 2021 Andvari Associates LLC

April 15, 2021

Q1 Letter: Fewer But Better

For the first quarter of 2021 Andvari is down 5.2% net of fees while the S&P 500 is up 6.2%.[i] Andvari clients, please refer to your reports for your specific performance figures. The table below shows Andvari’s composite performance against two benchmarks while the chart shows the cumulative gains of $100,000 investments.

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April 1, 2021

The Friend of the Wonderful, the Enemy of the Mediocre

Compounding capital at high rates—especially in a taxable account—is a challenge with smaller turnaround investments. If and when the turnaround succeeds, the investor must sell their position and look for the next opportunity. Capital gains will be realized and the next opportunity might not even be immediately available, both of which reduce long-term performance.

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March 18, 2021

The Conference Call Mavericks (Part 2)

We maintain that companies who engage with their shareholders in unique ways likely do so because there is something special about the company, its leadership, or both. This week we extend the theme by looking at a few companies that have taken relevant inspiration from Berkshire Hathaway.

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March 4, 2021

The Conference Call Mavericks (Part 1)

To achieve results different than the average, one must actually do something different. One underappreciated way in which companies may differentiate themselves from their peers is in their approach to communicating with shareholders. The way a company tells its story might just be a sign that something special is going on.

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February 18, 2021

Steady Returns From Steel in the Sky

AMT’s business model is one of the most competitively advantaged among publicly traded companies. The company has multiple characteristics, a number of which we have highlighted in past research reports, that make it a high quality and extremely valuable business.

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February 4, 2021

A Quick Guide to Executive Comp

Assessing management’s skill and integrity is a process that defies quantification. We have invested hundreds of hours reviewing proxy statements over the years. Many capable investors can and do get it wrong (we are guilty as charged). Our experience tells us the best protection from a poor management team is to ensure their compensation incentives are aligned to produce good results for shareholders.

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January 21, 2021

Robertet Groupe: Accounting for Good Taste

With Robertet, we see a company run by owner-operators, that has pricing power, is a provider of “picks and shovels” to its customers, and that has annuity-like revenue streams. Companies that embody multiple investment frameworks like Robertet are always on our radar as potential, long-term investments.

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January 7, 2021

Q4 Letter: The Leap of Faith

For the full year of 2020 Andvari is up 31.1% net of fees while the S&P 500 is up 18.4%.[i] We are proud to finish another year of composite outperformance against the market. The numbers also do not tell the full story. Andvari manages separate accounts for individuals and institutions with diverse needs. Many clients require fixed income exposure and less concentration relative to other accounts Andvari manages. These factors all impact the firm’s aggregate performance.

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December 23, 2020

The Fulcrum of Scale and Profitability

Websites that have taken the place of classified newspaper ads can earn extraordinary EBITDA margins of 50% to 70%. Think of eBay (used items), StubHub (market for ticket exchange and resale), or Apartments.com (property listings for renters). Each platform's ability to generate extraordinary profitability, however, depends strongly on the level of market share it has relative to its next closest competitor.

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December 10, 2020

Slug, Bleed, Trim & Type: Enduring Lessons From 35 Years of Desktop Publishing Software

The article which follows is a high-level summary of a deep dive we recently initiated into the history of the desktop publishing software market from its founding in 1984 until the 2000s. These are the software programs used to edit graphics and to lay out pages for documents ranging from brochures to newsletters to magazines. We work through the enduring lessons highlighted below, which are still applicable to investing today and to all businesses. But we certainly encourage our readers to 'go deeper' via our PDF if they are so inclined.

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November 12, 2020

Distributing Ownership at Serial Acquirer SS&C

SS&C checks off many of the qualitative boxes on Andvari’s list. Bill Stone, the founder, is still running the business after more than 30 years. He still owns 13.3% of SS&C which now has a market cap of $16.5 billion. He has an extraordinary track record of capital allocation (including demonstrating talent as a serial acquirer, which we value). He is an intense operator and has created a culture that retains and attracts highly motivated people.

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October 29, 2020

PAR Tech CEO on Software, Culture, and Accountability

If Warren Buffett was 30 years old, all he’d be doing is buying software businesses. They have every attribute of a business he loves. They have incredible moats around them. You can raise prices every year. Your customers don’t leave. You can deliver value and that value is paid for and expected to be paid for.

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October 15, 2020

Q3 Letter: Repeatable Process and Concentration

For the first nine months of 2020, Andvari is up 13.0% net of fees while the S&P 500 is up 5.6% (see Disclaimers at bottom). The table below shows Andvari’s performance against two benchmarks while the chart shows the cumulative gains of $100,000 investments.

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October 1, 2020

The Cultural Component to 10-Bagger Returns (Part 2)

The servant leadership culture at Waste Connections (WCN) is a compelling case study for its effectiveness in empowering employees. This concept also allowed WCN to continue its rapid growth via consolidation of the solid waste industry. WCN shareholders since 2004 have enjoyed 10-bagger returns.

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September 18, 2020

The Cultural Component to 10-Bagger Returns (Part 1)

Investors may not remember Larry Bossidy, but he is one of the great business leaders of the 20th century. Bossidy worked at General Electric for over three decades where he ultimately became Vice-Chairman. He left GE in 1991 to become CEO of Allied Signal, a manufacturer that badly needed help. His story offers tangible evidence on the power of building strong internal culture, which is a practice we value at Andvari.

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September 3, 2020

Sewage Pipes to Software in 30 Years

Tyler Technologies possesses many qualities that make for a high quality business. The first (and often loudest) criticism we hear about Tyler is related to Valuation. We agree it does have optically high valuation multiples based on current financials. There is also a narrow gap between Andvari’s estimate of fair value and market value. However, these facts mask the opportunity to earn good returns by investing in Tyler. At Andvari, we frequently emphasize that ‘expensive-looking’ stocks aren’t necessarily bad investment opportunities. This is often a function of one’s investment horizon, which, for us, is indisputably long.

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August 20, 2020

Lower Profits Can Produce Extreme Value

Investors might think the purpose of a company is to continually maximize profits, but the process of deliberately lowering short-term profits to invest in a brand can sometimes create enormous value over a longer period of time. This “capacity to suffer” (a phrase I borrow from Tom Russo) during a period of heavy investment is also a sign of a differentiated management team, something Andvari is always eager to discover.

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August 6, 2020

The Perils of Growth Seeking

Large, growing markets present obvious appeal to business leaders and investors, but the pursuit of these shiny objects can be fraught with risks of lost time and money. The scenario reminds us what specific behaviors we value in our executives.

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July 23, 2020

The “Permanent Home” Advantage

Within all industries there is the opportunity for companies to acquire their competitors or other companies in related markets. Some may naturally be better at it than others. Andvari acknowledges that M&A is unlikely to add value, yet we hesitate to say “all M&A” is bad. If a management team has the skills and track record of creating value through M&A, it’s a rare thing worthy of attention. Enter Constellation Software (CSU:CN), a brilliant example of a company that has become the acquirer of choice for owners and founders of software businesses.

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July 10, 2020

Q2 Letter: A Vehicle For Compounding Cash

For the first half of 2020, Andvari as a whole is up 4.2% net of fees while the S&P 500 is down 3.1%. Andvari clients, please refer to your upcoming reports for your specific performance.

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June 24, 2020

The Fertile Ground of Forced Divestitures

Within a single FTC-forced divestiture, there’s potential to examine not one, but two investment opportunities. One is the company that must sell. If it was dominant enough to merit an FTC action, it's likely to remain the dominant one in its market post-divestiture. The other is the acquiring company because it might be picking up a high-quality asset at a cheap price. The forced nature of the sale is likely to make the price cheaper than it might be in market-driven environments (and, in reality, these types of assets would not come up for sale otherwise). In both cases, the forced divestiture can be fertile ground for finding excellent businesses.

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June 12, 2020

How to Fend Off Google

Let’s imagine a contest between a relatively obscure company founded in 1969 and Google, both battling for supremacy in providing digital mapping services and software to enterprises. Google has the benefit of hundreds of billions in revenues and the ability to hire the best engineers in the world while the older company has zero recognition outside its industry and a fraction of the earnings power. Who wins and why?

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March 24, 2020

Andvari 2019Q4 Letter

For the full year of 2019, Andvari was up 48.0% net of fees while the S&P 500 was up 31.5%.1 The chart shows the cumulative gains of hypothetical $100 investments.

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July 9, 2019

Andvari 2019Q2 Letter

For the first six months of 2019, Andvari is up 38.7% net of fees while the S&P 500 is up 18.5%.1 The table below shows Andvari’s composite performance figures against two benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.

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April 21, 2019

Andvari 2019Q1 Letter

For the first quarter of 2019, Andvari was up 28.1% while the S&P 500 was up 13.6%.1 The table below shows Andvari’s composite performance figures against three benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.

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January 25, 2019

Andvari 2018Q4 Letter

For the full year of 2018, Andvari was up 1% while the S&P 500 was down 4.4%.1 The table below shows Andvari’s composite performance figures against three benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.

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February 1, 2018

Andvari 2017Q4 Letter

Instead of beginning with a summary of investment performance, I begin with even more important news. As many of you know, my wife Leann has cystic fibrosis, a rare and life-threatening genetic disease that affects the lungs and digestive system. After being in the hospital six times in 2017, Leann and I traveled to Duke University so she could be evaluated for a double lung transplant. It was an exhausting five days of tests and meeting with everyone on Duke’s transplant team. Duke later told Leann she is a good candidate for their program and Leann decided to join.

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February 2, 2017

Andvari Idea Wins Category in “Top Stocks for 2017” Contest

Last December I submitted a research report on the British software company Micro Focus—a holding of Andvari clients since late 2015—to SumZero’s “Top Stocks for 2017” contest. Given the company’s recent transformational deal to acquire Hewlett Packard Enterprise’s software division, the contest was the perfect opportunity to update my research and present the Micro Focus investment case to an esteemed community of colleagues.

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July 9, 2015

The Amazing Capital Cities Roll-Up

With change accelerating in the media/telecom world seeming to accelerate in the past few years, I finally got around to reading Walt Hawyer’s history of Capital Cities (I read the paperback edition and through this post I will reference the page numbers in case you have the book and want to follow along). I was already a little bit familiar with the company as a result of reading the Berkshire annual reports and knowing that Buffett has always said great things about Tom Murphy and Dan Burke (the two main leaders at Cap Cities following the death of its founder Frank Smith). I then learned a little more about the extent of the phenomenal returns Cap Cities produced for shareholders when I read William Thorndike’s book The Outsiders.

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June 14, 2015

How Much Can Charter Save With Greater Scale?

With Charter Communications one of our largest holdings (via Liberty Broadband), I've continued to look for reasons why I am wrong about the value of the company. During this ongoing process I've come across a few writeups that advocate selling Charter short. The crux of the bull thesis is cable companies in general will be one of the primary beneficiaries of the increasing consumer demand for greater internet speed and capacity as they are better positioned than the traditional telcos. Charter in particular should be able to derive greater benefits as it will be the acquirer of choice to further roll-up the smaller players in the cable industry and thus create a lot of value from synergies and cost savings.

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May 18, 2015

Notes on 2015 Markel Shareholders’ Meeting

I had the privilege of attending the annual Markel Corporation shareholders’ meeting on May 11, 2015 in Richmond, Virginia. I did my best to take notes of management’s prepared remarks and presentations which I present to you in outline format. The Q&A session is missing because I did not take notes during that time. Following my outline are some of my personal thoughts about what I heard.

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February 17, 2015

Why Motorola Solutions Ought to Be Attractive to Private Equity

After listening to Motorola Solutions’ 2015 Financial Analyst presentation this morning and thinking about the actions the company has completed in the past year, I am even more convinced the company is ripe for a takeover by private equity or by a larger company in the defense industry. Even if a takeover does not materialize, Motorola is in an excellent position to continue delivering good returns to public shareholders. Here’s an outline of my thoughts.

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September 15, 2014

Danaher to Acquire Nobel Biocare for $2.2 Billion

Danaher (DHR) early this morning announced plans to acquire Swiss-based Nobel Biocare for $2.2 billion (CHF 2bn / EUR 1.7bn). Nobel is a leader in the dental implant industry and will become a "cornerstone" of Danaher's dental platform.

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August 18, 2014

Markel (MKL) Still Undervalued & Still Deserves To Be in Your Portfolio

I've personally owned shares of Markel for nearly five years and have been to several of its annual shareholder meetings. It's high time I updated my thoughts and feelings with a fresh report on Markel. If you're an investor, I doubt you will find any new or unique insight into the company, but you might appreciate how I look at Markel's historical figures.

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June 17, 2014

Rolling With Rolls-Royce

After Rolls-Royce (RYCEY) shares fell earlier this year, I mentioned on Twitter how I thought it was a good buy. It is one of the top players in the oligopolistic aero engine market (which has huge barriers to entry), has a huge backlog, growing service revenues, and a strong possibility for margin expansion as it starts to deliver engines for the newest generation of widebody aircraft from Boeing and Airbus.

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April 23, 2014

Focused on ROIC and Shareholder Returns: W.R. Grace (GRA)

With Grace (GRA) down about 4% today (apparently analyst expectations were too high), I thought it would be a good time to do a short post on why I think Grace will provide shareholder returns in the 10-13% range for the long-term. The short answer is the company's absolute focus on returns on invested capital. I will borrow a lot from Grace's investor day presentation this past March.

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April 15, 2014

Motorola Solutions Ends Expensive Experiment

Motorola Solutions (a current holding of ours) announced this morning they would be selling their Enterprise unit to Zebra Technologies for $3.45 billion. With EBITDA of $284 million last year, Zebra is paying about 12.1x, a whole lot less than what Motorola has spent in putting together a division that has just failed to meet high expectations.

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March 31, 2014

StarTek: A Micro-Cap Turnaround That Is Turning

BeyondProxy has published another report of mine on StarTek, a current holding of Andvari. StarTek is a company in the middle of a successful turnaround and that I feel is worth 45% to 100% higher than current prices and is also a potential acquisition target in the next two or three years. Visit BeyondProxy to learn more and download the actual report. If you have any questions or comments about the report, feel free to contact me.

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March 4, 2014

Special Opportunities Fund 2013 Annual Report

Phil Goldstein's Special Opportunities Fund released its 2013 annual report. The fund did very well in 2013 and kept up with the S&P 500 but with (what I also believe) substantially less risk as the fund was invested in a significant amount of assets that undoubtedly returned much less than the market. For example, 12% of the portfolio was devoted to special purpose acquisition vehicles (SPACs) and 10% to cash/money market funds had to drag overall returns of the fund down.

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January 8, 2014

Some Thoughts on the Proposed Liberty/Sirius Transaction

Last Friday, Liberty Media proposed to acquire the remaining 48% of SiriusXM it didn't already own via a tax-free stock swap. In it's conference call regarding the transaction, Liberty described several benefits, but in my opinion the largest benefit will be the enhanced capital structure of the combined company. Liberty will be able to borrow a larger amount against Sirius and use the proceeds for other investment opportunities as it sees fit.

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November 23, 2013

The Zone of Reasonableness

For the past six months, and probably longer than that, investors and the financial media have been asking themselves or have been asked whether the market is overvalued. The market has marched higher and higher and the S&P 500 is now up 29% for the year. There also seems to be signs of a return of ridiculously-priced IPOs, mostly dot coms and bio-tech stocks in my opinion. People have explained why the market is overvalued by citing Schiller's CAPE ratio or that abnormally high profit margins will eventually revert to the mean.

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November 20, 2013

The Investment Case for TransDigm (TDG)

Towards the beginning of this year I put together a research report on TransDigm (TDG) for my clients. TransDigm is an exceptional company that operates in the aerospace parts industry and is unique among virtually all other public companies in that operates on a private equity business model. I've recently updated the report and you can read the bulk of it by visiting Beyond Proxy.

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September 17, 2013

BeyondProxy Adds Andvari Founder Doug Ott As Contributor

BeyondProxy, a publisher of investment research for the professional value investing community, recently added Doug Ott to its exclusive list of contributors for their website. The first contribution was Doug's thoughts on Motorola Solutions (MSI), a company in which Andvari clients are currently invested. You may read the post on BeyondProxy by clicking here.

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July 24, 2013

Motorola Solutions (MSI) Potentially Offering An Attractive Entry Point

Motorola Solutions (MSI) reported results and guidance that disappointed the market. The stock has been down 8%–10% today.

However, I think this overreaction provides an potentially attractive entry point for an investor, especially in light of the fact the company is under-leveraged and continues to return large amounts of capital to shareholders in the forms of dividends and share repurchases.

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July 18, 2013

There Are Many Things to Worry About, But Many Worry About the Wrong Things

I can remember last year several individuals voicing concerns regarding the "fiscal cliff" (a buzz phrase that has hopefully been excised from the vernacular) throughout November and December of last year. They were concerned that government spending would be curtailed and the stock market would suffer, therefore wouldn't it be prudent to raise a substantial amount of cash in portfolios?

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June 6, 2013

The Monetary and Moral Case for Investing in SVVC Alongside Bulldog Investors

On April 15 this year, Phil Goldstein and his Bulldog Investors group filed another Schedule 13D as owner of 9.67% of the outstanding shares of the Firsthand Technology Value Fund (SVVC). Shortly thereafter, the Bulldog group reported they owned 9.8% of outstanding shares. SVVC is a closed end fund “that invests in technology and cleantech companies, disclosed today that its top holdings as of April 30, 2013 were Twitter, Facebook, SolarCity, Silicon Genesis, QMAT, and Wrightspeed.”

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March 21, 2013

Walter Investment (WAC): Potential Opportunity After Earnings Miss

Mortgage servicer Walter Investment (WAC) fell 20% yesterday after missing analysts' expectations. For the fourth quarter of 2012, Walter only achieved 0.64 in EPS versus (14.3% growth year over year). Analysts expected 0.67 in EPS. Big whoop.

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February 28, 2013

Lampert Gives Baseline Liquidation Value for Sears Holdings Stores

In his annual letter to Sears Holding (SHLD) shareholders, Eddie Lampert reviews the progress of SHLD on its journey to transforming into an integrated retail experience via their Shop Your Way membership program. He also expounds upon the reasons for the turnover of top management across all major retailers (not just Sears).

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February 6, 2013

Headline Risk Renewed for Ratings Firms S&P and Moody’s

Yesterday, the Justice Department filed suit against S&P (owned by McGraw Hill) alleging that the largest U.S. rating firm "falsely" represented that crisis-era credit ratings on complex securities "were objective, independent" and "uninfluenced by any conflicts of interest." Deal Journal has some excellent excerpts from the complaint.

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