From tuna to tech, Hexagon breaks Swedish mould

In the shadow of well-known brands like Volvo and Ericsson, an acquisition-packed decade has made technology firm Hexagon one of Sweden's most valuable companies and a rare newcomer among its top blue chips.

The company, market leader in precision measurement technology used in fields from microchip making to surveying dam construction, is now worth more than Swedish world number two white goods maker Electrolux after taking its business so far from its roots as to be unrecognisable.

When Ola Rollen stepped through the doors at Hexagon as CEO in 2000, leaving a job as head of a division at engineer Sandvik, he entered a company with lots of businesses but no business idea and scarcely any growth prospects.

Founded in 1975, Hexagon was then a sprawling conglomerate with its fingers in everything from tuna fish imports to vehicle hydraulics and, as financier Melker Schorling told Rollen at a meeting in downtown Stockholm in 1999, it was basically garbage.

Schorling had bought a controlling stake in the company the year before, aiming to build something from the ground up. Rollen, who first made a name for himself as a young CEO of metals firm Kanthal, had attracted his attention.

"He said It can't get much worse. Build what you want," Rollen, now a trim and youthful 47, told Reuters from the company's Stockholm office of Scandinavian wood design, with large windows overlooking the capital.

Rollen had to think of ways to realign a company so diverse it came as a surprise when he found it ran day-care centres.

"We set up a number of criteria - that we would be world leading, that we would have large R&D content and little invested fixed assets - it should be easy to move the operations if there were shocks in the global economy," he said.

Path to leadership
Focusing the business on telecommunications gear or vehicle components were among the options he was considering when he recalled U.S. measurement technology firm Brown & Sharpe, which had once sought to recruit him - an offer he turned down.

While Hexagon had no previous business in the field, the firm offered a possible path toward leadership in a fragmented market being reshaped by innovation in fields like lasers.

To free up resources, Hexagon began selling off assets in less promising sectors, starting with its food business that under previous management thinking was a buffer for the cyclical engineering business but which was barely profitable.

Brown & Sharpe was fortuitously in receivership at the time and though it was as big as Hexagon, Rollen bought it, taking the first step down a road that would see the firm acquire more than 100 companies and shed virtually all its original business.

"Very often I find company executives just have really poor imagination," Rollen said. "Just because you run a paper mill doesn't mean you have to keep on trudging on the same spot."

Hexagon's four biggest deals - Brown & Sharpe, Swiss Leica Geosystems, Canadian NovAtel and U.S. Intergraph - cost nearly $4 billion and group sales have more than quadrupled since 1999 to 2.38 billion euros.

In the same period its operating margin has risen to 20.6 percent from below 5 percent, underpinning a rise in market capitalisation to 60 billion crowns from just under 2 billion crowns. By comparison, the wider Swedish market index has gained 14 percent in that time.

Schorling owns Hexagon shares totalling 26.7 percent of capital and 47.7 percent of votes in the company, whose biggest owners also include H&M founder Stefan Persson.

A rare bird
Its rapid rise and acquisition-fuelled transformation makes Hexagon a rare bird among Sweden's top 20 listed companies by market value, most of which are businesses a century or more old, which critics say shows a lack of dynamism in Sweden.

But the growth has not come without risks, highlighted when its heavy debt burden was seen as too risky in the financial crisis following the 2008 collapse of Lehman Brothers, when Hexagon only narrowly avoided breaching its loan covenants.

"If you are poor and are going to build something big, then you have to take risks," said Rollen, who owns 2 million, or 0.6 percent, of Hexagon shares, according to the firm's website.

Since then, Hexagon has lowered its net debt to earnings before interest, tax, depreciation and amortisation ratio to its target of 2.5 to attain investment grade on any notes it issues, down from about five after Intergraph was acquired in 2010.

That still leaves it well above the Swedish engineering companies against which it is measured, despite now generating more than half its sales from software. Atlas Copco's net debt to EBITDA ratio is 0.4.

"The worry about the debt levels has been the Achilles heel that has sent the share down in the past," said Nordea equity strategist Mattias Eriksson, whose bank has a hold recommendation on the stock.

"Now they have room to make acquisitions again. That is more or less what people have been waiting for really that they dream up something new and exciting."

Rollen said four or five potential big acquisitions were always on the radar of the group, which is now headquartered in London, and its goal of reaching sales of 3.5 billion euros and a 25 percent margin in 2015 would alone require 300-400 million euros of acquisitions.

"We can deliver on this plan while keeping our debt in absolute numbers roughly where it is and still make acquisitions and pay dividends and reach our targets," he said.

Let me entertain you
Rollen, who in his youth played the guitar in a rock band that cut a record deal with ABBA manager Stikkan Anderson, has a knack for showmanship.

Nowhere was this more evident than when he took the stage before thousands of customers in an Orlando, Florida, ballroom in June 2011 to Robbie William's raucous "Let Me Entertain You" to deliver a keynote that smacked more of show business than corporate presentation.

His high profile has some wondering how the company would fare without him. When he sold 1.7 million shares in mid-2011 to pay personal debts, the sale set off a 40-percent slide in the share price, though it has since recovered.

"The company certainly doesn't stand and fall with him," said Bjorn Enarson, analyst at Nordik bank Danske, which also has a hold recommendation on the stock.

"But the valuation may include some hopes he will figure out another exciting thing that turns into a new major shift for the company. And that hope might expire if he disappeared."

Rollen says the prospect of leaving is not on his mind.

"It is still fun," he said, and cited a remark made by one-time board member Carl-Henric Svanberg, now chairman of British oil and gas group BP.

"He said at a board meeting that the graveyard is full of irreplaceable people. One day I will resign and it will work out fine finding a successor."

© Thomson Reuters 2013