Background
Have you ever wondered how the makers of tomato puree or yoghurt measure the viscosity of their products? It may never have occurred to you to ask. Although we have investigated dozens of test and instrumentation markets, we had certainly never given much thought to toothpaste or mayonnaise consistency until Spectris plc asked us to carry out commercial due diligence on Bohlin Instruments, a manufacturer of rheometers. Rheometry is the measurement of the flow and deformation of materials. Rheometers are not cheap, $50,000 should buy you a good one, but they do last a long time. Many of the people we spoke to have at least one PhD and could probably have a go at building one from scratch if the need arose. However, rheometers are not particularly easy to use and the manufacturers' support staff help to get the best out of instruments.

Bohlin was a 3i backed MBO in 1998. The management team did a tremendous job developing a superb range of instruments, growing sales in Europe and establishing a unique position in the American asphalt market. Growth in the rest of the US market was the next logical step. In management's view, success would be elusive unless Bohlin could somehow match the field sales support of major US competitors. This was a classic chicken-and-egg situation. Without a much bigger market share Bohlin could not afford the sales and support staff, but without more people it would not improve its market share.

The logical solution was joining forces with a specialist instruments company with a US sales and support infrastructure. This, Spectris has through its operating company Malvern Instruments, which also shares customers with Bohlin.

Spectris is the laboratory and process instrument and process technology company which helps blue chip customers increase their productivity and process efficiency.

Approach
On paper, this looked like a marriage made in heaven. However, there was still an important job to be done verifying that further growth was indeed a realistic prospect under Spectris's ownership.

First of all, was the target's market position as good as the management claimed and, if so, was it sustainable? If not, this could end up an expensive purchase. Having settled that, did it have the necessary ingredients to take on entrenched US competitors? In particular did the machines perform as well, if not better, than competitors? This was a scientific sale after all: the machines have to meet market expectations. Were existing customers satisfied? If not, word would soon get around. Scientists talk to each other a lot. Was bigger and better sales representation in the US the only barrier to growth or were there other factors to be taken into account? And even with all the necessary ingredients in place, was there a realistic possibility of taking share from the competition?

The best way to get a reliable picture of growth prospects in such a specialist market niche is to talk to a wide range of market players. And that is just what we did. Fortunately the scientific community not only knows exactly what it is talking about, but was happy to share its opinions with us, even in the US where voicemail can be a barrier to research. We even had a lengthy conversation with the MD of the US market leader who spared no detail in telling us where he thought Bohlin had been going wrong.

Result
Based on what the market told us and our analysis, we could conclude that representation was the biggest barrier to growth and that the potential was there. However, because of the nature of the buying process growth was a slow, long-term proposition.

3i sold Bohlin to Spectris in October 2003.

"CDD has been an essential part of the Spectris acquisition evaluation process for many years, and AMR are the first people we turn to for process instrumentation projects. We particularly value AMR's commercial interpretation of survey results beyond the bare statistics."
Paul Boughton, Spectris

AMR likes a challenge, but when a call came from 3i's Bristol office on July 31 we knew we were up against it:

"We've got something for you. We need to get this done by the end of August - and, by the way, all of the key contacts are in Italy and Spain."

Anyone who has been to Italy and Spain in August will know that they take their summer holidays very seriously - the two countries just about shut up shop.

Surface Inspection is a UK manufacturer of machines which examine the surface of ceramic tiles to check for flaws and imperfections. This in-line technology provides ongoing data and reports on the production quality of the tiles. The information can be fed into quality control, and, ultimately help towards considerable labour cost savings.

Martin Coulthard founded the company as a quality inspection services business in 1987. Managing Director, Les Ashton Smith, joined in 1997 and, under his stewardship, Surface Inspection evolved into a product company, developing the Flawmaster® inspection system. In 2001, 3i Bristol backed a management buyout to reduce Martin's shareholding in the business.

This looked like a good business from the outset. Les presented the company's strategy clearly and logically. His team appeared close-knit and positive with the whole organisation focused on developing its product and market.

Questions for the investor centred on whether a small UK-based company could realistically dominate a market where the user-base - ceramic tile producers - is solidly Italian and Spanish. Could the company compete on level terms with the established - and local - plant-supply companies?

We organised our investigations around three key themes: understanding the ceramic tile industry and its trends; assessing customer needs and satisfaction; and understanding competitors and their future plans in the market.

Growth in the ceramic tile industry as a whole is well documented. People are switching to hard flooring and tiles in particular. Careful segmentation by tile manufacturers has identified the key growth areas within the market.

What of customer attitudes? Thanks to two consultants rescheduling their European holidays, and despite the summer shutdown, we were able to obtain personal interviews with a good cross-section of existing and potential customers among tile manufacturers throughout Spain and Italy. They gave Surface Inspection a resounding thumbs up: the relatively high cost of the Flawmaster® product was justified by paybacks within as few as 12 months.

At the same time we had good conversations with all of the existing independent competitors, a selection of the integrated equipment manufacturers as well as known and potential new entrants. Surface Inspection's clear advantage was that Flawmaster® was the only proven solution - in a sceptical industry. To back this up, our analysis of the speed of acceptance of technologies with comparable characteristics (for example, EPOS in supermarkets), demonstrated that the company's forecast market penetration appeared realistic.

All this was good news, but there was more. An analysis of the business plan revealed opportunities to increase revenue through wider service offerings and possibly through the sale of software upgrades to established users. Furthermore, as volumes increased, margins were set to improve. This was without considering the potential for applying the technology to other applications. In addition to Flawmaster®, the company has other products; it is now selling a mid-line inspection unit, the Biscuitmaster™. First impressions of Surface Inspection were good. The company turned out to be even better on close inspection under the surface!