Mergers & Acquisitions: The right time for a marriage?

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Mergers and acquisitions should be planned as a well-thought strategy, not just the opportunity to buy at a clearance price


Story by Sean Fitzgerald

WHEN TIMES ARE TOUGH and businesses across industry groups are suffering, the temptation can be strong for stronger companies to acquire their weaker competitors. Or more over, by reacting to a fire sale price on a company in an ancillary industry hanging on by a thread.

Unfortunately for businesses looking for a hot buy, acquisitions of another business should be part of a long-range strategy and be conducted with a healthy amount of due diligence.

Nationwide, the merger-and-acquisition environment was relatively calm in 2009, reflecting the trend of relatively few deals being consummated in Wisconsin during the past year. A semi-annual survey by the Association for Corporate Growth of nearly 90 M&A professionals in Wisconsin found 89 percent rated the state’s environment for business deals as fair to poor.

The reasons behind the slowdown may not be all that complex.

“Similar to most markets, M&A is driven by supply and demand,” said Brenen Sieber, managing director of Baker Tilly Capital.

Sieber, an accountant by trade who previously generaled much of Kohler Company’s acquisition activity during the early part of this decade, acknowledges there’s been a decline in M&A deals in the past year to two years, primarily due to four key factors.

First, uncertainty in the marketplace has lead some investors to be more skittish than usual about the risks involved in acquiring another company. Second, specific industry issues – often associated with over capacity and including significant capital investment in property and equipment – have made mergers more perilous now than during booming economic periods. Third, Sieber said, many companies lack the available debt to assume any further risk to their creditors. Lastly, there’s a “value disconnect” between what a company is actually worth and what the current owners want in compensation for selling.

Looking forward, the same M&A professionals surveyed for the Association for Corporate Growth report remain optimistic activity will increase in the year ahead. More than three-quarters of the survey respondents said they expect an increase in merger activity in Wisconsin during the first six months of 2010

A handful of M&A deals announced or completed here in the Fox Valley region during the past year illustrate the delicate nature of acquiring another company.

Finding the right fit

Companies grow in size one of three ways: by growing organically, through acquisition of another company that contributes added revenue, or by sourcing or contracting with other vendors to help complete larger jobs.

When looking to grow through acquisition, the art of the deal requires more than just identifying any company that can fill a void in market share, product mix, service or core competency.

“The goal is to find the right deal, not just a deal,” Sieber said. That means not only looking at balance sheets and profit & loss statements, but paying attention to subtle cultural components of personality, chemistry and other intangible characteristics.

“Companies tend to get caught up in the blocking and tackling of due diligence when looking at a merger,” said Sieber.

Sieber and his team at Baker Tilly Capital work with clients interested in growing through acquisition, guiding them through the initial stages of identifying potential acquisition targets all the way through the successful integration of the two merged companies. Oshkosh-based veterinary practice management software developer ImproMed Inc. reached out to then-named Virchow, Krause Capital – prior to its name change early this past summer – a year ago to help it seek out growth opportunities in its competitive industry.

ImproMed President and CEO Ron Detjen had tested the waters years earlier and reached out to a small handful of his competitors to feel out their desire to sell. But in an industry with about 40 software developers where every company knows its competitors and reputations abound, Detjen found his solicitations intimidated many of his colleagues who feared he was simply fishing for market intelligence.

“I found that my competitors were too nervous about dealing with me,” he said.

Sieber and his team alleviated that concern by doing the reconnaissance work up front, talking with firms about their desire to sell and serving as the façade for ImproMed, which holds a place as the second or third largest veterinary software developer in the industry, depending upon which measurements are considered.

Upon identifying Florida-based Sunpoint Software Inc. earlier this year, Baker Tilly Capital helped ImproMed broker the deal to purchase the 200-client software developer this past summer and merge operations into its Oshkosh headquarters. The deal captured the attention of the industry, and Detjen said he’s received inquiries from other software providers about possibly acquiring their interests.

“In our industry, making an acquisition is an important statement of fact,” said Detjen. “It told the rest of the industry that we were in the mode to buy. It told the rest of the industry that we’re really doing well at a time when a lot of our competitors aren’t.”

Detjen and ImproMed are considering additional acquisitions and were close to wrapping up another by the beginning of January, he said. So why not just simply act on one of the several calls he received from other competitors following the Sunpoint acquisition?

Sieber explains there’s often a substantial amount of emotion wrapped up in an M&A deal, generally on both sides of the table. It’s critical to keep that emotion in check. As the owner of a selling firm, one can’t seem too desperate to liquidate their business. As the acquiring company, one can’t come across as predatory early in the process, Sieber said.

“Sometimes it’s (about helping clients) dealing with ‘Deal Fever’ – they want to buy that company at any price,” Sieber said.

Beyond looking at the financial components of whether potentially acquiring a competitor could benefit ImproMed, Detjen said it was critical to evaluate Sunpoint’s customer base and determining how likely its portfolio of veterinary clinics might be to converting to ImproMed’s software. In addition, through Baker Tilly Capital, ImproMed was able to have Sunpoint conduct a survey of its customers’ satisfaction with their relationship, allowing Detjen valuable insight into the new clients he’d potentially add to his sales department’s Rolodex.

Business prospects continue to look positive for ImproMed. Even without the acquisitions, the company was poised for a record year of revenues and a record year for new client growth. Combined with the Sunpoint acquisition and the other deal Detjen hopes to consummate in early 2010, ImproMed’s growth in coming months will bring high paying, skilled jobs to Oshkosh during the course of the next year. Detjen said the company’s successes have prompted other cities to make overtures to attract him to move ImproMed operations to their community.

Entering new markets

OFTENTIMES, ACQUISITIONS CAN BE A STRATEGY to move into an entirely new field. Little Chute-based Heartland Business Systems hadn’t traditionally found much of its customer base in the point-of-sale realm often dominated by retail and hospitality industries.

Heartland began printing receipt paper rolls two years ago, but other than that, hadn’t discovered an in-road to deliver the menu of other services it offers to point-of-sale retailers.

A longstanding relationship between Heartland and Bob Boyea, owner of Green Bay-based Computer Services NEWi, led to a point in late 2009 where Boyea felt his customers might be served even better through the resources of Heartland. So the two came together, with Heartland acquiring the assets and customer list of NEWi and Boyea coming on board at Heartland to share his more than 25 years of experience, said Peter Helander, president and CEO of the business technology solutions provider.

“It’s all about critical mass, and Bob brings a variety of virgin clients that have never been exposed to the product and service offerings of Heartland,” Helander said.

Though it hasn’t directly provided retail point-of-sale technologies in the past, Heartland does offer a variety of other services such as telephony, Web services, programming and a litany of software applications to accommodate a host of business operations. Helander said by working with Boyea, Heartland can help NEWi’s clients be more cost-effective with their IT functions.

Growing its portfolio of new products, new services and expanding client base isn’t new to Heartland. The company acquired Green Bay-based Bacher Communications in the spring of 2009, which expanded its telephony service capability to clients. Helander said Heartland is looking at acquiring a firm based in northern Illinois in early 2010 to provide it with a more tangible presence in that region, where it’s already recognized a dramatic increase in sales growth in recent years.

When the deal gets done

SUCCESSFULLY WRAPPING UP AN ACQUISITION is a monumental task, but unfortunately amounts to less than half the work to ensure the fruits of the merger benefit everyone involved, Sieber said.

Integrating the two firms together – and transitioning the acquired company into the firm which bought it – can often consume more time, resources and effort than conducting the merger itself. It’s critical to put the resources behind a merger to make it go smoothly, Sieber said, because it affects everyone in the organization from both sides of the deal. Often those high-profile merger announcements that appear to fail after a few short years – often because they could never harness the power of the two companies working together as one – suffered as a result of a poorly-executed transition.

Neenah-based Bemis Company Inc. has completed 20 acquisitions in the last 20 years, according to Melanie Miller, vice president for investor relations at the publicly-traded manufacturer of flexible packaging and pressure sensitive materials. But the pending acquisition of the Food Americas operations of Alcan Packaging – announced last July and still undergoing regulatory review – will amount to the largest transition effort the company has ever endured.

Once completed, Bemis will add 23 Alcan flexible packaging facilities and more than 4,600 employees to its operations, giving Bemis a total of 84 manufacturing locations and in excess of 20,000 employees worldwide.

“Each of the plants we are buying will be intermingled into our existing divisions,” Miller said, explaining that previous acquisitions didn’t always result in such a complex transition. Bemis’ 2005 purchase of Brazilian flexible packaging firm Dixie Toga increased the company’s portfolio and its outreach, but allowed the former company to continue operating relatively on its own.

With the pending Alcan acquisition, the company’s human resources department, for example, has already been hard at work educating Alcan employees about Bemis employment policies and compensation benefits, allowing Alcan employees to not miss a beat on important issues like health care coverage on the day the acquisition is officially complete. Affected workers include nearly 1,000 in Wisconsin, with most employed at Fox Valley operations of Alcan.

Miller said Bemis plans to keep capital expenditures low for the first one to two years, which would aid the cost savings it’s expecting by making administration activities more efficient. In all, the merged company expects to recognize as much as $65 million annually in cost savings by the two-year mark following the completion of the merger.

Beyond cost-savings synergies, the acquisition of Alcan affords Bemis access to certain segments of the food packaging industry where it currently doesn’t have any expertise. While Alcan and Bemis have many of the same customers such as Kraft, General Mills and ConAgra, the two companies provided vastly different packaging solutions, sometimes even for the same product.

The proposed merger also expands Bemis’ geographic concentration, particularly in emerging Latin markets.

“They have a great position in Mexico, whereas we’re not quite as strong there,” Miller said, indicating Alcan operations in Mexico rang up about $200 million in revenues last year while Bemis operations south of the border totaled about $35 million in sales.

Miller said greater opportunity exists in South America, where the economy boasts much more virility right now. A pharmaceutical packaging plant in Brazil operated by Alcan will allow Bemis to enter the lucrative pharmaceutical packaging market in South America, where it currently doesn’t have a presence.