Rollup realities
Cultures can clash and communication lines can get crossed when consolidation companies hit the acquisition trail
By Bill Wade -- Industrial Distribution, 2/1/2000
The basic premise couldn't be any simpler. Take a highly fragmented industry -- like industrial distribution -- facing technological change, customer upheaval or chronic financing difficulties. Add in a few well-healed foreign firms or, worse, a couple of previously unknown competitors from "outside the business." Since the industry leaders are probably family-run businesses with limited succession strategies, the next step to protect profit and continue growth is clear: consolidate.It can't miss. The new company will start out life with the best of everything -- smart, entrepreneurial ex-owners as key managers; freshly infused capital from public or private equity funds; and savvy top management eager to reap the "low hanging fruit" by combining back offices, systems, inventory, purchasing power and expanded customer contact. Regional, national or even multi-national market dominance can be achieved from day one.
Why then do consolidations -- also variously referred to as rollups, buys-ups, build-ups or "poofs" -- seem to be faring so poorly in the public markets? Is the recent stock price track record of these companies simply reflective of a couple of widely publicized problem cases (Waste Management, Republic Industries, Corporate Express, Physicians Resource Group, etc.) or is there a special set of management hurdles facing these hybrid corporate structures?
Indeed, there is. A study of several consolidations, both successful and disastrous, points time and again to common areas of misunderstanding. The key to success seems not to be bound up in valuations, EBITDA or financial engineering. Rather, it boils down to a proposition articulated in a classic Harvard Business Review article by Willard Rockwell, one of the first large-scale consolidators, in 1968: "What you acquire first of all when you buy a company is its people. They are the precious asset than can keep it imaginative, aggressive, inspired, and dynamic. In my view, if you keep this thought well in mind, you will not go wrong." This is certainly true, but employee misunderstanding and mistrust make the nurturing of this asset a real trial.
A consolidation is a company, not a club
Consolidation of an industry is a traumatic time for all involved, and since there is normally more than one consolidator at work when the craze strikes a segment, seller choice often becomes clouded -- but rarely overwhelmed by -- non-economic factors. This transaction represents an irrevocable investment decision for both parties. Since the driving force in family business sales is usually the ability to "take some chips off the table," cash or highly discounted cash equivalents end up ruling the day.
It is interesting to note, however, the language used by sellers and outsiders (vendors, customers, etc). Typically, the terminology revolves around "joining the group," as though the decision was not equity transfer but membership in a club. All public companies need to be reminded of the corporate nature of the new entity and the set of decision-making processes this implies. Buying groups may "vote" on vendors, companies do not. Trade associations may vote on legislative positions, companies do not.
Since this paradigm transformation is so critical, it is imperative to begin creating a cultural basis of shared or common beliefs as soon as possible (even before the closing), and to the greatest organizational depth possible. There is one rule to maximize this crucial process -- oversimplify. The basic tenets of the new company's approach to everything from customer service to human relations has to be covered quickly and concisely ... and then has to be restated and summarized over and over.
A major factor in the delineation of the "new deal" should be the introduction of a formalized business planning process -- no small challenge to organizations that may not have even done budgets in prior years. Business planning is an excellent opportunity to involve many levels of many functions, and to forcefully demonstrate the depth of change being anticipated in the organization and the industry within which it competes.
Corporate vs. family business
A large part of the appeal of smaller family business is the supposed lack of corporate bureaucracy necessary to run the enterprise. Once consolidated with others, these simple, free-standing organizations find it necessary -- and usually difficult -- to assimilate the tentacles of a corporate structure into their isolated individual companies.
Formal organizational structure is essential (the plan should be finalized even before closing), as this is the neural network that will guide all future development. Note that it is not enough to simply draft a bunch of reporting relationships -- they must be rigorously respected. The possibilities for chaos from continuing informal, and often contradictory, structures can't be overestimated.
There are two other warnings. First, never assume a common level of data quality -- it's not there. Migrations from different charts of accounts, part numbering schemes, product or vendor coding structures, or process protocols are just too much to overcome on the first pass. Define everything database-wise as intricately and immediately as possible. Secondly, be prepared for corporate naivete on a broad scale. Behavior and communication patterns that seem "normal" to large company veterans are foreign to these newcomers.
Monetary issues beyond purchase price
Most sellers come from a background of extreme corporate frugality -- which is understandable since the company's money was their money on nearly a direct basis. Two interesting problems spring from this fact. First, every cent will be fought over in post-closing cleanup. Although they may have just received a check for $10 million for the purchase of the business, sellers may get outraged over $100 car allowances. Personal is personal, and no amount is too small to forgo. The best possible defenses against this disruption is to detail everything -- even though it's deemed immaterial during negotiations -- in writing.
Also, limit post closing adjustments or any other types of payment. These valuations severely limit the ability to consolidate or make cultural changes, and may actually cause unit behavior counter to the interests of the new company.
Understanding the underlying motivation of sellers is critical. Inclusion of previous owners on boards of directors tends to be dangerous, as most consolidations are built from multiple acquisitions. Inclusion on or exclusion from such can be a bone of silent (but very real) contention. Once again, written detailing of mutual expectations is a must to avoid these hiccups.
Executive committees or management/operational committees are often substituted for "real" board seats. Without careful delineation of authority, these can cause management cross-currents as well. Remember, under no circumstance can the company become a democracy, and "voting" -- especially showing deference to individual age or organization size -- rarely optimizes decision making. If used at all, consider communication the prime objective of these constructs.
Consolidation companies created from multiple acquisitions -- either serial or of the "big bang" school of development -- require feverish attention to detail. In all spheres (economic, social and political) of the combining enterprise, the challenges extend well beyond those encountered in the two-party deals. It is absolutely essential to pinpoint objectives -- operating, financial and personal -- as precisely as possible for all involved. Concentrating on ideas that provide two-way payoff -- both for buyer and seller -- will accelerate the true consolidation.
The merger (or consolidation) route can be all that its most enthusiastic proponents claim it to be -- if the reasons for merging are right, if the pre-planning is sound, if major pitfalls are anticipated, and if the CEO is a stark realist.
Bill Wade is chairman, president & CEO of Quality Distribution Service Partners, a distributor and service provider in the heavy duty truck and equipment business.
Seminar gives 'inside scoop'
on mergers, acquisitions
Want to get the scoop on what really happens during a buyout or a merger?
Could you benefit from being a smarter buyer or seller, or knowing all the options to selling your company?
These topics and much more will be covered at Industrial Distribution's seminar, "Advice From the Inside," March 8-9 at the Ritz Carlton in Atlanta, Ga. ID and Adam Fein, an authority on acquisitions and mergers, have assembled a star lineup of industry experts to address the tough issues that occur during consolidations.
In addition, seminar sponsors International Business Systems, NxTrend Technology, Prophet 21 and Software Solutions will be available to explain how technology solutions enable transactions. Another chief sponsor, equity investment firm R.W. Baird & Co., will host an evening reception and participate in the discussion.
Specific topics include:
- "How to sell your business successfully," with Robert McBeth, former president and owner of Associated Industrial Supply, Inc.
- "What is your company worth? Valuing your industrial distribution company" with Steve Pinsky, former corporate development director at MSC Industrial Direct Co., Inc.
- "Rollup realities: 10 lessons that business owners need to learn," with Bill Wade, chairman and CEO, Quality Distribution Service Partners
- "What you should know about M&A intermediaries," with Jere Freeman, Trinomic Inc.
- "Critical tax issues to help you get the most out of your deal," with Jack Healey, CPA, senior vice president and CFO, Industrial Distribution Group
- "The bottom line: What you need to know about selling your company," with Russ Warren, president, and Frank Novak, vice president, The TransAction Group, Inc.
- "Creating a successful ESOP," with Randy Bishop, vice president and CFO, Cameron & Barkley
- "Business and legal strategies for a successful alliance," with Abraham Frumkin of Duane, Morris & Heckscher
- "Post acquisition value creation," with Michael Marks, president, Indian River Consulting Group
- "Distribution rollup as a strategic option," with Mark Baldwin, chairman and CEO, Pentacon, Inc., and Jack Fatica, vice chairman, Pentacon.
To register, or for additional information, please call 1-877-787-1861 or visit ID Online at www.inddist.com.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
