Advice from the inside

Experts gave the inside scoop on mergers and acquisitions at a recent Atlanta seminar

By -- Industrial Distribution, 5/1/2000

Consolidation may be slowing, but it's still an important business issue for the industrial channel. That was the message delivered at a recent seminar sponsored by Industrial Distribution and Pembroke Consulting.

Titled "Mergers & Acquisitions: Advice from the Inside," the two-day seminar was held at the Ritz-Carlton in Atlanta, March 8-9. Speakers included experts in every area of consolidation-investment bankers, buyers, sellers, intermediaries, attorneys and consultants. Distributor attendees represented large and small companies across a range of industry segments, from general line to specialty houses. They attended to learn the ins and outs of the consolidation market and to network with some of the movers and shakers in the industry.

The meeting began with a presentation by Adam Fein, president of Pembroke Consulting, and Jeffrey Germanotta, senior vice president of equity research at R.W. Baird & Co. The two talked about market conditions, the drivers of merger and acquisition activity, and future trends in consolidation. They noted the poor performance of distributor stocks recently, and pointed to a shift in public interest from "bricks"-traditional companies like distributorships-to "clicks"-the new e-commerce firms. Both factors have contributed to a drying up of private funding for consolidation in the public arena, Germanotta said.

"Situations like this have caused, essentially, a slowdown in consolidation activity in the industry," noted Fein.

But all is not lost, they said. The many advantages associated with consolidation-further reach, more leverage in the supply chain, greater operating efficiencies-still exist. While Fein and Germanotta predicted a decline in the number of publicly traded distribution firms in the years ahead, they said private consolidation is a viable route for many companies looking to gain mass. Germanotta even pointed to the growing trend of public companies turning private. Witness recent announcements by White Cap Industries and East coast-based Wilmar Industries. White Cap merged with turnaround specialist Leonard Green & Partners in March, and Wilmar was moving ahead on a merger deal with two private investment firms earlier this year.

"Many companies are deciding the public market simply doesn't value them," said Germanotta.

But even those companies that choose to consolidate privately will need to address e-commerce. A key part of that strategy, Fein and Germanotta said, involves partnering with e-marketplaces, as companies like W.W. Grainger, Applied Industrial Technologies and MSC Industrial Direct have all done.

The bottom line is, if you're thinking about buying, selling or merging in the next three to five years, Fein advised: "Don't play the game of 1997, 1998. The dynamics of the market have changed."

Brave new world

Indeed, the dynamics of the market have changed in the short time since Bob McBeth sold his company, Associated Industrial Supply of South Carolina, to Dillon Supply, another Southern firm, in January 1999.

Many of the challenges McBeth faced, however, remain the same. He advised attendees to put together a "deal team" before attempting to sell. That team should consist of an attorney, accountant and intermediary. He also told attendees that "the optimum time to sell is when you have no compelling reason to do so."

The seminar continued in a similar vein with a presentation by Steve Pinsky, former director of corporate development for MSC Industrial Direct. Titled, "Get Every Dollar: How to Figure What Your Company's Worth," the session covered the various ways a buyer places value on a company. He also noted that it's the distributor's job to show the potential buyer what they should pay for his or her company.

"The price of a company is what someone is willing to pay for it," Pinsky said.

Following Pinsky's talk, Bill Wade, chairman and CEO of Quality Distribution Service Partners, shifted gears to talk about "Roll-up Realities." Wade founded a distribution roll-up (in the automotive aftermarket industry) that acquired 15 companies in its first year and then merged with its largest competitor to form a $550 million distributorship with 160 branches. Drawing on his experience, Wade spoke to the difficulties of merging different corporate cultures from the buyer's perspective. Planning and communication are two of the most important parts of the process, he said.

He stressed the importance of understanding what the seller expects from the deal, putting everything in writing, being up front about corporate changes once the deal is done, and ensuring that you communicate with new employees as often as possible. Those steps can help smooth the roll-up process, he said.

Wade also advised attendees not to implement a completely new computer system during a merger or acquisition. A better plan, he said, is to choose a system already in use at one of the companies and bring the other firm or firms on board.

Wade's session was followed by a panel discussion on acquisition from the buyer's perspective titled, "How to be the Smartest Buyer You can Be." Panelists were: Ben Taber, director of mergers and acquisitions, Würth Group; Bill Sanford, senior vice president and CFO, Wilmar Industries; Joe Homa, president, Integra, Integrated Procurement Solutions, Inc.; and J. Fegley, vice president, Integra, Integrated Procurement Solutions, Inc.

Consult the experts

"Don't go it alone," was a common theme throughout the conference. Seeking advice from legal experts, tax experts, bankers, intermediaries and others, the speakers said, is crucial to a successful deal. That's why Jere Freeman of Trinomic, Inc. spoke to attendees about, "What You Should Know About M & A Intermediaries." Based in Atlanta, Freeman has represented both buyers and sellers as an intermediary for 15 years.

In addition to touting the importance of intermediaries-companies or individuals that help facilitate the consolidation process-Freeman gave key advice on the best way to find an intermediary. While the local yellow pages, newspapers and trade publications are options, he said personal referrals are best. Good sources are your banker, accountant, attorney, or financial planner, he said, along with former business owners in your industry.

The first day of the conference rounded out with two other presentations-one by Jack Healey, senior vice president and CFO of Industrial Distribution Group, on "Critical Tax Issues," and another by Russ Warren and Frank Novak of the TransAction Group, Inc. Warren and Novak's presentation was titled, "What You Can't Afford Not to Know About Selling Your Company."

M & A wasn't the focus of every business session, however. On the second day, attendees got to choose from two workshops under the heading; "A Business Owner's Alternatives to M & A." Randy Bishop, vice president, CFO and secretary at Cameron & Barkley, gave tips on how to create a successful Employee Stock Ownership Plan. Cameron & Barkley has been employee-owned for over 20 years. And Abraham Frumkin, a partner with Duane, Morris & Hecksher in Philadelphia, talked about the option to form strategic alliances in his session, "Legal Strategies for a Successful Alliance."

Frumkin stressed the importance of being able to service customers globally, noting that alliances and buying groups are another way to achieve that goal. He also noted the importance of e-commerce alliances and joint ventures-because of the need to gain efficiency in today's marketplace. He talked about the legal intricacies of alliances and joint ventures, emphasizing that such deals can be successful as long as they are done carefully.

A third session offered on the second morning of the conference was titled "Post Acquisition Value Creation," and was delivered by Dr. Robert Swaim of Indian River Consulting Group. Returning to the previous day's "don't go it alone" theme, Swaim noted the importance of involving M & A specialists in both the planning and integration process. Above all, Swaim said the point of his session was: "To get the important point across that doing a deal is one thing, but making it work is another."

Rick Witmer of Brown Brothers Harriman & Co. made a similar point in his presentation, one of the last of the conference. Titled, "Know Your Options: Three Distributor Case Studies," the session detailed the different consolidation routes taken by three BBH & Co. clients. Based on his experience with those and other companies, Witmer said it's of utmost importance for distributors to keep a tight rein on operations during the negotiation process.

"I would urge ... you to focus on operations, because if a company falters [during negotiations], it has very problematic effects on the ability to do these transactions," said Witmer. "The most important thing is to focus on operations."

Mark Baldwin and Jack Fatica of Pentacon, Inc. agreed, and ended the conference with their discussion of roll-ups as a strategic option. Pentacon is a roll-up of several fastener distributorships that came on the scene in 1998. The two explained what a roll-up is and why it is a good option for some companies. Fatica's company, AXS Solutions, Inc. of Erie, Pa., was one of the first to join the Pentacon roll-up. Fatica said his experience with Pentacon-he is now vice chairman of the company-has been "The greatest learning experience that I've had in my life and in my career."

That was another common theme among all those involved in M & A activity in recent years. While the road to consolidation is rarely a smooth one, it seems that more often than not it is an eye-opening journey.