The impact of M&A and why you can’t ignore it

Buyers

Staying objective in an overheated market

The first time Chris Gabrelcik decided to buy a company, he first went to the bookstore and bought “Mergers and Acquisitions For Dummies.” The founder and president of Lubrication Specialties Inc. still has the copy on his shelf, but he’s learned a few things firsthand along the way.

He knows he’ll easily see the possibilities and potential of an acquisition, so he needs a second set of eyes to be more skeptical.

“After I went through it, I would hand it off to somebody, just a friend, and say, ‘What do you think about this? What could go wrong?’ Because it’s really the surprises that poison the well,” Gabrelcik says.

Scott Barbour also sees the value of minimizing surprises — although his dealmaking is on a much larger scale.

The president and CEO of Advanced Drainage Systems Inc. recently spearheaded buying Infiltrator Water Technologies for approximately $1.08 billion. He was pleased with the process, including how fast his employees were able to move through a deal process that was announced and closed on the same day.

However, there’s always something to learn. Next time, he says he might take more time upfront with key people to run through challenges to the deal structure and negotiation.

“There are always surprises that come, things that you don’t anticipate,” Barbour says. “You would like to have anticipated those and have good, thoughtful answers and strategy to counter strategy.”

ADS was able to anticipate some things and adjust to others as they arose, but the company was perhaps a little too focused on going down a certain path at the beginning, he says.

“That devil’s advocate, that’s a useful meeting — sometimes a painful meeting, but a useful one,” Barbour says.

Looking at both sides and trying to anticipate negotiating and integration challenges can also help buyers stay objective, especially if an aggressive buying strategy is necessary to achieve synergies and your company’s growth goals.

“With the economy being somewhat stable and a low GDP growth, that’s how a lot of these companies are growing, because maybe they have to,” says Steve Bennett, Central Ohio Regional President of U.S. Bank.

Wade Kozich, senior adviser with boutique investment bank Footprint Capital and head of Transaction Advisory Services at GBQ Partners LLC, sees both strategic and financial buyers getting more creative, such as moving up and down market as they get more aggressive.

However, if you’re buying companies in today’s market, it’s critical to not chase price. You need to prove out the numbers in your model and stick with them, says Brett Motherwell, managing partner at Kassel Equity Group.

“Buying and selling companies has the ability to be a highly emotional event, both for the seller and buyer,” he says. “You can say that there are some folks out there who are unaffected, but odds are, it’s probably not their capital. When you have that type of emotional connection to a deal, don’t chase it. Don’t chase it up, and don’t chase it down, both on the buy and sell side.”

 

Culture

Its impact cannot be underestimated when growing your business

Philip Derrow takes culture seriously. Very seriously. The CEO of Ohio Transmission Corp., the parent company of OTP Industrial Solutions and Air Technologies®, accesses cultural fit early in the buying process. If it’s not right, his company doesn’t even get to the letter of intent stage.

“You can’t pay too little to make up for the bad cultural fit,” he says.

In his experience, the minimum time to change culture is three years, and those three years can be costly both in money and time. And there’s no guarantee the effort will be successful.

After buying more than 25 companies, OTC’s only culture failure was one of its very first transactions, Derrow says. Luckily, it was a very small company, so OTC was able to bear it and learn from its mistake.

Of course, no matter how close the cultural fit is, there’s always some adjustment. To deal with those differences, OTC adopted a business Hippocratic oath.

“We have a policy of first do no harm,” Derrow says. “What that means in practice is we change nothing right off the bat. We rarely change the name. We never change pay plans. We almost always have to change insurance, just because it’s almost impossible to keep the previous plan. But we work hard to make sure that there’s no harm that results from changing the insurance plan. We don’t change reporting structures. We don’t change phone numbers. We don’t change email addresses.”

Joe DeLoss also understands the importance of culture. After the Hot Chicken Takeover founder raised his first preferred equity investment round, he almost crippled that culture in 2017 when the company went from about 40 employees to 170 in six months. He underestimated the operational demands of opening two new restaurants.

“We instantly went from directly managed — I had two or three leaders that intervened in every employee relations issue, every training opportunity, myself included — to having multiple layers of management,” he says.

In addition, the value system wasn’t locked down.

“We hired a lot of people out of that 100 that didn’t fit our work culture and so experienced a ton of volatility because we were growing too quickly, and it felt out of control,” DeLoss says. “That rolls downhill pretty quickly and had a lot of collateral damage.”

Only at the end of 2018 did Hot Chicken Takeover get past the issue.

“We realized what the secret sauce is that we won’t jeopardize and have a better understanding of what it’s going to take to build infrastructure around that,” he says.

 

To hear more about how culture drives growth and its impact on critical M&A decision-making from Derrow, DeLoss, Matt Golis of GiveGame and Clara Kridler of Root Insurance, don’t miss the luncheon roundtable at the Smart Business Dealmakers Conference Sept. 25 at the Hilton Columbus Downtown.