The process is far from glamorous. It’s mostly the grunt work of gathering information and the tedium of sorting through it time and time again. And once you’re done with that, there are usually more questions remaining than answers. So back you go, on another round of fact-finding.
But if you do all that, your company has a much better chance of flourishing in the long term, says Papada.
At Technitrol, the inspiration for acquisitions doesn’t come from the top; instead, it comes from further down the corporate ladder in the $616 million company’s many divisions. Once an initial acquisition opportunity has been identified, then Technitrol’s corporate leaders step in to assist.
“We work with them, do the analytical work, we gather up intelligence so we’re aware of who people are,” he says. “But pretty much the legwork is done at the segment level.”
Technitrol acts as a parent company for its two segments: Pulse, which manufactures electronic components, and AMI DODUCO, which manufactures precious metal contacts and other electric components. Each of these segments has several divisions that provide leads on potential acquisitions.
For Papada, acquisitions are all about giving Technitrol’s divisions the freedom to search out growth opportunities while having the courage to say no if the research says the opportunity won’t be a good fit.
Ideas from below
Allowing Technitrol’s segments to form the idea for an acquisition is a logical first step, Papada says. With so many branches in the company’s worldwide business, it’s nearly impossible for those at the corporate headquarters in Trevose to find every available opportunity.
“The segments are much more able to do it than we are,” Papada says of identifying acquisition opportunities. “In terms of where the products are going to be produced, engineered, designed, who is going to sell them, who is going to market them, that is all really at the segment level.”
Doing it the other way and taking growth suggestions to its segments could have problematic consequences for the company, he says.
“It could become a never-ending ‘This is your fault’ if something doesn’t go right,” he says. “That’s why we prefer to have the ideas and the enthusiasm build up from the people who will have to make it all work.”
Papada says that placing the responsibility for finding new growth opportunities in the hands of the segments means Technitrol must also ensure that the segments are properly coached on what makes an acceptable acquisition. For example, segment leaders know acquisitions must be related to the company’s product line.
“We won’t have anybody coming at us out of the blue and asking us to acquire a company that makes car bumpers,” he says. “They know that’s not what we do.”
Segment leaders also know that publicly traded Technitrol is looking for acquisition opportunities that will positively affect the company’s earnings per share and profits.
“They look for business opportunities that we think are going to be really fast-growing and produce products that are going to be relatively immune from copycatting,” Papada says.
Segment leaders do their own research, visit factories of the potential acquisition and view the product lines. Much like a prosecution team, the segment’s leaders build a case in favor of making the acquisition, and much like a legal defense team, it is the job of Technitrol’s corporate leaders to pick that case apart.
As Technitrol does its due diligence in researching an acquisition candidate, questions inevitably arise about the company’s practices and procedures, and its potential to turn a profit as a part of Technitrol. Management then turns those questions back at the segment leaders who provided the due diligence data.
“As the due diligence material comes in, the research raises questions, and we find very long discussions begin to take place in the organization,” Papada says. “The questions are usually aimed back at the operating people who are championing the deal.”
Papada says CEOs can’t stop at just finding answers to questions. They must also question the answers.
“You can accept no answer as the correct answer,” he says. “It’s not to be a pain in the neck. It’s to challenge the answer and see how logical the thinking is that underlies the answer.”
When considering an acquisition, an answer may make sense on the surface, but nobody can explain the logic behind it.
“That’s why you must challenge every assumption and ask more and more questions,” says Papada.
Once an acquisition is agreed upon, a company’s leaders must prepare to assimilate the culture of the acquired company into that of the acquiring company.
“When you acquire a company, you are going to have a whole host of different things coming into your company,” he says. “But the biggest thing you are going to have is cultural differences. They do something this way, and we do it that way.”
For some company leaders, it’s as basic as taking the acquired company and reshaping its culture and practices to align with their own. But for Papada, realigning an acquired company’s culture doesn’t necessarily mean throwing an entire culture in the trash and replacing it with Technitrol’s.
Papada says the company’s leaders examine each idea to see if it fits within the company’s structure, he says. In some cases, they have discarded an element of their company in favor of something employed by a newly acquired company.
“People think that integration is ‘We have to fit them into us,’” Papada says. “But I think integrating is bringing the best of both companies into what we make.”
On many occasions, they find that an acquired company does something as well, or even better, than Technitrol does, Papada says.
“We did an acquisition a number of years ago of a company called GTI,” he says. “They were a direct competitor of ours, so direct that our manufacturing facilities were down the street from each other. In that situation, we actually kept some of GTI’s products and eliminated a number of our own, because in some cases, we felt their products were superior to our own.”
Papada says the worst thing a company can do during an acquisition is to come to the table with a one-track mind. If its leaders view an acquisition as a one-way street, that mentality can close a company off from ways to improve itself. He says it’s important to remember that the acquired company drew your interest for a reason.
“The overall challenge of integration is that you don’t come at it with blinders on,” he says. “Make sure you come at it with an open mind and recognize that the acquired company got to where it is because it was doing something right.”
Guidelines for success
There are no hard-and-fast rules a company must live by as it prepares to make an acquisition. But there are some things Papada keeps in mind any time Technitrol is considering an acquisition.
The guidelines, he says, are geared toward keeping the company’s leaders in the right mindset during the process.
- Without a present, there is no future.
Papada says that too often, company leaders get too caught up in projections and hypothesizing about the future. While the future is an important thing to consider when making an acquisition, don’t neglect the present.
“I hear people telling me all the time about how we need to develop a new strategy, we need to think three to five years from now,” he says. “I tell people that’s all true, but we also need to concentrate on getting an adequate and attractive return for our shareholders now.
“If we don’t do that, they won’t be shareholders in three to five years.”
- Make hay while the sun shines.
It’s an old saying at Technitrol. Business, especially the electronics business, is notoriously volatile and cyclical. If a business is going to capitalize on acquisition opportunities, it will likely be in a period of financial growth.
“There can be no excuse for not producing when the markets are cooperating,” Papada says. “Because as sure as God made little green apples, the cycle will change. You won’t know exactly when that is, but when it does, it can hit you really hard. Then you have to wait it out.”
- Things are rarely what they seem to be.
CEOs should never become so enamored with an acquisition opportunity that they forget to take a step back and look at things rationally. It is especially hard when everyone in the company is pulling for a deal.
“When people come to me and say, ‘We have to do this, we have to do that, and if you don’t do it, the world is going to fall down,’ my experience is that all is rarely as it seems to be,” Papada says. “So you really have to sit down and ask some good questions to get to the bottom of things.”
- Never be afraid to walk away from a deal.
Papada says CEOs should never become obsessed with an acquisition to the point that they are afraid to walk away. No company grows by making bad acquisitions, he says, and if the research says it is a bad idea, listen to the research. If it looks like you might be paying too much or not getting enough in return, it’s probably true.
“We walk away from deals all the time,” Papada says. “We’ve walked away from deals early on because the price didn’t make any sense. We’ve walked away after we’ve made a deal on price because the due diligence showed that under no circumstances would we want the company.
“One of the biggest mistakes people make is saying, ‘This is something I must do at all costs.’ That’s always a signal that there is trouble coming down the pipe. You need to continually test and retest the assumptions you have.”
HOW TO REACH: Technitrol, www.technitrol.com