On the rise Featured

7:00pm EDT February 28, 2007

Peter McCausland believes in keeping his messages simple, so his acquisition strategy is guided by five words: “Get what you pay for.”

McCausland says one of the easiest mistakes to make when purchasing a company is to overpay, and it’s also one of the hardest mistakes to overcome. That’s why, when the chairman and CEO of Airgas Inc. sets about positioning his company for a purchase, he sees to it that his due diligence team is meticulous about researching every facet of the potential acquisition, from the financials to the culture to the people.

“A lot of mistakes can be made up for through hard work, but overpaying is one that strains an entire organization,” he says. “Even though our industry is relatively recession-resistant, there are periods of time where it flattens out, and if you are left with too much debt and flattening sales, you tend to cut expenses, and that is the kiss of death.”

You never really know if you have overpaid for an acquisition until the purchase is complete, but by thoroughly researching it beforehand, performing intensive communication during the process and then periodically evaluating it afterward, you can increase your chances of getting maximum value out of your company’s investment.

Those three acquisition principles have helped McCausland lead Radnor-based Airgas to the top of the specialty gas distribution field, with a history of 350 acquisitions and more than $2.8 billion in annual sales.

Due diligence
McCausland says that when vetting an acquisition, the first step is finding the right people to perform the research. The information is there to be gathered, but your acquisition team has to know what it is looking for.

With that in mind, McCausland has assembled a team of people from diverse disciplines to research purchase opportunities. The team, made up of accountants, lawyers and operational managers, is charged with researching companies from many different perspectives. “We have a healthy respect for a lot of the legal aspects of acquisitions throughout our program,” he says. “A lot of our acquisition leaders have also come from the accounting profession. They are certified public accountants who then learned our business. “The final piece that has been so important has been the input from the people who run our operating units. They’ve been through acquisitions. They know what to look for. They know how to transition customers.”

McCausland says the accountants and lawyers are kind of the defensive unit of an acquisition team. By crunching the numbers and reviewing the legal history of an acquisition candidate, you will find the level of financial and liability risk you would be assuming, and consequently, whether pursuing the opportunity would be a smart move.

Your operational input is like your offense, because your operations people will be the ones in the field engaging employees and customers during the acquisition process. “You need to get operating input, especially as you grow to be a big company with an extensive business platform,” he says. “At Airgas, we have more than 900 locations with a lot of infrastructure supporting it and lots of functional groups working on it. So in order to realize the true value of an acquisition, your operating people really have to lead the way.” McCausland likes to turn the process of vetting acquisitions into a numbers game. Not only does he want a large, diverse group of professionals performing research, he wants a lot of irons in the fire at one time.

Though it might seem like juggling a lot of different purchase opportunities is a surefire way to let something important fall through the cracks, he says it’s the only way to ensure that your company can keep moving forward, even when adversity strikes. “I always tell our people that if you keep the pipeline full so that you’re evaluating lots of purchase opportunities at the same time, you’ll tend to migrate toward the better opportunities,” he says. “That way, you won’t feel so bad if you encounter opportunities that are less attractive or pose problems and they fall by the wayside.”

When performing due diligence, a number of companies you are considering will pose problems that cause you to slow down or abandon the opportunity altogether. You might discover that a company is delinquent on payments or has pending disputes with customers. McCausland calls them little things but says they are warning signs nonetheless.

He says acquisitions encounter roadblocks all the time, so you cannot fall in love with the idea of making a purchase. You must use the numbers and information your due diligence team provides to create a sense of discipline. “I think the discipline is going through the process and quantifying all those yellow and red flags,” he says. “You have to come up with realistic cash flow numbers, use conservative projections and then know when to walk away.”

Counting on communication
As an acquisition is being finalized, you might not be able to tell your newly acquired employees everything that is going on, but McCausland says you should tell them what you can in full, being honest and forthright. If you aren’t, don’t be surprised when your employees start filling in the blanks with rumors. “Everyone wants other people to be honest,” he says. “When you feel like you’re not being dealt with honestly, you’re not going to be loyal or cooperative, and you’re going to be suspicious.”

McCausland opens the communications gate as soon as an acquisition is announced. He sends Airgas representatives to the headquarters of the acquired company and begins familiarizing the new employees with how Airgas does business. For example, late last year, after completing an acquisition of Linde AG’s bulk gas business in Cleveland, some of Airgas’ leaders traveled to Ohio to meet with members of the Linde group so that the two sides could get to know each other. “We told them about our business philosophy and our values,” he says. “We try to impress upon them that we’re a company that does the right thing, and not just within the bounds of the law. “After that, we tried to convey to them how we treat our associates, what kinds of support we have for our associates, our benefits, training and things like that.”

Communication, however, is a two-way street. You must be as willing to field questions as you are to give a speech on the basics of your company.

McCausland says that even — and especially — if the news is bad, the need to be upfront doesn’t go away. You might think being the bearer of bad news could be a morale-crusher, but withholding information could have an even more damaging effect on your company long-term.

If you intend to cut people or close facilities, do not wait until the last minute to tell them. He says springing bad news on people and giving them little time to react is one of the quickest ways for your company to get a reputation as having a bad work environment. “We are totally honest in terms of who we intend to hire and keep,” he says. “If there is a situation where we will be shutting something down, we try to make sure the people are taken care of appropriately.”

McCausland has learned that communicating frequently with employees at a newly acquired company is one of the most important steps in making them feel valued. “We need to have people who feel that they’re valued and supported,” he says. “Those environmental things are very important to our performance.”

McCausland likes to say that, when it comes to company culture, his title of CEO stands for “Chief Environmental Officer.”

“I think having an environment where people feel valued and supported and safe, where they can speak their mind, is so important to the success of our organization,” he says.

Four types of acquisitions
Over the years, McCausland has divided acquisitions into four categories: core, product line, adjacencies and transformational. The categories progress based on level of risk. Since ascending to the top post in 1987, McCausland has performed the first three, but not any transformational acquisitions.

Core acquisitions are the safest kind, companies that fall in line with your own competencies and areas of expertise. He says if you like to play it close to the vest, these are the kinds of acquisitions you should look at first.

Product line acquisitions involve purchasing a company that sells a product different from your own.

“If we do product line acquisitions, we select them based on what we think our existing customer base will buy,” he says. “The challenge is to negotiate an acquisition, buy it, have it become sort of a functional core on that particular product line, and then transfer that knowledge — how to sell the product, how to ship it and service it — onto the larger platform of your company.” He says adjacencies are acquisitions that require more of a creative eye. They involve companies that are not in your industry but that possess some kind of product parallel your business can exploit.

“In our case, it might be some kind of specialty chemical shipped in a returnable container,” McCausland says. “Because we have 7 or 8 million returnable containers out there, it’s not our business, but it has characteristics of our business.”

For adjacencies, he says the best plan of action is to set the acquisition up on a separate platform apart from your main company and treat it like a different company at first. “Maybe it will coalesce with your industry at some point in the future, but as of right now, it’s a different industry with a whole new set of challenges and a different knowledge base you have to attempt to master,” he says.

The fourth and riskiest type of acquisition is transformational. It’s an acquisition that is so different, it will transform your company. “We’ve looked at these over the years, but have never done one,” McCausland says. “It would really have to be the right situation.”

As the level of risk goes up, the need for more intensive research rises, as does the discipline to walk away if need be.

“The risk goes up exponentially with each type of acquisition,” he says. “As you move along the curve, the due diligence requirements rise exponentially as well.”

Risk should create a strong sense of caution as you consider a purchase, but it shouldn’t stop you in your tracks. McCausland says there are many ways to manage risk, and you have to figure out what type you have the stomach for. “One way to manage risk is through due diligence, but you also can manage it through price and through company size,” he says. “In product line acquisitions and adjacencies, you can try to buy a small enough company that, if things do go bad, it’s not going to have a material impact on your overall performance.”

HOW TO REACH: Airgas Inc., www.airgas.com