Acquisitions and cultures: The right fit is the bottom line for both; make your decision after careful research

Editor’s note: Mal Mixon, former chairman of Invacare Corporation and a well-known entrepreneur, will regularly share his business advice and experience with Smart Business readers. Ask him a question at [email protected], and your inquiry could be the inspiration for his next column.

Q: I’m been growing my business organically the past several years and have concluded that in order to accelerate growth, I need to look at acquisitions. From your experience, what are the top factors to consider when evaluating the type of company to acquire?

A: I think it is essential to include acquisitions if you have a long-term growth plan. At Invacare Corporation, we wanted to grow 50 percent organically and 50 percent by acquisition. You can set it at 60/40 or at anything you want. It just felt like 50/50 was right.

During the period I ran Invacare, we did more than 50 acquisitions. They generally fell into three categories:

  1. Geographical expansion, such as in another area of the country or a foreign country.
  2. A new product line that uses your current distribution system. For example, wheelchairs and beds, in my business, are sold through the same channel, to the same people, to the same customers.
  3. Consolidation of your industry. As an industry consolidates, you should become a much stronger player and improve your sales and margins. Improved profitability is consistent with improved market share.

As far as what you look for, we always had an acquisition team to examine a business in every way they could. You can’t collect too much information. Sometimes even casual conversations are as important as formal presentations.

Try to find out if the business proposition is presented fairly and if you understand everything going on.

I never did an acquisition that wasn’t accretive to the shareholder. It always added to my earnings. We were able to do acquisitions because we had a good, positive cash flow and a solid line of credit from the bank. If you don’t have good cash flow and you don’t have a lot of credit, forget it.

Q: How important is culture when merging two organizations, and what pitfalls exist when trying to merge two cultures that may not perfectly mesh?

A: There are always issues with culture when merging two companies. In my case, I always thought that Invacare was the preferred culture. But we were always sensitive to other companies’ cultures and tried to blend them in over time.

You must recognize there are usually redundancies, particularly with infrastructure. For example, you don’t need two presidents. Take action fairly quickly. Morale will fall in the acquired company if you don’t show that they are loved and accepted by the new company.

If the acquired company won’t move its facility, and you need them, you’ve got to compromise. That’s a difficult subject but the important thing you want is one and one to equal three.

By putting the two companies together, you want the merger to be better than if they were alone. You have to be sensitive to that, use common sense and do the best you can. If you’re insensitive, you may destroy the company.

Be patient and wait for success to arrive; do what is necessary to win

Editor’s note: Mal Mixon, former chairman of Invacare Corporation and a well-known entrepreneur, will regularly share his business advice and experience with Smart Business readers. Ask him a question at [email protected] and your inquiry could be the inspiration for his next column.

Q: You write in “An American Journey” about the opportunities you took advantage of. What if you were graduating now with your master’s degree in business administration? What trends do you see?

A: I’ve been on the Harvard Business School advisory board the last few years, and today’s graduates want to work on Wall Street where starting salaries are phenomenal — much higher than industry. Fewer graduates want to work for a company. One of my classmates runs a huge company and says he doesn’t even recruit at Harvard Business School anymore because he can’t compete with Wall Street.

I think if you go into business, you start at a certain level and work your way up. A lot of the graduates today want success a little too fast. But there is not much I would change about my life. Every job I took I tried to be the best I could be, I learned and then I got promoted. I performed, but had to strike out on my own to be a CEO.

I was good at sales and marketing, and my superiors did not want to take me out of it. If I had to do it all over again, I\ wouldn’t do anything differently.

Q: I am in sort of the same situation you were in at 36 years old. I have a family business. I look for companies to buy that I think would add value, too. It’s a very difficult environment. I don’t have a lot of money. What sort of advice would you give me if I were to try to do what you did today?

A: A lot of people say they want to buy a company, but I am not sure they want to do the things necessary to complete a transition. It’s more difficult today; there is more competition. You have to let lawyers and accountants know and talk to everybody you see. I would say it generally takes a year, unless you are lucky, to find an opportunity.

Here’s a story I’d like to tell you: I once bought a company with zero money. I was walking my dog on a Sunday afternoon, and I ran into my lawyer friend Bob Gudbranson. He told me about a deal, I later put together a finance package and received a spectacular return.

It looked like I was required to invest $3.3 million. I was able to do a sales-leaseback for $2 million on the property. Secondly, $1.5 million in receivables (from highly reputable companies) could be purchased for $1 million. So I borrowed $1 million secured by the receivables. I paid back the loan, took the profit on the receivables after tax and invested it in the company.

You never know from where your next deal will come. Just be on the lookout and let people know you are seeking an opportunity. Also think about putting your investment group together. If you find an opportunity, you’ve got to be able to put it all together financially.

A complete story of his Mal Mixon’s rise from rags to riches is told in his book An American Journey, published by Smart Business. It can be found at www.anamericanjourney.com and on Amazon.com

Amazon in talks to buy TI mobile chip arm: paper

SEATTLE, Mon Oct 15, 2012 – Amazon.Com Inc. is in advanced talks to buy the supplier of chips for its Kindle tablet computer, Israeli financial newspaper Calcalist reported on Monday, in what could mark a step in the company’s ambitions in the smartphone sector.

The report said any deal for the smartphone chip business of Texas Instruments Inc. would probably be worth billions of dollars and could make Amazon a direct rival to Apple Inc. and Samsung Electronics Co. Ltd., which also design their own chips.

“It would make sense, as the chip is a critical component and Amazon has an existing relationship with TI,” said Ovum analyst Nick Dillon.

TI’s chips are used in Amazon’s Kindle Fire tablet and Amazon CEO Jeff Bezos had underlined TI’s strength in the industry at the tablet’s recent launch.

“With the trend towards more vertical integration, led by Apple, speculation that Amazon is interested in TI’s chipset arm is unsurprising,” said Ben Wood, head of research at British wireless consultancy CCS Insight.

But some analysts questioned whether it would make sense for Amazon to spend billions on the business when many smaller and independent smartphone chip makers are reporting steep losses.

TI has flagged its plans to exit the business.

Gartner analyst Carolina Milanesi said she doubted whether Amazon wants to “become that intimately involved with hardware.”

TI said last month it would shift its wireless investment focus from products like smartphones to a broader market including industrial clients such as carmakers, where it is hoping for a more profitable and stable business.

UnitedHealth to buy most of Brazil’s Amil for $4.9 billion

NEW YORK, Mon Oct 8, 2012 – UnitedHealth Group Inc said it would buy a 90 percent stake in Amil Participacoes SA, Brazil’s largest health insurer and hospital operator, for $4.9 billion, tapping into a fast-growing private healthcare market as challenges mount for its U.S. business.

The deal announced on Monday follows a series of multibillion-dollar takeovers by U.S. health insurers in their home market, including Aetna Inc.’s $5.6 billion buy of rival Coventry Health Care Inc. and WellPoint Inc.’s planned $4.5 billion purchase of Amerigroup Corp.

“(Brazil’s) growing economy, emerging middle class and progressive policies toward managed care make it a high- potential growth market,” UnitedHealth Chief Executive Stephen Hemsley said in a statement.

U.S. health insurers have come under pressure as the government reins in reimbursement for its Medicaid and Medicare programs for the poor and the elderly and as competition grows among health plans serving employers.

The deal with Amil adds to a growing international business at UnitedHealth, the largest U.S. health insurer. The company has begun operations or struck alliances in Australia, the Middle East and the UK during the past two years.

Buying the stake in Amil gives UnitedHealth a chance to test a different model of medical service: Amil offers insurance coverage and also runs hospitals and doctor facilities. While some examples of this already exist in the United States, the largest U.S. insurance companies for the most part operate separately from networks of doctors and other healthcare providers.

Microsoft nears deal to buy Yammer: source

REDMOND, Wash., Mon Jun 18, 2012 7—Microsoft Corp. is close to buying business software company Yammer Inc for more than $1 billion, according to a source familiar with the details.

Microsoft’s interest in Yammer, known for its social networking functions, could allow the software giant to beef up its offerings for corporations.

A Microsoft spokesman declined to comment. A representative from Yammer did not immediately respond to a request for comment.

Backed by PayPal co-founder and Facebook investor Peter Thiel, Yammer said it counts more than 80 percent of Fortune 500 companies as clients. It raised more than $140 million in venture capital funding.

Bloomberg, which first reported the deal, said the announcement about the transaction was expected at the end of June.

Thomas H. Lee buys most of Party City retailer

BOSTON, Tue Jun 5, 2012 – Private equity firm Thomas H. Lee Partners will buy a majority stake in Party City, North America’s largest retailer of party goods such as balloons and Halloween costumes, in a deal that values the company at $2.7 billion.

The retailer’s current private equity owners — Advent International Corp, Berkshire Partners LLC and Weston Presidio — as well as Party City management will have “significant minority stakes” in the company after the deal, according to a statement released by all the firms on Tuesday.

WellPoint To buy 1-800 Contacts for $900 million, according to report

INDIANAPOLIS, Mon Jun 4, 2012 –  Health insurer WellPoint Inc. plans to buy contact-lens and eyewear retailer 1-800 Contacts Inc. for a transaction value close to $900 million, the Wall Street Journal reported, citing a person familiar with the matter.

The deal will close in the third quarter and will start adding to the company’s per-share earnings in 2014, the Journal said in its report. The deal will be financed with cash on hand, the report said.

“We see a unique way of tying 1-800 Contacts into our product design,” WellPoint Chief Financial Officer Wayne DeVeydt is quoted as saying in the report.

WellPoint would also get “a diversified revenue stream into a higher-margin business,” the report said, quoting the CFO.

1-800 Contacts has after-tax margins in the “double digit range,” compared with around 4 percent to 5 percent across WellPoint’s health-insurance business lines, the report quoted DeVeydt as saying.

WellPoint and 1-800 Contacts Inc. could not reached for comments.

Eaton to buy electrical equipment maker Cooper Industries for $11.8 billion

CLEVELAND, Mon May 21, 2012 – Diversified industrial manufacturer Eaton Corp. agreed to buy electrical equipment maker Cooper Industries Plc for $11.8 billion in cash and stock, its biggest-ever acquisition, a move that will lower Eaton’s taxes by shifting its incorporation to Ireland.

Eaton will pay $72 per share for Cooper: $39.15 in cash and the rest in stock. Eaton shareholders will control almost three-quarters of the new Eaton Global Corp Plc.

Cooper shares were up 27 percent at $70.89 in morning trading, the day’s biggest gainer on the New York Stock Exchange, while Eaton stock was up 1.1 percent at $42.88.

The Eton-Cooper agreement would be the biggest deal of several mergers announced on Monday. Analysts said this was one way for companies to grow in a sluggish global economy.

“It drives the point home that acquisitions are an increasingly important growth avenue in a slow-growth world,” said analyst Matt Collins of Edward Jones.

“Record low interest rates and solid balance sheets make it that much easier to get deals done. Overall I wouldn’t say that it necessarily means anything strategically for other companies in the space, other than more of the same consolidation is likely,” Collins said.

The pricing appears to be fair or “slightly expensive,” valuing Cooper at 11.5 times projected earnings, JP Morgan analyst Ann Duignan said.

The deal will allow Eaton to better participate in an electrical market that is expected to benefit from investment to modernize aging power grids in both mature and developing economies. It will also allow Eaton to expand into lighting and lighting controls, a market poised to benefit from a rebound in commercial construction.

Eaton also cited expected growth from the oil and gas industry, which both Cooper and Eaton serve.

DaVita eyes new markets with $4.4 billion HealthCare deal

DENVER, Mon May 21, 2012 – DaVita Inc., the biggest U.S. operator of dialysis clinics, has agreed to buy privately-held HealthCare Partners for about $4.42 billion in cash and stock to expand into new markets to help offset potential revenue pressures in its main business.

HealthCare Partners, based in Torrance, California, runs medical groups and physician networks in Southern California, Central Florida, and Southern Nevada. Its revenues in 2011 were about $2.4 billion.

The company provides its services to more than 667,000 patients and has total care dollars under management of about $3.3 billion, DaVita said.

The deal follows changes to the way healthcare companies are reimbursed by U.S. state-run health insurer Medicare which could put pressure on revenues across the industry.

Medicare changed its reimbursement model last year to encourage clinic operators to reduce costs and use drugs more sparingly. It no longer pays for individual services and drugs but instead makes a lump-sum payment per dialysis session, as long as patients are kept in good health.

Analysts have said this favors large players such as DaVita and its biggest rival FMC, the U.S. arm of Germany’s Fresenius Medical Care, because they are better placed to cut costs, but it also creates revenue pressures.

DaVita Chief Executive Kent Thiry said DaVita was currently focused on integrated care for specialized kidney care services. “HealthCare Partners executes on that same mission across a full and deep array of healthcare services in three geographic markets.”

Wells Fargo’s play for prime brokerage prompts skepticism

As Wells Fargo becomes a bigger player in the investment banking game, not everyone is a fan.

Moody’s Investors Service, the rating agency, raised concerns on Monday about the bank’s recent move outside its comfort zone of consumer lending. Moody’s directed criticism at the bank for stepping into prime brokerage, calling the bank’s recent acquisition of the midsize company Merlin Securities “credit negative.”

Wells Fargo agreed to buy Merlin last month for an undisclosed sum, making it the last of the nation’s biggest banks to enter prime brokerage, the lucrative business that caters to hedge funds and other big investors. Prime brokers provide a broad array of services, including cash management, execution of leveraged trades and securities lending.

Moody’s expressed concern the Merlin takeover “signals that Wells Fargo intends to expand its” investment banking business. “Though Merlin is small and has a limited balance sheet, we expect that Wells Fargo will build this business and seek to expand its products and services,” Moody’s said in the report.

Fitch, one of Moody’s top competitors, offered a softer interpretation of the deal. While Wells Fargo “may use Merlin as a platform for further expansion, the transaction is still viewed as relatively small in nature,” Fitch said last week.

In a statement, Wells Fargo defended the deal and challenged the Moody’s assessment.