Lincoln Electric does a lot of deals – it recently closed three in 30 days – but it won’t make just any acquisition.
“Our threshold is cost of capital,” says CFO Vince Petrella. “What kinds of returns can we deliver and what value can we create for our shareholders based on investments in either organic or inorganic activity?”
Last year, Lincoln earned a 20.7 percent return on invested capital – up 4.5 points from 2017.
In this week’s Dealmaker Strategies, Petrella shares how Lincoln Electric approaches acquisitions to drive continued earnings growth.
Lincoln always tries to align its M&A activity with the company’s underlying business strategies.
“One of our core strategies is to continue to expand and grow our capabilities in the automation space,” Petrella says. “We’ve embarked on a multi-year strategy execution to accumulate skills and capabilities as well as end-market exposures in automation that can expose us to a greater growth trajectory for the business.”
When considering a property or acquisition opportunity, ask first, ‘What’s the fit?’
“How does this fit into the strategies our company has developed for growing the business and improving our returns?” he says. “We view automation as a high-growth opportunity for our business.”
Lincoln’s corporate M&A team sources the deals, working closely with business unit and operating unit leaders.
“The team is looking to understand what their needs might be and to canvass them for ideas on attractive targets that would accelerate our strategies,” Petrella says. “If the target is suitable, that results in some investigative work to understand the markets that a target might serve, what kinds of capabilities they have or what technologies might be interesting to bring into the business.”
That leads into the due diligence process, when the company brings to bear “a broader array of functional and technical expertise across the company,” Petrella says. This is the time to determine the risks and opportunities a target might present, he adds.
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From December through January, Lincoln completed a string of three acquisitions in 30 days, including the purchase of the soldering business of Worthington Industries Inc. When you’re making a lot of acquisitions, you’ll probably earn a reputation. That works in Lincoln’s favor as the company pursues new targets.
“Encourage them to talk to management teams and companies that you’ve brought into the fold,” explains Petrella, who says that, “We will provide references and tell target company management teams to talk to the last couple management teams that we’ve acquired. Actions speak louder than words, so we encourage those targets to talk to those previously acquired companies.”
Focus on growth
Lincoln sees every new deal as an opportunity to add resources and capabilities.
“We’re not the kind of company that views acquisitions as a cost-cutting opportunity,” Petrella says. “We tend to leave the business running largely how it is running with the management team, and then add whatever value we might have that we can leverage through our existing relationships with customers and technologies.
“Lincoln views acquisitions as adding value and bringing new talents and managers into our organization. New technologies and new ways of doing business can enhance our existing portfolio of capabilities and relationships with customers.”
To ensure long-term satisfaction with a new acquisition, Lincoln selects the most talented leaders to fill the role of integration managers.
“It’s really important that you onboard the organization in the most effective way possible, to not be disruptive and detract from the value that you acquired,” Petrella says. “If anything, you need to overemphasize and overinvest in resources in the integration efforts, particularly early on in the acquisition process.”