| Alliances frequently result in mergers and/or | | | | business strategy of the unit." |
| acquisitions. Partnering relationships, such as joint | | | | Tyco International Ltd. is a diversified global |
| ventures or strategic alliances, can sometimes | | | | manufacturer and supplier of industrial products |
| lead to a merger or acquisition situation. After | | | | and systems with leadership positions in each of |
| companies work together for a period of time | | | | its four business segments: Disposable and |
| and get to know one another's strengths, | | | | Specialty Products, Fire and Security Services, |
| weaknesses, and synergistic possibilities, new | | | | Flow Control, and Electrical and Electronic |
| relationship opportunities become apparent. One | | | | Components. Through its corporate strategies of |
| could argue that a joint venture or strategic | | | | high-value production, decentralized operations, |
| alliance is simply the getting to know each other | | | | growth through synergistic and strategic |
| part of a courtship between companies and that | | | | acquisitions, and expansion through product |
| the real marriage does not occur until the | | | | market globalization, Tyco has evolved. From |
| relationship has been consummated by a merger | | | | Tyco's beginnings in 1960 as a privately held |
| or acquisition. | | | | research laboratory, it has transformed into |
| To make the point, Dan McQueen, president, at | | | | today's multinational industrial corporation that is |
| Fluid Components International (FCI) built a | | | | listed on the New York Stock Exchange. The |
| Partnering relationship with Vortab, a small | | | | Company operates in more than 80 countries |
| technology company. Vortab produced static | | | | around the world and had fiscal 1999 revenues in |
| mixers, a technology suitable for flow conditioning | | | | excess of $22 billion. |
| that complemented FCI's product offering. While | | | | In the mid-1980s, Tyco returned its focus to |
| Vortab also had three other distribution partners | | | | sharply accelerating growth. During this period, it |
| in addition to FCI, FCI's volume with Vortab | | | | reorganized its subsidiaries into the current |
| continued to grow to the point that Vortab's | | | | business segments listed above. The Company's |
| technology became an important part of FCI's | | | | name was changed from Tyco Laboratories, Inc. |
| total sales volume. After about three years into | | | | to Tyco International Ltd. in 1993, to reflect |
| the relationship, FCI acquired Vortab. | | | | Tyco's global operations more accurately. |
| Because of the close relationship between Vortab | | | | Furthermore, it became, and remains, Tyco's |
| and FCI, when the Vortab was put up for sale | | | | policy to focus on adding high-quality, |
| McQueen knew its true value. Resulting from his | | | | cost-competitive, low-tech industrial/commercial |
| knowledge, FCI was able to purchase Vortab at a | | | | products to its product lines that can be |
| much more realistic price than Vortab's asking | | | | marketed globally. |
| price. The Vortab technology integrated well with | | | | In addition, the Company adopted synergistic and |
| FCI's core competency technology and today FCI | | | | strategic acquisition guidelines that established |
| also distributes Vortab through some of its | | | | three base-line standards for potential acquisitions, |
| non-direct competitors. | | | | including: |
| The following list demonstrates some of the | | | | 1. A company to be acquired must be in a |
| specific values created or developed from the | | | | business related to one of Tyco's four business |
| various organizational blending methods: | | | | segments. |
| · Operational resource sharing | | | | 2. A company to be acquired must be able to |
| · Functional skill transfer | | | | expand the product line and/or improve product |
| · Management skill transfer | | | | distribution in at least one of Tyco's business |
| · Leverage (economies of scale) | | | | segments. |
| · Capability increases | | | | 3. A company to be acquired that will introduce a |
| Mergers | | | | new product or product line must be using a |
| Mergers occur when two or more organizations | | | | manufacturing and/or processing technology |
| come together to blend or link their strengths. | | | | already familiar to one of Tyco's business |
| Also in the deal is a blending of their weaknesses. | | | | segments. |
| The hopeful result is a new more powerful | | | | Tyco also developed a highly disciplined approach |
| organization that can better produce goods and | | | | to acquisitions based on three key criteria that |
| services, access markets, and deliver the highest | | | | the Company continues to use today to gauge |
| quality customer service. Mergers offer promise | | | | potential acquisitions: |
| for synergistic possibilities. This is achieved by the | | | | 1. Post-acquisition results will have an immediate |
| blending of cultures and retaining the core | | | | positive impact on earnings; |
| strengths of each. In this scenario, a new and | | | | 2. Opportunities to enhance operating profits must |
| different organization generally emerges. The goal | | | | be substantial; |
| is a sharing of power, but usually the strongest | | | | 3. All acquisitions must be non-dilutive to |
| rise to the top leadership. | | | | shareholders. |
| Exxon - Mobil | | | | Using its synergistic/strategic guidelines to |
| The Federal Trade Commission gave Exxon and | | | | acquisitions, Tyco succeeded in significantly |
| Mobil the green light On November 30, 1999 for | | | | improving the Company's positions in each of its |
| their $80 billion merger. The next day the | | | | four business segments. During the period from |
| transaction was completed. The merged | | | | 1986 to the present, a number of smaller |
| organization officially became Exxon Mobil Corp. | | | | acquisitions were made to strengthen specific |
| The merger actually brings "the companies back | | | | product lines or enhance the Company's |
| to their roots when they were part of John | | | | competitive position in the various segments. The |
| Rockefeller's Standard Oil empire. That company | | | | major acquisitions were: |
| was the largest oil firm in the world before it was | | | | · 1986 - Grinnell Corporation, manufacturers |
| busted up by the government in 1911." | | | | and distributors of industrial/construction products |
| At the 1998 announcement of their intention to | | | | (which with Grinnell Fire Protection Systems |
| merge, Mobil chairman, Lucio Noto made a | | | | acquired by Tyco in the 1970s brought back |
| comment about the need to merge. He said, | | | | together the two divisions of the original Grinnell |
| "Today's announcement combination does not | | | | Corporation under the Tyco umbrella). |
| mean rhat we could not survive on our own. This | | | | · 1988 - Allied Tube and Conduit, |
| is not a combination based on desperation, it's one | | | | manufacturers of steel pipe and related tubular |
| based on opportunity. But we need to face some | | | | products. |
| facts. The world has changed. The easy things | | | | · 1989 - Mueller Company, manufacturers of |
| are behind us. The easy oil, the easy cost savings, | | | | water and gas flow control products. |
| they're done. Both organizations have pursued | | | | · 1991 - Wormald International Limited, |
| internal efficiencies to the extent that they could." | | | | manufacturers, contractors and suppliers of fire |
| While part of the deal was the selling of a | | | | protection systems and products. |
| Northern California refinery and almost 2,500 gas | | | | · 1992 - Neotecha, manufacturers of |
| station locations, the divestiture represents only a | | | | Teflon-lined butterfly/ball valves and sampling |
| fraction of their combined $138 billion in assets. | | | | devices. |
| Lee Raymond, Exxon chairman, now chairman | | | | · 1993 - Hindle/Winn, manufacturers of high |
| and chief executive of the merged company said, | | | | performance butterfly/ball valves. |
| "The merger will allow Exxon Mobil to compete | | | | · 1994 - Classic Medical, Uni-Patch and |
| more effectively with recently combined | | | | Promeon, three separate companies each involved |
| multinational oil companies and the large | | | | in providing a disposable medical product or |
| state-owned oil companies that are rapidly | | | | supplementary products. |
| expanding outside their home areas." | | | | · Preferred Pipe, manufacturers of forged |
| Exxon Mobil is now like a small oil-rich nation. They | | | | steel products. |
| have almost 21 billion barrels of oil and gas | | | | · Kendall International Co., among the world's |
| reserves on hand, enough to satisfy the world's | | | | largest manufacturers and distributors of |
| entire energy needs for more than a year. Yet, | | | | disposable medical supplies, wound care dressings, |
| there is still the opportunity to cut costs. The | | | | bandaging, elastic support and other vascular |
| companies expect their merger's economies of | | | | therapy compression products. |
| scale to cut about $2.8 billion in costs in the near | | | | · 1995 - Tectron Tube, manufacturers of |
| term. They also plan to cut about 9,000 jobs out | | | | pipe and tubular products. |
| of the 123,000 worldwide. | | | | · Unistrut, manufacturers of metal framing |
| AOL - Time Warner | | | | products and services. |
| On January 10, 2000, Steve Case, chairman and | | | | · Earth Technology Corporation, an |
| chief executive of America Online (AOL), sent an | | | | environmental consulting firm specializing in the |
| e-letter to his 20 million members. He said, "Less | | | | design of water and wastewater treatment |
| than two weeks ago, people all over the world | | | | facilities. |
| came together in a global celebration of the new | | | | · 1996 -Professional Medical Products, Inc., |
| century, and the new millennium. As I said in my | | | | makers of adult incontinence products and other |
| first Community Update of the 21st Century, all | | | | disposable medical products. |
| of us at AOL are extremely excited by the | | | | · Thorn Security, manufacturer, installer and |
| challenges and prospects of this new era, a time | | | | servicer of fire and security systems worldwide. |
| we think of as the Internet Century. | | | | · Carlisle, a leading manufacturer of specialty |
| I believe we have only just begun to see clearly | | | | packaging materials and garment hangers. |
| how the interactive medium will transform our | | | | · Watts Waterworks Businesses, |
| economy, our society, and our lives. And we are | | | | manufacturers of valves, hydrants, and fittings |
| determined to lead the way at AOL, as we have | | | | used primarily in water utility, wastewater |
| for 15 years-by bringing more people into the | | | | treatment and power generation markets. |
| world of interactive services, and making the | | | | · Sempell, a manufacturing and servicer of |
| online experience an even more valuable part of | | | | specialty valves used in industrial and power |
| our members' lives. | | | | generation applications. |
| That is why I am so pleased to tell you about an | | | | · ElectroStar, a leading manufacturer of |
| exciting major development at AOL. Today, | | | | complex printed circuit boards. |
| America Online and Time Warner agreed to join | | | | · 1997 - American Pipe & Tube, a |
| forces, creating the world's first media and | | | | manufacturer of steel pipe, tubing for the fire |
| communications company for the Internet | | | | protection, fence markets and steel studs/trusses |
| Century. The new company, to be created by | | | | for the residential and commercial construction |
| the end of this year, will be called AOL Time | | | | markets. |
| Warner, and we believe that it will quite literally | | | | · Submarine Systems Inc., the leader in the |
| change the landscape of media and | | | | design, development, manufacture, installation, |
| communications in the new millennium." | | | | supply and maintenance of undersea fiber optic |
| The next day newspaper headlines read, | | | | telecommunications cable systems. |
| "America Online, Time Warner Propose $163-Billion | | | | · ADT, a leading installer and servicer of |
| Merger." The Los Angeles Times said, "In an | | | | electronic security systems. |
| audacious deal bringing together traditional | | | | · Keystone, a leading designer and |
| entertainment and the new world of the Internet, | | | | manufacturer of industrial valves, actuators and |
| America Online and Time Warner Inc. on Monday | | | | accessories marketed worldwide. |
| announced they will merge in the largest business | | | | · INBRAND, a manufacturer and distributor of |
| transaction in history." | | | | adult incontinence products. |
| The story later revealed the value comparisons | | | | · Sherwood Davis & Geck, a manufacturer |
| of the companies. While AOL earns less than | | | | and distributor of disposable medical products. |
| Time Warner, the stock market thinks AOL's | | | | L. Dennis Kozlowski, chairman of the board and |
| shares are worth more. "America Online is valued | | | | CEO said, "Tyco is successful because it adheres |
| by the stock market at nearly twice Time | | | | to basic strategies such as being a high-value |
| Warner-$173 billion, compared with $101 billion as | | | | producer, keeping our business simple and close to |
| of Friday's [1/7/00] market close-even though it | | | | our markets and customers, empowering our |
| has one-third Time Warner's annual revenues." | | | | employees for greater achievements, while |
| The article also stated "AOL earned $762 million | | | | growing internally and through acquisitions." Good |
| on $4.8 billion in sales in the year ended Sept. 30 | | | | ideas, but too bad about Kozlowski--I guess one |
| [1999]." AOL chairman, Case wants to move fast. | | | | should be careful on how much is spent on a |
| The Times article stated, "Case said the two | | | | birthday party? |
| chairman began discussing a combination this fall | | | | Irving Gutin, senior vice president at Tyco has |
| [1999], he has tried to impress upon Levin [Gerald | | | | worldwide responsibilities for corporate |
| Levin, chairman at Time Warner] the need to | | | | development and 30 years of M&A experience. In |
| operate the new company at Internet speeds." | | | | sharing a conference platform with, his conviction |
| (We all know the rest of the story...nothing is | | | | was obvious. He said, "We don't want to partner, |
| forever.) | | | | we want to own the whole thing-it's easier that |
| The prophets of gloom are always ready to point | | | | way." |
| out the down side to deals. In UPSIDE magazine, | | | | FASB Accounting Rule Change |
| Loren Fox reported some of the challenges to | | | | The rules of the game are changing. Some of the |
| the marriage. They are: | | | | accounting benefits of acquisition will soon |
| · "The holy grail of strategic synergy has | | | | disappear. Spending some extra time with your |
| been elusive in the media world." | | | | accounting and legal departments could prove |
| · "In the offline world, it's notable that Time | | | | beneficial in the long-term. |
| and Warner Brothers have continued to run fairly | | | | George Donnelly, in his article in CFO magazine |
| independently despite a decade as Time Warner." | | | | writes, "The current state of accounting rules is |
| · "'From any standpoint, this has not been a | | | | clearly a factor in the frenetic acquisition activity |
| success to date,' says Yahoo President and COO | | | | at Cisco Systems and Lucent Technologies Inc. |
| Jeff Mallett." | | | | Like many high-tech companies, the two giants |
| · "When you buy the company, you get | | | | can acquire with little drag on their finances, |
| things you don't need." | | | | because pooling-of-interest accounting enables |
| · "Warner might make these deals easier, but | | | | them to avoid onerous goodwill charges that |
| it might also bring new risks-even for AOL, a | | | | otherwise would ravage earnings. |
| veteran of 25 acquisitions over the last six years. | | | | But because of the death sentence the Financial |
| Employees might flee to pure dot-com | | | | Accounting Standards Board has levied on pooling, |
| companies, ego clashes could stymie plans or | | | | companies must use straight-purchase accounting |
| financial gains may never cover the large premium | | | | after January 1, 2001. Then buyers will have to |
| paid for Time Warner." | | | | amortize goodwill for no more than 20 years." |
| · "You don't need to own everything to do | | | | Consolidations and Rollups |
| what AOL and Time Warner are doing." | | | | Bill Wade in Industrial Distribution said: "The basic |
| Warner-Lambert | | | | premise couldn't be any simpler. Take a highly |
| Merger mania can make strange bedfellows, let | | | | fragmented industry-like distribution-facing |
| alone promises unfulfilled. Alliances can lead to | | | | technological change, customer upheaval or |
| mergers. Warner-Lambert is an example of all the | | | | chronic financing difficulties. Add in a few |
| above. This is corporate soap opera at its best. | | | | well-healed foreign firms or, worse, a couple of |
| · June 16, 1999, Warner-Lambert Company | | | | previously unknown competitors from outside the |
| announced that it has signed a letter of intent | | | | business. Since the industry leaders are probably |
| with Pfizer Inc. to continue and expand its highly | | | | family-run businesses with limited succession |
| successful co-promotion of the | | | | strategies, the next step to protect profit and |
| cholesterol-lowering agent Lipitor (atorvastatin | | | | continue growth is clear: consolidate." |
| calcium). The companies, which began | | | | A consolidation or rollup, as it's frequently called, |
| co-promoting Lipitor in 1997, will continue their | | | | generally occurs when an organization or individual |
| collaboration for a total of ten years. Further, with | | | | with deep pockets sets out to buy several small |
| a goal of expanding their product collaborations, | | | | companies in a fragmented industry and rein them |
| the companies plan to explore potential Lipitor line | | | | in under a new or collective pennant. In 1997 the |
| extensions and product combinations and other | | | | National Association of Wholesale-Distributors |
| areas of mutual interest. | | | | reported that 42 of the 54 industries they studied |
| · November 4, 1999, newspapers across | | | | had been significantly affected by consolidation. |
| America report on "one of the biggest mergers | | | | Frequently a professional management and buying |
| of any kind, ever." The Wall Street Journal said, | | | | strength create economies of scale that allows |
| "Now, American Home is set to merge with | | | | the consolidator to pluck the low hanging fruit in |
| Warner-Lambert Co. in a stock deal that is valued | | | | the industry. They will invest significantly in |
| at about $72 billion. It stands as the biggest deal in | | | | systems to eliminate the duplication of effort and |
| drug-industry history and one of on the biggest | | | | inefficiencies that exist within the industry being |
| mergers of any kind, ever." Also reported, | | | | consolidated. |
| "Warner-Lambert held talks with Pfizer Inc. at the | | | | While some call it smoke and mirrors, many |
| same time it was negotiating with American | | | | consolidators are yielding outstanding results. In |
| Home." | | | | 1997, at 39 years old, financial whiz Jonathan |
| · November 4, 1999, The New York Times | | | | Ledecky pulled off a bold deal. As reported in CFO |
| runs a story titled, "Can a Strong-Willed Chief | | | | magazine, He went to the public equity markets |
| Share Power in a Merger?" The article lead with, | | | | and raised half a billion dollars for his company, |
| "The planned merger between American Home | | | | Consolidation Capital Corp., in a brazen initial public |
| Products and Warner-Lambert once again raises | | | | offering. Without revenues, assets, operating |
| the question of whether John R. Stafford, | | | | history or identity (name or industry), he raised |
| American Home's famously strong-willed chairman | | | | the capital in a blind pool on the strength of his |
| and chief executive, is capable of sharing and, | | | | reputation alone. |
| perhaps more important, letting go of power." | | | | U.S. Office Products (USOP) is the result of 220 |
| · January 13, 2000, Warner-Lambert | | | | acquisitions. Sharp Pencil was one of six privately |
| Company indicated that, as a result of changing | | | | owned office-supply companies that Ledecky put |
| events, it is exploring strategic alternatives, | | | | together. But he didn't stop, after two years, and |
| including meeting with Pfizer, following Pfizer's | | | | 220 acquisitions later, USOP was a member of |
| recent approach. In that regard, Warner-Lambert | | | | the Fortune 500, with $3.8 in revenues. "It was |
| said that its Board of Directors has authorized | | | | crazy," says Donald Platt, senior vice president |
| management to enter into discussions with Pfizer | | | | and CFO at USOP. Platt did rely highly on outside |
| to explore a potential business combination. The | | | | resources, including a team of lawyers and |
| Company stated that, in light of changing | | | | accountants to get the job done (the 220 |
| circumstances, its Board had concluded that there | | | | acquisitions). "We restricted then to well-managed, |
| is a reasonable likelihood that Pfizer's previously | | | | profitable companies. At worst, we would still be |
| announced conditional proposal could lead to a | | | | making money," says Platt. |
| transaction, reasonably capable of being | | | | H. Wayne Huizenga is the owner of the Florida |
| completed, that is better financially for | | | | Marlins baseball team. He is also the king of |
| Warner-Lambert shareholders than the proposed | | | | consolidators. He pioneered his technique by |
| merger with American Home Products. | | | | rolling-up trash-truck businesses to create Waste |
| Lodewijk J.R. de Vink, chairman, president and | | | | Management Inc., the nation's largest waste |
| chief executive officer of Warner-Lambert, | | | | company. He went on to create the largest video |
| stated, "It has always been the Board's objective | | | | chain, Blockbuster Video. With AutoNation, |
| to secure the best possible transaction for | | | | Huizenga, now struggling, is attacking the retail |
| Warner-Lambert shareholders and we will now | | | | automobile industry. In mid-December 1999 |
| pursue discussions with Pfizer to determine if a | | | | AutoNation had 409 retail franchises but |
| combination with them to achieve that goal is | | | | announced the closing of 23 of their used-car |
| possible." The Company emphasized that there | | | | superstores. |
| can be no assurance that any agreement on a | | | | Michael Riley learned about consolidations while |
| transaction with Pfizer, or that any other | | | | serving as personal attorney for Huizenga. In July |
| transaction, will eventuate. | | | | 1999, Riley's company, Atlas Recreational Holdings |
| · January 24, 2000, in response to inquiries, | | | | Inc., paid $14 million to purchase controlling interest |
| Warner-Lambert Company said that it would | | | | in the only publicly traded RV dealership chain in |
| continue to explore strategic alternatives, including | | | | the United States, Holiday RV Superstores Inc., in |
| discussions with Pfizer. The Company's | | | | Orlando, Florida. Riley's avowed intention is to |
| unwavering goal is to provide the greatest value | | | | grow the company from $74 in annual sales in |
| to Warner-Lambert shareholders. Warner-Lambert | | | | 1998 to $1 billion by 2003 by acquiring other |
| officials emphasized that there can be no | | | | dealerships. |
| assurance that any transaction will be completed | | | | Riley says, "Consolidations really will help. We can |
| and offered no further comment. | | | | bring advantages to sales and service. We can |
| Was American Home Products the bride left at | | | | make a difference in warranty. There is a real |
| the altar? The Wall Street Journal didn't think so, | | | | value added when you put these companies |
| in fact they called American Home the Runaway | | | | together." |
| Bride in their November article. Additionally they | | | | Same Industry, Different Strategies |
| listed several companies that American Home has | | | | In mid-1997, roll-ups, United Rentals and |
| them selves left at the altar. | | | | NationsRent were formed. They are in a race, but |
| · Early November 1997, American Home | | | | are using different strategies to achieve their |
| Products and SmithKline Beecham begin merger | | | | results. After two years of ravenously gobbling up |
| talks. | | | | companies, United had 482 locations while |
| · January 30, 1999, Talks break off. | | | | NationsRent had accumulated only 138 stores. |
| · June 1, 1998, American Home and | | | | NationsRent has been developing a nationwide |
| Monsanto announce agreement to merge. | | | | identity with stores that look-alike and have the |
| · October 13, 1998, American Home and | | | | same signage and layout. United Rentals presence |
| Monsanto cancel plans to merge. | | | | is virtually unknown since the stores retain their |
| · November 3, 1999, American Home and | | | | previous appearance. |
| Warner-Lambert Co. in talks to merge. | | | | Motivations for Consolidators |
| Acquisitions | | | | There are several good reasons why |
| An acquisition is basically the function of one | | | | consolidators attack a particular industry. The |
| company consuming and digesting another. The | | | | following list provides some of the rational that |
| result is that the acquiring company shores up | | | | assist them in their decision making process. As |
| core weaknesses or adds a new capability | | | | you look to profit from the trend, keep these |
| without giving up control, as might occur in a | | | | elements in mind as you make your selection on |
| merger. Added capabilities, rather than synergy is | | | | whom to acquire. |
| usually the reasoning behind acquisitions. In this | | | | · Confidence by the players that they can |
| situation, the acquiring company's culture prevails. | | | | capture significant and highly profitable additional |
| Frequently one company will acquire another for | | | | market share by implementing the cutting edge |
| their intellectual property, their employees or to | | | | management, procurement, distribution and |
| increase market share. There are numerous | | | | service practices that will give them a competitive |
| strategies and reasons why one company | | | | edge over smaller players. |
| acquires another, as you will soon discover. | | | | · Gain national customers through increased |
| Guardian Protection Services has been acquiring | | | | capabilities in delivering the highest levels of |
| alarm companies within its northeast region of | | | | standardized service and national geographical |
| operation to supplement its internal growth. Russ | | | | coverage. |
| Cersosimo, president says, "This is just another | | | | · Larger customers of independent |
| way for us to satisfy our appetite for growth. | | | | distribution channels are seeking broader |
| Our desire is to expand our opportunities in the | | | | geographic coverage and networks of locations |
| other offices. That is another reason why it is | | | | that allow for greater service capabilities, and the |
| attractive for us to look to acquire companies, to | | | | smaller customers want a high level of customer |
| get their commercial base and commercial sales | | | | service and response. |
| force that is in place in those offices. We wanted | | | | · Customers' desire for more product |
| to make sure that we can digest the new | | | | sophistication. |
| accounts without putting strain on our paper flow | | | | · Insurance and financing synergies. |
| and the systems we have in place." | | | | Fragmented Industries Are Ripe for Consolidations |
| Who does R&D acquisitions well? Electronics | | | | and Rollups |
| Business recently answered, "Cisco Systems Inc., | | | | Some industries that are ready for consolidations |
| San Jose, the networking equipment company, | | | | or rollup examples include heavy-duty truck repair, |
| which boasts many success stories among its 40 | | | | office products, recreational vehicle dealerships, |
| acquisitions of the past six years." None of their | | | | rental stores (equipment, tools and party) and |
| acquisitions were in mature markets, rather all | | | | distribution. Consolidation does not just happen. It |
| were leading edge, allowing Cisco to broaden its | | | | is triggered by shifts in supplier and customer |
| product offering. Cisco hedges its acquisition bets | | | | expectations. Consolidation in a supplier base or |
| through volume. Ammar Hanafi, director of the | | | | customer pool often alters the economic rational |
| business development group at Cisco says it | | | | for the structure of an industry. Functional shifts |
| counts on two out of three acquisitions | | | | are accompanied by serious margin shifts among |
| succeeding and the remaining third doing just | | | | channel participants. |
| okay. Acquiring people, intellectual properties and | | | | Take notice of the speed in which an industry can |
| specialized skills is important to companies like | | | | experience consolidation. If you are a consolidator, |
| Cisco. They think that even if the acquired | | | | pick the low hanging fruit before another beats |
| technology does not pan out, they have the | | | | you to it. If you are fighting consolidation, take |
| engineers. Generally, any fast growing company | | | | notice of the state of your industry and make |
| like Cisco cannot hire people fast enough and the | | | | adjustments (like strategic alliances) to your |
| acquired personnel are a boon to the company's | | | | business plan if your industry is highly fragmented. |
| progress. Retention of acquired employees is at | | | | · TruckPro, the $150 million sales creation of |
| the heart of their acquisition strategy. "If we're | | | | Haywood and Stephens Investments, was sold in |
| going to lose the people who are important to the | | | | May 1998 to AutoZone, the $3 billion distribution |
| success of the target company, we're probably | | | | king of do-it-yourself auto parts. |
| not going to have an interest," says Cisco | | | | · In June 1998, nine heavy-duty distribution |
| controller Dennis Powell. | | | | companies with volumes of $6 to $37 million, |
| "Cisco doesn't do big acquisitions, the cultural | | | | simultaneously merged and raised $46 million from |
| issues are too huge," Hanafi says. Cisco buys | | | | the public for their brand new $200 million |
| early stage companies with little or no revenues. | | | | company, TransCom USA. |
| While they often have paid extremely high prices | | | | · Brentwood Associates, a venture capital |
| for the acquisition, they seem to do better than | | | | company, during Spring and Summer1998, |
| most with their selection. Between 1993 and | | | | created HAD Parts System, Inc. a $145 million |
| 1996, Cisco bought cutting edge LAN switching | | | | operation, by acquiring three companies in the |
| technologies for a total of $666 million in stock. | | | | Southeast. |
| More than half was spent on Grand Junction | | | | · In July 1998, Aurora Capital's QDSP |
| Networks Inc., which developed fast Ethernet | | | | acquired majority interest in nine heavy-duty |
| switchers. At the time of purchase, it is estimated | | | | companies from FleetPride, a $200 million parts |
| that Grand Junction's annual revenues were $30 | | | | and service operation. |
| million. "Today, the four LAN switching acquisitions | | | | Stated in Truck Parts & Service, "Here the |
| account for $5 billion of Cisco's $12 billion in annual | | | | independent suffers a staggering disadvantage to |
| revenues." "We acquire companies because we | | | | roll-ups. Consolidators have access to large |
| believe they will be successful. If we didn't believe | | | | amounts of capital. The independent |
| in their success, we would not acquire them," | | | | businessperson, however, must primarily finance |
| says Powell. | | | | his growth by earnings retains from current |
| Little known West Coast Texas Pacific Group | | | | operations. New high efficiency service bays, |
| (TPG) has been acquiring at a feverish pace. Their | | | | significant and growing training expenses, data |
| semiconductor and telecom buying spree includes, | | | | processing and communications technology all |
| GT Com in 1995, AT&T Paradyne (from Lucent | | | | clamor for increased working capital. The large |
| Technologies Inc.) in 1996, Zilog Inc. in 1997, Landis | | | | players' acquisition cost advantage eventually will |
| & Gyr Communications SA in 1998, ON | | | | win him all the mega-fleet business and the vast |
| Semiconductor (from Motorola Inc.), Zhone | | | | majority of business from mid-sized fleets. |
| Technologies Inc., and Advanced TelCom Group | | | | Supplementing his parts acquisition cost |
| Inc. in 1999. | | | | advantage, the consolidator will be able to lower |
| TPG banks heavily on intellectual capital. Many | | | | many overhead costs through centralized |
| believe that by being part of TPG, their single | | | | management and volume discounts...Combined |
| biggest advantage is access to broad pool of | | | | savings in parts acquisition cost and overhead |
| talented and well-connected people. CEOs can | | | | reduction should easily exceed 4% of sales." |
| take advantage of TPG's contacts in other | | | | Some of the indicators that an industry (any |
| industries around the world. "TPG has this ability to | | | | industry) is poised for consolidation are listed |
| build a virtual advisory board...that they don't even | | | | below. If you notice your industry has similar |
| have to pay for," says Armando Geday, | | | | issues, it is just a matter of time. Plan now for |
| president and CEO of GlobeSpan Inc. | | | | what is coming. Where do you want to be when |
| Lucent Technologies, Inc. has also been rampaging | | | | the train arrives? |
| through the same market as Cisco. Lucent's 1999 | | | | · A high degree of fragmentation with |
| (January to August) acquisitions as listed in CFO | | | | numerous smaller companies and few, if any, |
| magazine include: | | | | dominating players. |
| · Kenan Systems for $1 billion | | | | · A large industry that is stable and growing. |
| · Ascend Communications for $24 billion | | | | · Multiple benefits for economies of scale. |
| · Sybarus for $37 million | | | | · Synergies that can be achieved by |
| · Enable Semiconductor for $50 million | | | | consolidating companies. |
| · Mosaix for $145 million | | | | · Infrequent use of advanced management |
| · Zetax Tecnologia, $ N/A | | | | information systems. |
| · Batik Equipamentos, $ N/A | | | | · Limited access to public capital markets and |
| · Nexabit Networks for $900 million | | | | somewhat inefficient capital structures among |
| · CCOM, Edisin, $ N/A | | | | companies. |
| · SpecTran for $99 million | | | | · Lack of opportunities, historically, for |
| · International Network Services for $3.7 | | | | owners to liquidate their businesses if they wish |
| billion. | | | | to leave the industry. |
| An advantage that Lucent has over its | | | | Reasons for Business Owners Selling to |
| competitors is access to its 25,000-employee Bell | | | | Consolidators |
| Labs idea factory. As such, they are more likely | | | | The reasons for a business owner to sell his or |
| to purchase technology rather than R&D. Still, | | | | her business are as varied as there are people. |
| Lucent continually reviews the comparative | | | | Usually it is not one reason but several combined |
| advantages of technology and R&D in relationship | | | | reasons that influence a seller's decision. The |
| to its own projects in reviewing acquisition | | | | following list provides you with the general areas |
| possibilities. Lucent executive vice president and | | | | that might drive a selling decision: |
| CFO Donald Peterson says, "In every space in | | | | · First generation owner, without heirs, |
| which we have acquired, we have had | | | | nearing retirement. |
| simultaneous research projects inside. It makes us | | | | · Lack of capital to make necessary |
| knowledgeable, and lets us have a | | | | technological and capital improvements to |
| build-versus-buy option." | | | | compete, within an industry, and with new |
| Lucent wants their units as a hole to do well and | | | | competitors. |
| if acquisition helps that cause, they acquire. | | | | · Flat growth rate in industry. |
| Peterson also says, "We view acquisition as a tool | | | | · Better profitability as part of a larger |
| among many that our business units can use to | | | | organization. |
| advance their business plans. We evaluate | | | | · Centralized buying. |
| acquisitions one by one, in the context of the | | | | |