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