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Special Report (Enterprise) FINANCE -- ACQUISITIONS
YOU DON'T HAVE TO BE TED TURNER TO MERGE
Small companies can also reap substantial benefits from the M&A game
Warren Struhl, a 33-year-old entrepreneur in Secaucus, N.J., had made a big success of his company, which supplies specialty papers and stationery for small businesses to use in desktop publishing. But his success was creating a serious problem. Some of the original investors in his five-year-old company, PaperDirect Inc., wanted to cash out. After some searching, he found an investment bank willing to buy a 20% stake. But then Deluxe Corp., a $1.8 billion Minneapolis concern that prints and processes checks, offered him more than $100 million for the entire company. "It was an offer I couldn't refuse," Struhl says. In August, 1993, he paid off his original investors fiftyfold.
Now, Struhl is playing the acquisition game himself. His new company, six-month-old Genesis Direct, based in Fort Lee, N.J., was founded as a consolidation play in the fragmented catalog industry. He plans to buy up niche catalogs with sales of roughly $10 million each and provide them with efficient, centralized operations and the technology to make them more profitable. Economies of scale, such as paying in bulk for paper and mailing, will also improve the bottom line. He has already completed one acquisition and has 15 more under way. Selling PaperDirect was what got him interested in buying other companies. "The fact is, it was intriguing for me to be involved in the acquisition process," says Struhl. "That was one of the sparks that ignited me."
Billion-dollar megamergers, such as Time Warner and Turner Broadcasting System or Walt Disney and Capital Cities/ABC, have been making headlines over the past couple of years. Yet there is an equally dramatic merger wave involving thousands of companies a mere fraction of that size. According to Mergerstat, which tallies deal information, some 1,061 transactions of $50 million or less worth $18.4 billion were conducted in 1995, vs. 797 in 1994 and 483 in 1991 worth $6.2 billion. A Coopers & Lybrand survey last summer of fast-growing businesses with under $50 million in sales found that nearly half are planning a new acquisition in the next three years.
Many of the small-business deals are in the same industries as the megamergers, such as banking, health care, media, computer software, and telecommunications. But much of the action involves mom-and-pop companies. A surge of consolidations has transformed such traditionally fragmented industries as waste management, funeral services, auto supplies, and video stores.
Several powerful trends have been driving both large and small deals: A stable economy, low interest rates, and available credit. One of the most important factors, says Michael J. Rolland, a managing director responsible for middle-market mergers and acquisitions at Merrill Lynch & Co, is the high level of stock prices, which is giving owners the confidence and the leverage to expand.
CASH RICH. The buoyant market has been especially valuable for buyers, as Daniel A. Potter, chairman of Video Update in St. Paul, Minn., will attest. He took his company public with only 15 stores in 1994 when he saw the consolidation-wave starting to hit his industry. Potter has acquired 19 video-rental companies and now has 225 stores in the U.S. and Canada. The ability to purchase companies for stock, "has been a very powerful tool," he says.
Buyout and venture-capital firms, flush with money from pension funds and other institutional sources, are also making deals happen. Last year, buyout firms raised $14.1 billion, more than six times the $2.2 billion they raised in 1990, according to Private Equity Analyst, a newsletter out of Wellesley, Mass. "That's the rocket fueling this activity," says Ted Stolberg, a partner at Stolberg Partners, a small-company investment firm in Denver.
Owners of small companies, for their part, are coming to realize that mergers and buyouts are the easiest ways to catapult themselves into the big leagues. "It's harder to be independent than it was 20 years ago," says Carl Thoma, a principal in Golder Thoma Cressey & Rauner, a private equity firm in Chicago that buys and consolidates small businesses. Bulking up gives companies more clout with suppliers, fills gaps in their core businesses, and allows them to afford new technologies that will help them compete locally and globally. In a period when it's hard for companies to improve earnings either by raising prices or further slashing costs, an acquisition can double revenues virtually overnight.
The net result of this activity is that, for small companies, the merger game these days is decidedly a sellers' market. "This is probably going to turn out to be the best time to be selling," says Stephen P. Galante, editor of Private Equity Analyst. Adds Thoma: "A number of years ago, there really wasn't anyone to sell to. Now, somebody will come along and offer you a sum you never dreamt of."
Pulling off a good deal, though, can be a highly complex undertaking. Among the many considerations are whether the buyer's and seller's cultures will mesh. That is especially important in such industries as software, says Maxwell Steinhardt, president of TMS Inc. in Stillwater, Okla., which sells software used in document image processing and CD-ROM publishing and which recently agreed to acquire Sequoia Data in Burlingame, Calif., a maker of complementary software. "We looked at a bunch of companies before we got this deal going," he says. "In the software business, people are everything. You really need to click very quickly or it isn't going to pay off for you like you hope."
SUITOR AUCTION. The case of Plumley Cos. in Paris, Tenn., is a particularly graphic illustration of the fact that deals involving small businesses can be as difficult and complex as the megamergers. Michael A. Plumley, chairman and CEO of the manufacturer of custom-molded rubber components, mainly for the auto industry, took over the company from his father in 1987. Since then, sales have grown from $56 million to more than $125 million. He needed more capacity to expand, plus his customers were asking him for complete engine sealing, rather than just rubber gaskets. "We had a tremendous capital crunch for growth," says Plumley. To take the business to the next level, he wanted to raise more capital. But two of his brothers wanted to cash out to pursue other careers rather than invest more in the business.
In June, 1994, Plumley set out to find a partner. "We decided to see if we could align strategically with someone who could assist us capital-wise as well as have the other product lines we needed to do total engine sealing." He enlisted Furman Selz, a Wall Street investment banking firm. The firm set up a competitive bidding process. After rejecting more than a dozen suitors, Plumley decided in January, 1995, to sell the business for stock to Toledo-based Dana Corp., which manufactures a variety of automotive components and industrial products. Plumley's two brothers got liquidity, and the company got tremendous financial backing and the new product lines it needed to meet its customers' needs. Plumley and a remaining brother stayed on to manage the growth.
But while he is happy with the deal, Plumley says the eight months it took to find a partner and put the acquisition together were tough. "It's a grueling emotional process," he says. "You're selling your life to an extent." Even after the deal closed, he says, "the emotional roller-coaster has not ended, and we did the deal a year ago." While he is pleased with Dana, he says, "after being in a family business for 23 years, you don't just immediately adjust to a new set of parents."
Now, Plumley is on the other side. Last December, he bought Mohawk Plastics Co., which makes molded plastics. It may be a seller's market these days. But, says Plumley, "it's a lot more fun to be a buyer."BY AMEY STONE, WITH DAVID LEONHARDT, IN NEW YORK AND WENDY ZELLNER IN DALLAS