Last month’s announcement of the dissolution of the partnership between American Sanitary Supply (AmSan Inc.) and Triple S — its buying group affiliate for the past four years — added to suspicions that the jan/san distribution giant is struggling under the fiscal weight of 41 acquisitions, all of which occurred in the five years preceding the onset of the economic slump still felt today.

A change in leadership (John Muthe recently stepped down and Michael Mulhern, a foodservice industry vet, stepped into the CEO position), plus the relocation of AmSan’s headquarters to the Chicago area also fueled speculation and rumors regarding AmSan’s financial health.

Executives of the privately held company are reticent with regard to reorganizational details, as well as the primary catalysts for the string of upheavals.

AmSan represents a recent era of aggressive consolidation characterized by a few large conglomerates buying small and medium-sized companies at a startling pace (“rolling” them up). Recent less-than-positive business revelations regarding AmSan and other big buyers might imply that consolidation frenzy is all but dead. Not true.

Seemingly unnoticed in recent years are the host of middle-market players that have been acquisition-minded. These players, albeit behind-the-scenes, have left their own mark on the industry and just might represent the most logical and stable model for jan/san industry consolidation.

Companies such as Perkins Paper in Taunton, Mass., Supply King in Neptune City, N.J., Kellermeyer Co., in Toledo, Ohio, and NASSCO, in New Berlin, Wis., have acquired at least two and as many as six companies in the past three to six years.

A World Apart
This article references two types of consolidation: roll-ups and middle-market acquisitions.

The term consolidators will be used with reference to roll-up buyers, while middle-market players fall under the category of strategic buyers.

Consolidators, in recent years, have turned much of their focus to consolidating or “rolling up” middle market companies, according to research published in September 2002 by Cherry Tree, a private investment banking firm headquartered in Minneapolis.

“Consolidators’ business strategy is to aggregate similar companies across a wide geographic area. Their premise is that by consolidating similar companies, they can achieve stronger national branding coupled with operations that are more efficient...The ultimate strategy is to consolidate a critical mass of companies in a short period of time, then create liquidity with an IPO (initial public offering),” according to Cherry Tree’s report.

Strategic buyers, according to Cherry Tree, are companies that make acquisitions with the expectation of achieving a competitive advantage in addition to their current assets. Strategic buyers bank on the synergy created with the merger of the two companies providing a lasting return on their investment.

“Because they can achieve synergistic returns, strategic buyers have the capability to realize the greatest value from acquisitions.”

While both strategies present implementation challenges for the buyer, those inherent to the roll-up strategy, in many cases, appear uniformly across various industries, says Scott Benfield, president of the Chicago-based Benfield Consulting.

“If you look at distribution, roll-ups, other than maybe just a few, have almost totally failed to deliver shareholder value many years after the roll-up,” he explains.

Because there are relatively few fixed costs in distribution, Benfield says roll-ups don’t make as much sense as they do for, say, small manufacturing companies that when combined, allow the buyer to eliminate a large amount of duplication.

Often in roll-up situations, a buyer comes in with a financial background, looks at the industry, and compares it to others where roll-ups have worked. But, Benfield says, that’s a mistake.

“Distribution at its core is still different enough from manufacturing and open-store retailing that it doesn’t conform real well.” In the past 10 years, Benfield says he has seen very few distribution-sector roll-ups that have been viable in the long run. Most often, roll-ups are driven by the investors’ foreseen financial gain and characterized by a buy, build-up and sell succession of events.

Middle-market, strategic acquisitions, on the other hand, hold one of the biggest keys to success: they involve closely held companies banking on duplicated procedures that can be consolidated. Also, a singular drive for substantial financial gain is often a lesser motivator.

“Although many acquisitions take the form of a purchase of assets, the real value lies in preserving and carrying forward the customer, vendor and employee relationships of the acquired company,” explains Gene Melzer, president of Nassco Inc., of his own company’s acquisitions.

State of M&A
Corporate merger and acquisition activity has slowed considerably since its 1999 peak. Middle-market transactions, however, have been the least affected of the market segments, according to Cherry Tree’s research.

“In spite of the overall slowdown, transactions in the middle market continue to account for nearly half of all M&A deals across the country,” the report states.

Merger and acquisition activity has remained steady, if not vigorous, in the jan/san community during the economic slump. Acquirers list product diversity, seller willingness, price, efficiency, growth opportunity and complementary company cultures as key reasons they’re attracted to companies.

Perkins Paper (known simply as Perkins) of Taunton, Mass., is one distribution company that has been extremely proactive in its acquisition strategy — regardless of the economic conditions. Larry Perkins, executive vice president and COO of the company, along with his brother Gary Perkins, president and CEO, uses growth through acquisitions to supplement the company’s own internal growth. Of the 17 companies acquired, six have occurred since 2000.

Many of the acquisitions have extended the reach of the company’s product mix, says Larry Perkins. “Most of them are foodservice, which includes janitorial products,” he says. Other areas include restaurant equipment and supplies and bakery lines. These areas complement Perkins’ core business — sanitation products and foodservice paper goods.

“We’re always looking to create acquisitions,” says Perkins.

Since 1996, Kellermeyer Co., a Toledo, Ohio-based distributor, has acquired five other businesses, says the company’s president, Don Kellermeyer.

“The reason someone like myself works is we’re paying reasonable prices for the companies, and we buy in our market and get rid of all the [duplicate] expenses within two to three weeks,” says Kellermeyer. After consolidating accounts receivable and the purchasing and bookkeeping departments, but keeping the sales, customer service and the repair departments intact, overall cost is reduced while profitability is increased.

Supply King of Neptune City, N.J., has acquired four companies in a six-year span, says Henry Levenstein, vice president of sales and marketing. The acquisitions have tripled the size of the company. Many of the acquired companies are considered friendly competitors, Levenstein says, and acquisitions are as much of a result of unexpected opportunities as they are strategic.

If distributors can structure deals so that they acquire businesses without a lot of overhead costs, it’s a no-brainer, Levenstein says. He mentions one acquisition where, “we took all their stuff and just moved it into our building. We got rid of the overhead, and the gross profit went right to the bottom line.”

Due or Die
Finding a willing seller is one thing, but uncovering a potential acquisition’s strengths and weaknesses requires heavy-duty detective work.

For two companies to meld successfully, there has to be a viable link in strategies and visions between the two cultures, says James Mulick, president of the Pittsburgh-based Ameridan Resources.

When expectations differ from a situation’s actual outcome, the acquirer risks losing key employees, who often take their customers with them when they go, he adds.

Mulick says distributors often spend too much time concentrating on the financial details rather than considering the big-picture value equation in terms of the acquisition’s impact on the company.

“You have to have an idea of how you’re going to create value through an acquisition,” he says. Then the acquirer can put together a plan to execute the deal and integrate the two companies.

Short-sighted, incomplete evaluations of potential purchases can produce disastrous results — namely, paying too much for what you’re getting.

“You have to have an understanding through the process that there’s a thing called escalating momentum,” Mulick cautions. “Once you start investing time and money and are committed to getting this done, if the people on the sell side are good negotiators, they can lure you into paying too much. You have to have the discipline to walk away.”

Above all, Mulick recommends that acquirers have a rigorous, structured and disciplined evaluation process in place; Mulick uses the term due diligence. He defines it as: “the process by which you make sure that what you think you’re getting is actually what you get.” Hiring an advisor to work with a company’s attorney and CPA can help acquirers get to the bottom of the financial, strategic, competitive, and legal costs and benefits.

Plan of Transaction
There are a number of ways buyers can get their hands on hot prospective sellers — brokers, cold calls and word-of-mouth. The final method seems to be the most popular match-up pattern in the jan/san industry.

Once talks with a willing seller are underway, finding the value of a company can be a painstaking process, often laced with emotion for the seller. For the buyer, the right price means accurately translating the assets of the company into a monetary value — seldom a cut-and-dried figure.

“There’s a lot of effort that goes into the pre-purchase planning phase, the gathering of information and learning about their staff and their operations,” says Melzer. He has acquired two sizeable competitors since 1997, both of which were merged into his existing location in New Berlin, requiring expansion of his warehouse and office facilities.

There are many ways to gather information. Some use questionnaires to collect data on everything from sales to finance to warehousing and purchasing — every facet must be examined.

Melzer’s first step in the negotiation process is the execution of nondisclosure and confidentiality agreements with the prospective seller. Then he begins to cover all of the bases including: the company’s profitability, its vendors and product lines, its customer base — account sizes, ordering patterns and geographical distribution, and its employees and corporate culture. “All those things are important in making a well-founded decision,” he says.

Personnel issues include an examination of the stability and longevity of the work force, the performance of the sales staff, pay structures and the benefits package. But the analysis doesn’t end with the tangible measurements.

“It’s not textbook,” Melzer notes. “You’re dealing with personalities and corporate cultures. In my opinion, it’s very emotional for an owner to give up his company. In many cases, it’s been part of them their whole life and perhaps several family generations. You have to keep in mind the emotional side of an owner making a decision to sell the company.”

Add Ingredients, Blend
If there is to be a work force reduction, do it quickly. Combine inventory as quickly as possible, and waste no time in making any new technology available to all employees.

Kellermeyer says of the recently acquired Bockstanz Bros.: “In three weeks time we had their warehouse emptied and in Bowling Green, and we had their computer systems up.”

Personnel challenges are always a touchy issue with acquired companies. “They’ve got to integrate into our culture. That’s the most difficult part,” says Melzer. “They’re used to doing something one way in a familiar environment, now they need to make changes and march to our drummer, so to speak,” he adds.

Perkins says earning employees’ trust in an acquisition is always a challenge, and he relies on help from key staff to make the transition easiest. Employees new to the acquirer’s culture must also be trained on the systems on which they’re required to work.

“We never make the same mistake twice,” says Perkins. With one of its acquisitions, the company underestimated the time it would take for salespeople to learn the ins and outs of the laptop computers they were using.

“Now we have a better sales training program in place. Sometimes it takes longer than you expect and you have to put more resources in place to get it done,” Perkins says.

The distributors interviewed say they mainly leave it up to individual salespeople to tell their customers about the change. Some then follow up with a formal letter addressing any new or changed services, such as changes in products or delivery areas.

“You need to make it as transparent as possible to the customer,” says Levenstein. You don’t want to change delivery dates, phone numbers and contacts,” he says. “Even though there is some transition you want to make sure it doesn’t hit them in the face.”

More of the Same?
For distributors looking to sell in the coming years, plenty of eager potential buyers await the word. According to Fleet Capital, a Connecticut-based financial solutions provider to middle market companies, acquisitions will gain momentum in 2003. “Potential catalysts include record-low interest rates, bottom fishing, reduced seller expectations and the fact that there’s more than $100 billion of available private equity capital on the sidelines.”

“I think within jan/san you’re going to see two primary trends: one is toward super-regional players where the pure jan/san distributors are going to merge together to become super-regional players,” Mulick predicts. The other trend will involve the overlap of products in the marketplace. “Other companies will continue to handle more and more jan/san products and some non-jan/san companies will buy jan/san distributors.”

Inherently Different
“There are a lot of differences between roll-ups and those companies that are carefully buying businesses,” says Benfield. “They’re pretty predictable cycles.”

As for AmSan, the industry will simply have to wait to see how things shake out. The company rolled up, but never went public (because of the economy or other factors). That might be where it missed the boat, since at one time, it was the goal. In an article published in early 2000 in the Triangle Business Journal, a reporter asked then-CEO John Muthe when he planned to take the company public. “As soon as tomorrow,” he responded. For AmSan, that day has not yet come.




POSTED ON: 4/1/2003