Plastics News: How important is corporate culture — can that help or sink an acquisition?
Crawford: What we find very quickly is, those managers who want responsibility rise to the top very quickly. Those people who don't fit in tend to weed themselves out within 90-120 days.
In any acquisition, we need to get rid of the ``we-they'' feeling right away. This isn't a Goodyear plant or a Rockwell plant — this is a Cambridge plant. If you really make it a big deal in the first 90 days, if you make your expectations clear about how we expect the business to run, then the people who fit your culture, who thrive in your culture, can rise to the top.
Really, the key to doing turnarounds is management. Good managers will find a way to make a horrible situation work, and lousy managers will find a way to take a successful situation and screw it up.
We emphasize what we call bench strength. You have to be able to plug a management hole with somebody that you know, somebody who knows our system, and who we know their strengths and weaknesses.
In some acquisitions we replace everybody in management, and in others we replace nobody, and in fact we may take some people to help strengthen us.
Wambold: A lot of our growth has come from acquisitions from pretty large, well-known companies with very strong cultures. I think culture has been an issue for us right along.
I think it's an issue that, to some degree, we've been successful with because we didn't spend all of our time on it. We worked on it appropriately, but we tended to spend most of our time working on results, which is what our culture wants to be: bottom-line results.
As I listen to this group, I'm sort of fascinated. I think if each one of us wrote a couple of sentences on what integration means, I think you would find that we think integration means a lot of different things.
If you're integrating a company with strongly decentralized systems and processes, it means one thing. If you're integrating a company where things are strongly centralized, it means something quite different. The people react to this cultural phenomenon in a major way, based on what it is you're really trying to accomplish.
In our case we're very centralized. We have to be, based on what it is we're trying to accom¬ plish with our customer base. When you have a spread of plants all across the country, you have to have a bureaucracy, if you will, to be able to manage that. In our case, integration means pretty tight integration. It means: ``We bought your business; customer service is now going to be over here.'' That's how it works.
It means people are confronted, all at once, with very big changes in the way they operated their business. So it can be quite a challenge. That's one of the reasons that we have gone after businesses that are successful, that do have good management, because in fact you need really good people to be able to do it.
It's also one of the reasons that when we integrate a business, we automatically combine it with people that are in our other business. We automatically put people in, take people out, shift the mix around, in order to get those processes as well-understood and in place as quickly as we possibly can.
I think you make it very clear how you operate, and you make it very clear what the important things are. In our case it's bottom line, it's results. But I think the journey is a long one.
McKinniss: Most firms that I've bought have been entrepreneurs. The first decision I try to make when I walk through for an interview is, is there somebody there that's going to be able to pick up the ball and run with it? Because most of those guys that have run smaller businesses don't have a whole management team. And nine times out of 10 the owner isn't going to stay, no matter how you work the contract.
So you hope there's somebody sitting there who knows the sales side and the customer base. That's what I look for, because the manufacturing operation is not as critical to me as the customer base.
Spell: You have to be so careful you don't do anything to upset the apple cart. That's what we're most scared of.
You have to be so careful you don't do anything to alienate the workers, the management, the customers. So we always try to err on the side of being conservative, moving slow, don't make any mistakes, understand the business, get to know the customers, before you do anything.
It never happened to us, but I think the worst thing you can do is take a decent business, and on our watch destroy it or run it into the ground because of some decision we made or some error we made.
Harbison: One thing that never ceases to amaze me is that in an entrepreneurial company, how little an understanding of cost structure there really is and what products actually cost.
When we talk about culture change, we try to bring people into a more knowledgeable position. When you sit down and run their book of business and apply a real costing analysis to it, products that they think they're making a fortune on, they're actually losing money on.
And products they want to allocate excess cost to because they don't like them are actually the most profitable part of the production.
When you start putting this information on the table for them, they are absolutely amazed, astounded, and probably don't believe you, in a lot of cases. That's probably the biggest wake-up call we get on any acquisition.
Buechler: First of all, there's no substitute for a good plan, so we try to make sure we have a plan when we walk in, the day that we close.
But the other big item is what we call the personal-touch treatment. We meet with all of the shifts the day that we close, no matter what time it is. We meet the people that we're going to be working with. And we tell them the plan.
I firmly believe that for most people, one of the biggest concerns is the unknown. If they don't know what's going to happen, they start to create a concern in their mind.
But if you meet with them, you say, ``Here's the plan: The company's name is going to be X, your benefits are only changing by this, or they're not changing at all. Here's who is going to be who is in charge of the operation.''
We also try to convince them that they don't work for me, they work with me. If people feel comfortable, and part of the team, in most cases they'll give you everything they've humanly got.
We try to meet with all of the larger customers too, personally, right after the transaction closes, so they know who we are as well.
Durham: We've had that same experience at Huntsman. You try to spend a lot of time communicating, a lot of time being very candid. If you don't know an answer, just say that you don't know, rather than give an answer that you later have to change.
I have a letter that I send to every employee, that really lays out who we are as a company, what our values are, what we are trying to accomplish, what we expect, the type of performance we expect. I don't think you can overcommunicate in that process.
I think it's human nature to fill in the unknown with a negative.
You have to have a plan when you go in, you have to do the homework upfront. I like to interview every member of the top management personally, and cross-check my impressions with other people in that organization.
I think I make people paranoid, maybe, asking questions that way. But I find if you cross-check enough, you get a pretty good perspective on what a person can do and what they can't.
You have to go by dead instinct; you have to find people who you think are straight shooters in the group, and you've really got to dig. But I think spending that time really pays dividends down the road.
Wambold: There's one thing that has amazed me in many of the deals we've made, and it really has been a good amazement. We make a habit, as soon as we've done the deal, to sit down with the company managers and say, all right, here's the basis for this deal.
We lay it all out on the table: This is the kind of economics we have to have, this is how we've analyzed the material you gave us, this is how we think we're going to get these kinds of synergies. And you pick the best people around the table and you say, what do you think?
What has amazed me is that the list has changed every time we've done it. It doesn't surprise me if the list is 40 percent different from the list we started out with. And it's always better. We've beaten our numbers every time.
There are some really smart people that come along with these businesses that know a lot more about what their problems are than you do.
When we bought Amoco Foam Products Co., we had all kinds of ideas about the way we were going to save money on thermoforming. And we were right about a lot of them. But they came up with some ideas that we never had on the list, bringing some real benefits to the bottom line.
The plan is important, and flexibility on the plan is even, probably, more important.
Plastics News: On the theme of culture, what's been your experience in international acquisitions?
Crawford: There's a huge difference in my mind when you go outside North America. It's one thing to turn a company around when you speak the same language and know the rules of the game. It's another thing to do it when you can't talk to anybody.
No. 1, you want a good company. And depending on where you're going in the world, it's very difficult to find a good company. Particularly when you go over to Europe, those companies are very few and far between. You've got to pay an exorbitant amount of money.
And then, if you even have a plan that you want implemented, the implementation of the plan is very difficult because they have social laws that we've never dreamed of. Particularly if you're trying to do business in a place like Germany.
We know we need to be there. So far we've covered it with joint ventures.
I think if you look at the automotive plastics suppliers today, a lot of the guys who have done major acquisitions in Europe are in trouble today as a result of those acquisitions. It's a different world, a different ballgame when your hands are tied.
Durham: I used to say that any acquisition you make overseas is always going to take longer than you think it will, it's going to be less profitable, it's going to cost more than you think.
It's tougher to travel and be there when you need to. If you take all the variables of what will make a successful deal, it's just tougher all around.
I think a lot of companies get caught up in the glamour, if that's the word, of expanding internationally, and they generally underestimate what it takes to be successful.
In our company, unless you have a specific customer or a specific opportunity that provides a compelling reason to be international, then we're not interested.
Wambold: There's a real strong social contract in Germany and France between employers and employees. A lot of it is legislated. A lot of it is not, but just because it's not doesn't mean it doesn't hurt you.
We've had pretty good success internationally, though. If you want to be there, you need to think of it as not being a satellite of what you do. And you'd better go with the same quality of management team there, and have the same trust you have in the team that you've built in the United States. Because you really need outstanding people.
Plastics News: When do you walk away from a deal?
Buechler: I think any time you have a concentration with one single customer, that can be a concern. That's probably not worth full price.
The worst thing that you can do is go in and say that you have to do a deal. Then you get yourself in a bidding war. And the next thing you know the whole thing is getting out of hand.
McKinniss: Early on, in any acquisition, the first thing I get involved in is, is there any environmental problem? I know a couple companies that really took a bath on environmental prob¬ lems. You can run into a million dollars there very quickly.
That will kill a deal quicker than anything. If it smells, I'm gone. And I've had five or six acquisitions that I've looked at in the last two years where I've walked because of environmental problems. That's my first question if I go look at a plant: Do you have any solvents? How do you dispose of your oil?
Wambold: Do you have an old pond around? If you've got a pond, God knows what's in the pond or at the bottom of it.
Spell: It's not a money issue. It is money — but it's the stigma of the problem, and having to be responsible and address it. And taking the time. This can drag on for years.
Plastics News: Have you ever bought a company at an auction?
Wambold: Sure, it's really no different. You have to know the value of the business, know how it fits, know what you can get.
If you know the value of the business, an auction is nothing more than any other way of buy¬ ing the business. Other than it typically drives the price up, rather than down.
Durham: There is so much money floating around right now trying to buy businesses — financial buyers, LBO funds — that unless you can really demonstrate some synergies, unless you can really put something together that can create real value, then it's pointless to pursue it. Because an auction is just going to drive the price up to a point where economics won't make sense any longer.
Wambold: Prices are pretty steep now, Rick. We have slowed down our acquisitions. We've done some deals that we've been involved in for a long time, trying to bring them home. But prices were pretty high during 1998. A lot of it has to do with the amount of money chasing deals, the number of people that want to be in it.
Durham: There's a lot of pressure to put money to work. A lot of LBO firms are saying, this will be the first step in my roll-up, so I'll overpay for this one because the next three, I'll be able to get my synergy.
Plastics News: Does that strategy work?
Durham: I don't think so. I'm glad it's not me that's trying to throw too much money at deals. I would hate to be in that position where you've got that pressure.
Plastics News: When does it make sense to do a hostile takeover?
Durham: Generally, never. I think the worst deals are generally hostile takeovers. But if there's an opportunity to buy a public company, and the management doesn't have any interest in selling the business, but it's still attractive and you don't think there are a lot of competing bidders, then I think it makes sense. I think it's usually a bad way to buy a business. I think even hostile takeovers end up being friendly takeovers in the end, or you don't buy it. It's very, very seldom that somebody acquires a business and doesn't work out a deal, ultimately, with the board, with management, and so on.
Plastics News: Then is Applied Extrusion Technologies Inc., which Huntsman made a hostile offer for in 1998, completely out of the picture?
Durham: Opportunities are never completely out of the picture. You have a strategy of what you're trying to build as a company. You look at an opportunity that would be complementary to what you're doing, and we feel like it would be a great fit, then it's an issue of at what price the shareholders will be attracted.
Plastics News: What M&A mistakes have you made, and what have you learned from them?
Harbison: Don't give anybody you really need a lot of money at closing.
Durham: I think over time, if you're a company that acquires a lot, you get a lot better at it. We have something of a database of deals. I always like to say: What did we assume upfront, what were the projections we made, what were the synergies we expected and what did we really achieve? Go back and do a post-audit and look over time at where you tend to overshoot, where you tend to undershoot, and where you tend to miss. If you develop the discipline of doing that, you learn a lot and approach a new opportunity with a more level head and more realistic view of what really is achievable.
I think sometimes people get excited about the deal, and they get emotionally involved. They start putting on the rose-colored glasses of what's achievable.
I'd say, in general, we've come out pretty close. But certain things early on we'd tend to overestimate or underestimate. I think you get better over time.
Harbison: I don't think a lot of people who haven't done multiple acquisitions have any idea what's really involved. It is a business unto itself, and it requires its own team to research, do the due diligence, put the financing and capital structure together.
It's not something that you just say, gee, I'm going to take the CFO or the chief operating officer and we're going to go out and make some acquisitions. I think that's a huge mistake. A number of companies we've looked at tried that; that's the reason they are for sale. They've had ill-fated acquisition attempts, and it's pulled them right down the toilet.
Plastics News: How do you create the team within your company that does acquisitions?
Wambold: We have a very simple philosophy — the guys who are going to run it are involved in buying it. We have a detailed acquisition plan. Each functional leader in our group knows exactly what their piece is, including the law department. We meet on a regular basis, around a table like this one, to go through the list and see where we are and what we've learned.
We always learn something. We try not to learn it twice.
Spell: You've got to have an outstanding legal counsel and accounting firm. I think that with a lot of laymen who don't do deals a lot, that's a critical mistake.
The law firm and the accounting firm that we've used over the years know how we operate, they understand a little bit of the business. That just makes it so much easier. Secondarily, we have a bank that we bring in early in the process, if it involves due diligence, understanding the business, understanding the people. That's critical too.
McKinniss: A lot of it depends on the size of the firm that you're trying to acquire. If you've got a great big law firm with a whole bunch of people, but you're working on a smaller acquisition, then you're probably not going to get a good job done on the smaller acquisition. You need to get guys that are relative to the size of the business you're trying to acquire.
I probably, on my last deal, didn't do as well, legalwise, as I think I could have. I would have been better off to add a second lawyer to that scenario. And I broke my own rule, because I've always said you never go to court without two lawyers: one you know and one you don't know. I've done very well doing that, and this time I didn't do it, and I'm kicking myself for it.
Crawford: There are a lot of risks you can't quantify, particularly in automotive, specifically related to the launch cycle. Every three or four years we have to launch a new product. And it costs a huge amount of money to launch a new product. You can go through $4 million or $5 million on a significant launch like that.
And with the automobile companies, even if your product is perfect, and you're making a body panel or an interior panel, if it doesn't fit with the panel next door, you've got a big problem. It doesn't matter if yours is perfect.
Those are the areas that you can't quantify, that have come back and bitten us the worst. And I don't have a good solution for it, other than working harder at it.
The other un~quantifiable risk that you have, if you're a growing company, at least in the case of our company, is that you outgrow your management team. The guy who's really good at running a $100 million business is seldom good at running a $1 billion business, or even a $500 million business. You have to continue to develop new management that is appropriate to run the business. If you're trying to run an international business, for example, you'd better have somebody with international experience, or you're going to pay a lot of money for that knowledge.
If you've got to go outside your circle of knowledge, in terms of managers, and you end up bringing somebody in who is not a good fit, who doesn't reinforce your culture, you can create huge problems across your organization. You can lose people. You can decide to shut plants that shouldn't be shut.
Wambold: Whenever you buy a business that's being presented to you by a broker or an investment banker, or someone else outside of the business, beware.
Beware of the material that you're being given to evaluate the business on. I don't mean that it will be wrong. But it obviously is professionally put together to paint a picture in a certain way.
Crawford: All the sales charts look like hockey sticks [with the projected sales really taking off].
Wambold: Invariably it's the new product. The new product sizzles. Almost every package that I've been through and every deal that I've put together, there's always been this:
``But this new product that we're working on right now, which you can see ...'' — and they hand you something — ``it's going to be on the market in 12 months or eight months ...'' and it is supposed to be everything in the whole world.
Almost by rule now, we give those nothing. If you really believe in it, you can give them some sort of earn-out on the new product.
But almost across the board we don't give credit in our price for anything we can't count at the time we're doing the deal. Especially if it's a whiz-bang.
Plastics News: Will merger mania continue?
Crawford: I think automotive is ahead of the curve.They've taken consolidation to an extreme. The OEMs are sitting there scratching their heads and saying, this was our idea? Now they have these international suppliers that can't fail. If they do, you'll see General Motors, Ford and Chrysler running seating plants, because they can't make the car without the seats. It's gone a lot further than they ever dreamed it would go.
My guess is that you're going to see, in automotive, a retrenchment. I don't think it will ever go back to what it was. But I think rather than two or three, you might have five or six suppliers of some products.
The other problem that I think they're seeing in spades is, the idea of having global suppliers sounds great. But very few companies are able to manage a global enterprise that can compete with the local people. There are very few successes.
Harbison: Once you get a handful of companies out there that have the geographic locations they need to serve on a North American basis, and the process capabilities and technical expertise, then a lot of the smaller companies lose value. Because you sure don't need their equipment. There's so damn much equipment out there, no one knows what to do with it all. So all of a sudden, from a marketing point, what's going to drive the next acquisition? There's no value in buying another guy unless he has a superior customer base. And that customer base is going to be driven to the larger companies.
There's a lot of opportunities for smaller guys to exist out there. But you're going to wind up with a handful of larger companies and then a lot of local or small regional guys that are more specialized.
The thing that's really going to surprise people is the diminution of the value of the players that are out there now that may be $20 million or $30 million or $40 million in sales. They're going to find out that they've got nowhere to go in a few years because they don't bring anything to the table.
Wambold: But the history of the world, not just about business, is about players becoming large, then new people coming out, innovating around them and replacing whatever it is they do.
Consolidation will continue until some smart people come up with a way of changing the name of the game and doing something very differently.
Look at Amazon.com. Don't think it can't happen in the plastics industry, folks. It can happen. It's just a big supply chain. Somebody will think of clever ways.
The trick of being big — and staying big — is trying to make sure you figure them out before they do.