Graham Packaging Co. LP moved carefully before it made last year's biggest acquisition in the plastics industry - buying Owens-Illinois Inc.'s blow molding assets.
Still, the deal held some unexpected surprises. A top Graham executive shared those lessons at the Plastics News Executive Forum, held Feb. 28 to March 2 in Litchfield Park.
Buying a company can mean solving big problems on short notice. For example, Graham needed to move about 100 workers from O-I's plastics operation near Toledo, Ohio, to Graham's campus in York, Pa. Not only did Graham help those workers find homes in York, the company also bought many of their houses in Ohio, said Mark Leiden, vice president of global marketing, planning and investor relations.
Now, Graham is working with brokers to sell those homes.
``There were 85-90 houses on the market at once in Toledo,'' Leiden said. ``Never would I have thought we'd be in the real-estate business.''
The sale of the O-I bottle business to Graham's majority owner, New York-based Blackstone Group, had been rumored for months before the papers were final. That slowness was purposeful, Leiden said.
Graham's model had always been smaller plants located on-site or near customers' facilities. O-I's plants had excessive management turnover, a troubling sign, Leiden said. There was some overlap with customers that had to be smoothed. And handling the different cultures of 1,600 employees that were absorbed within Graham was no small problem.
All that needed to be worked out in 60 days, the time earmarked by Graham management to make a decision. ``That brings its own stress to an acquisition,'' Leiden said.
Due diligence was detailed, with Graham executives considering every product and piece of machinery. Executives visited customers - a must to gauge attitudes about the sale, he said.
Meanwhile, in Minnesota, John Bonham of Thermotech Co. has been going through similar acquisition heartburn. Bonham, president and chief executive officer of the Hopkins, Minn., injection molder, is considering buying a company or forming a joint venture in China.
Recently purchased by Boston-based equity firm Audax Group, the automotive supplier wants to hike sales from $75 million last year to $200 million annually in the next few years, Bonham said.
``$200 million is a threshold for us to continue to play,'' he said. ``There's going to be a huge shakeout, and we want to stay in the game.''
Bonham and Leiden were part of a March 1 mergers and acquisitions panel that explored both sides of the purchase equation. While a deal generally could be perceived as good news for the firm footing the bill, the speakers cautioned that some intangibles must be considered first.
Acquisitions are critical for continued success, especially for those grappling with globalization, labor costs and consolidation pressures, said panel moderator David Solomon, managing director of investment firm Goldsmith Agio Helms in New York.
Jeff McKenzie, managing director of Los Angeles investment firm Houlihan Lokey Howard & Zukin, said, ``Many buyers don't realize how [consuming] in terms of time and how emotionally draining the process can be. For a seller, it's critical to find the best buyer for your business and not just the highest value.''
Bonham, for instance, looked at several hundred potential acquisitions during the past five years before settling on two or three.
Audax bought Thermotech on Dec. 31, 2003, and Thermotech soon found that China needed to be at the top of its radar screen. The company hopes to have a manufacturing operation in China this year, Bonham said, but it prefers to mitigate risk by not rushing into a deal. Thermotech had exclusive deals with two Chinese companies, only to see them both fall apart: one seller got cold feet, while another decided that now was not the right time to sell.
The company has spurned North American add-ons, especially companies too similar to Thermotech. A purchase should add some value, either in product or capabilities or geography, he said. And new customers are key.
``I don't know how people sleep at night with one customer having more than 50 percent of their business,'' he said.
Thermotech now is looking at partnering with several companies in China owned by Audax, while Bonham continues to scour the area for other opportunities. He said he is going back to China soon to do more research.
Acquisitions in China have absorbed time for another panelist, equity firm Crimson Investment of Palo Alto, Calif. The company specializes in Asia-based purchases and has offices in Taipei, Taiwan, and Shanghai, China. Managing Director Steven Dollinger recommends setting up a wholly foreign-owned enterprise instead of trying to form a joint venture. A greenfield facility built from the ground up is the best approach, he said.
Otherwise, the risks are great, he said. Many state-owned companies come with a lot of baggage, and a company faces the threat of its intellectual property being stolen. ``There's not a lot to buy [in China],'' he said.
McKenzie said the market has changed in North America: No longer is an initial public offering the way to raise money. ``It's no longer glamorous or sexy to be public,'' he said. ``It's not always a good liquidity option.''
Equity groups hold about $200 million to $300 million of pent-up funds, and the money is looking for a home, he said. Meanwhile, strategic buyers, such as competitors in the same business, have become less aggressive and more selective.
Firms that are performing well can command multiples of six to eight times earnings before interest, taxes, depreciation and amortization, McKenzie said. Those multiples have moved up 1-2 points from just a few months ago.
``Corporate buyers only can play when they really feel the business fits,'' he said. ``For an equity group, the sole purpose is to do transactions.''