Global Fastener News

1998 FIN – Consolidators: Acquisition Pace to Pick Up

March 28
00:00 2014

March 31, 1998 FIN – Members of the Western Association of Fastener Distributors got the answer that they were looking for as a panel representing three companies vying to buy North American fastener distributorships told about their acquisition plans.

Distributors kept asking, “What are you paying?”
The first response was “1 to 100 times EBIT [earnings before interest and taxes].”
Later it was “the textbook numbers would be 4 to 8.”
Finally distributors’ curiosity was satisfied when Questron Technology Inc. CEO Dominic Polimeni gave them a specific number.
“As a public company it is public record,” Polimeni explained. “We’ve been paying 5 1/2 to 6” he said of four deals closed in 1997.
Brian Kerester of Distribution Dynamic Inc. provided some approximate examples of what those multipliers yield: DDI purchased Allied Bolt for $1 million, Beaver Bolt for $9 million and C-Tech Systems for $45 million.
Any numbers mentioned at the WAFD spring conference include lots of “ifs,” Ben Taber of the Germany-based Würth Group said.
All three companies said that are looking for well-managed, profitable acquisitions where the owners will stay in place. None of the panelists are looking to buy a deteriorating or turnaround company.
Taber said his accountant calculates an offering range based on the raw numbers and the Taber prepares a bid based on such subjective factors as number if years in business, appearance, future plans, succession plans, geographical locations and “golf handicap.”
The list of “ifs” includes pulses for a distributor located where the parent company is not represented or with “significant relationships” with key customers or suppliers because they add “strategic significance” to the corporation.
Conversely a distributor with a large exposure to a limited number if customers may be offered a lower purchase price.
And the panel of buyers mentioned numerous other questions: does the distributor have a toehold into a market where capital from the parent company can help grow the business? Is it a growing company? What savings can be realized in a consolidation? Does the company own its real estate?
Even the EBIT calculation would be altered by certain circumstances, such as distributor who has been paying himself a $1.5 million salary.
A history of suits or liens affects the bid, Taber noted. “Mr. Würth just shudders” at the litigious U.S. society and wants to avoid it.

Consolidation: “A Natural Process”
Consolidation of an industry “is not driven by us,” DDI’s CEO Larry Del Santo said. Customers are demanding more service for less cost. They are wanting to deal with fewer suppliers. National and international end users are wanting the same distributors to provide service in all their markets.
Hospital suppliers are down to three or four major firms, and the number of office products suppliers plummeted from 1,300 in 1980 to five today.
“We think [economies of] scale is critical,” Del Santo said. “We’re all frustrated with Fastenal. You must integrate.”
Fastenal has approximately 560 stores to gain buying power.
Taber predicted that within a decade there will be “eight to 10 large players” in North American fastener distribution. “There will always be fragmented players. I don’t think eight companies will be controlling 80% of a $9 billion industry.
Del Santo predicted that fastener industry consolidation will proceed at twice the speed of the office supply industry during the past decade.
“There is a lot of cash out there” looking for sellers, Del Santo observed. “Within three to five years there could be five companies doing a billion dollars in sales.”
However, “there will always be a place for local, regional distributors,” Polimeni said.

The Players
Companies on the panel were Würth, DDI and Questron. In addition, Pentacon Inc., which just went public on the stock exchange two weeks earlier, and Porteous Fastener Co., which has made several acquisitions in recent years, attended the conference.
Würth had $4 billion in sales last year and $400 million in profits, Taber reported. Two-thirds of the profits came from outside Germany.
Würth is currently composed of 143 companies in 59 countries and has been growing at a 17% annual rate. Würth added 3,000 new jobs in the past year.
During the 1990’s Würth has had eyes on the world’s largest market, North America. Würth has made five high profile acquisitions.
Distribution Dynamics Inc. has made six acquisitions in two years; starting with Los Angeles based Century Fasteners through Texas based Rainbow Fasteners last month. All acquired companies focus on value-added services to OEMs. Corporate customers include Harley-Davidson, Winnebago, Polaris and Cummins.
DDI expects to be at $200 million in sales by the end of this year, Del Santo said.
DDI seeks to blend senior management experience in corporate development and finance with distributors who know the fastener business.
In addition to buying distributorships, DDI has added five new facilities this year through internal growth.
Boca Raton, FL-based Questron was experienced in electronic hardware distribution and got into fasteners because Quest Electronic Hardware was the fastener division of Arrow Electronics, where Polimeni was once corporate counsel.
“It is no longer just distribution, it is a service business,” Polimeni said.
He described Questron’s goal as being “partners for profit with complete inventory management solutions. It is more than fasteners. Value added is really what it is all about.”
Today, Questron is a $50 million company, and he expects to go to $100 million. Acquisitions include Webb Distribution and California Fasteners.
Questron’s business may start with fasteners, but customers will expand the offerings. They may want plastic components and then drawer slides or custom packaging and kits.

Thinking of Selling?
If you are thinking of selling, prepare yourself and your company first. Panelists suggested distributors start by determining their objective in selling, consult a business broker, use accountants to review their books, find an attorney with acquisition experience, meet with potential buyers, and finally, “do your homework and be realistic.”
Determine what you are looking for in a sale: 100% cash at closing, cash and options, or cash and stock?
Keeping profits down for tax purposes may hurt the sale price, though the consolidating companies are accustomed to dealing with multiple recordkeeping for tax and other purposes. “We’re used to seeing multiple sets of books,” Del Santo said.
“Cooked books” are not likely to fool fastener consolidators. “We know what industry standards are,” Polimeni said.
A good year can make a difference in the sale price.
Though DDI looks at three years of records, if focuses on the past 12 months.
Tell your employees. Though Würth has conducted audits of company records after business hours or some sellers have told employees the auditors are jus bankers, Taber finds the clandestine examinations are not good. “I recommend toy tell employees. It eliminates rumors.”
Investigate the companies you are considering as buyers. “Go to Germany and meet with Mr. Würth and [CEO] Dr. [Walter] Jeager,” Taber suggested. “Get to know the companies we’ve acquired. You want to know who you are getting into bed with. Do your won due diligence.
“Get on a plane and come visit us,” Kerester invited distributors interested in selling. “You can get a sense of an organization by walking around.”
Once the buyer and seller have indicated mutual interest, a sale can happen in 60 to 90 “intense days.”
Del Santo said an important early step for DDI is interviewing major shareholders.
Customers aren’t contacted “until the very end,” Kerester said.
“We all do basically the same thing,” Taber said of the due diligence process.
Würth offers a “nonbinding bid” to determine if the buyer and seller “are on the same wavelength.”
The early offers, “are not just guidelines,” Polimeni pointed out. “It doesn’t pay either party to invest in the due diligence process for no sale.”
“Our attitude is that the due diligence stage is confirmatory” rather than to stop a sale, Kerester said.
Del Santo acknowledged that the acquisition process can be tough. “It is easier to get a divorce than sell a company.”
The panelists invited inquiries from distributors.
“It never hurts to talk to us today,” Kerester said. “You may be wanting to do things today to prepare for down the way. There is good, free data to have.”
Taber added that it is important for distributors to know what their company is worth. “Seventy percent of you know what you r home is worth and 98% know what your car is worth. But hardly anybody knows what their business is worth.”

After the Sale
All the panelists are looking for companies where management will stay, and the consolidators claim to allow independence after the sale.
“If you buy a well-managed, profitable company, leave it alone,” Taber said.
“Make sure you team up with someone with the same principals,” Del Santo advised.
Before acquiring a company, the buyers have already determined that the selling company provides a “compatible culture” which makes independence possible, Polimeni explained.
That doesn’t mean there won’t be changes, panelists acknowledged.
Polimeni said most changes “are for the better.”
Expect you have to continue to perform after the sale. A management contract is almost certainly going to involve incentives.
“The worst thing a buyer fears is that management will walk out the door,” Taber said.
“This is a daily business,” Del Santo said. Problems can arise if the “focus turns off the business” after the sale.
Taber said thus far the Würth Group hasn’t had a situation for the corporation to step in.
Del Santo explained that DDI develops a strategic plan and budget prior to closing so the continuing management knows what is expected.
The DDI senior management team meets with employees the day after closing to assist in the adjustment. Employees have been happy because the closing sale has thus far always been accompanied by improved employee benefits.
Kerester attributed the low number of problems to the selection process. “We are looking for a partner.”
Questron makes it “very clear upfront” what changes can be expected, Polimeni. ©1998/2014 Fastener Industry News.
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