Pelican Products, Batting Six-For-Six, Offers 10 Rules For Successful Middle Market M&A
The unwavering verdict of the middle market M&A world is that relative bigness brings a higher multiple when a company is sold. So Pelican Products, a specialty container and packaging manufacturer, while quadrupling its revenue since 2008, to $400 million through half a dozen acquisitions, could have seen its market value climb some eightfold.
Given the enormous rewards, you may be wondering why every forward-looking middle market company doesn’t go on an acquisition binge. The simple answer is that acquiring companies is difficult and risky. Integrating acquired companies challenges the best of leaders. And, indeed, more acquisitions fail than succeed, studies have shown, meaning it’s easier to ruin your company doing a deal than it is to double its value.
The good news is that making successful acquisitions isn’t entirely a matter of chance. Pelican, headquartered near Los Angeles in Torrance, Calif., didn’t luck into making six value-building deals. It did so with a detailed plan, with substantial up-front investment in people and systems, and with notable discipline and rigor in the execution of deals and in post-closing integration of businesses. I had the good fortune to visit with Pelican’s management and its private equity owners – together they possess a wealth of acquisition experience — and what follows is a list of middle market M&A rules, some unexpected, gleaned from those discussions:
1. Before acquisitions, secure your platform: Behrman Capital, a private equity firm with five funds and $3 billion raised, bought Pelican in 2004. Pelican’s founder, Dave Parker, stayed on for two years as CEO, and the new owners quickly named to the Pelican board Lyndon Faulkner, a potential successor who had run a prior Behrman portfolio company, Nimbus CD International. Faulkner’s resume was large for Pelican, but such skills would be essential in the expansion and M&A campaign Behrman had in mind. Faulkner had senior-level experience at very large and high profile companies, notably Microsoft and Technicolor. And he had deep experience in taking new products to market, serving as key executive in the launches of the Compact Disc (CD), the Digital Video Disc (DVD) and the Xbox gaming platform. Ahead of making deals, the new Pelican owners invested millions of dollars in new systems and people with M&A skills. (There were also savings reaped, notably from modernizing Pelican’s procurement processes.) “It all comes down to how strong your platform team is,” says Grant Behrman, co-founder of the firm bearing his name. Faulkner was named CEO in 2006.
2. Somebody has to run the existing company during a deal: While hiring experienced M&A hands, Pelican’s new owners were fortunate to inherit John Padian, the company’s chief operating officer, who’s been around for 37 of Pelican’s 40 years as a company. “I stick to my day job, keeping the company running,” Padian says, which allows Faulkner and some others to wade into deal activity nearly full-time. Faulkner is well aware that the home fires could easily go untended. “It’s exciting to work on deals,” he says. “It’s freaky to see how quickly people would forget about their day jobs.”
3. Walk away: From the beginning, on the acquisition of a lighting maker, financial and inventory information had been slow in coming and questionable in reliability. Persevering, Pelican brought in third-party auditors in hopes of sorting it all out. But Pelican CFO Don Jordan was still left wondering about the target’s management, “do they even know” the true numbers? It was costly and painful, but after five months of due diligence Pelican walked away.
4. Talk, don’t email: Working down a due diligence list with an acquisition’s management, email tends to just bat the ball back-and-forth, says Jamie Mearns, vice president of finance at Pelican. Speaking by phone or in person tends to drive the process forward. Talking also builds relationships. Sure, scheduling lengthy calls, especially with time differences, is hard. But worthwhile: the owner of an Australian company who had agreed to sell to Pelican was balking at an environmental study of his facilities. During a two-hour call on a Sunday, Mearns, who’d developed a good rapport with the man, finally blurted out: “If we don’t do the study, and we do the deal, and something bad is found, I’m getting fired.” The personal touch persuaded the seller.
5. Economic downturns produce good deals and M&A mistakes are often made during ebullient times: Warren Buffett, of course, famously recommends being greedy when others are fearful. But making a major acquisition when the economy is in chaos requires conviction and guts. Pelican’s biggest competitor in the container business, Hardigg Industries, became available in 2008. But it was a bet-the-company kind of acquisition, requiring outside financing to cover the $200 million price. Lenders were reluctant. But the opportunity was unique. “In our little world, this was Coke buying Pepsi,” says Pelican COO Padian. Lehman Brother collapsed during the talks. Without Behrman’s direct involvement, the financing wouldn’t have fallen into place.
6. Make detailed post-closing integration plans – and be prepared to ditch them: Hardigg’s Storm brand was Pelican’s direct competitor in heavy duty storage cases, and post-merger plans suggested Storm be retired and the combined companies rally around the Pelican brand. But as Faulkner and others spoke to big customers, they got push back. End purchasers want choice and if the market’s No. 2 disappeared, Faulkner came to believe, he’d merely be elevating brands No. 3 and 4. “I realized Storm had its own value,” Faulkner says. A team working on consolidating the brands was told to stand down. Pelican’s board was surprised, having counted on cost savings baked into the combining of brands. “Unbelievable board discussions,” Faulkner recalls. “The strategists didn’t agree.” In hindsight, the move maximized the retention of Hardigg’s $150 million revenue base.
7. Be patient: Smaller companies you’re acquiring mightn’t have data in the forms you’d like. The owner quite possibly hasn’t told employees a sale’s in the offing, and therefore has to be cagey about information requests within his own organization. Literally the CFO might be sticking around at night to assemble data. And a seller naturally wants to protect competitive information right up until closing. In buying a thermal packaging maker in the pharmaceutical field, Pelican had to wait until two weeks before closing to get details on a new product that hadn’t hit the market yet, but that was crucial to future sales projections. “They were extremely reluctant,” Mearns says. The company, Cool Logistics, has provided a big sales boost to Pelican since the 2014 acquisition.
8. Beware the maddening math of smaller acquisitions: They’re cheap. A company with sales below $25 million might cost 5 or 6 times its cash flow, vs. a multiple of 10 for a company bigger than $100 million in sales. And so acquiring little companies can be accretive, as their earnings post-deal are awarded the fatter multiple your own company is accorded. Behrman, the private equity chief, thus has a fondness for smaller acquisitions; his firm has overseen 55 add-on deals to platform companies. But Faulkner has to balance that against the strain on his team. “Due diligence on a little acquisition can be just as time-consuming as on a big one,” Faulkner notes. A deal needs to move the revenue needle and, with Pelican revenues at about $400 million, a tiny acquisition isn’t worth the trouble. Behrman concurs that lowering one’s guard on smaller deals is a cardinal sin: “Every time up to bat you have to do just as much due diligence.”
9. Know what you don’t know: Jumping into the pharmaceutical packing industry – companies in that business were already buying Pelican containers and retrofitting them to ship drugs – made perfect sense. But Pelican didn’t know the market, which is global and fast changing. So Pelican found and hired a German consultancy expert in the market and that helped frame two big acquisitions, Minnesota Thermal Science and Cool Logistics, which diversified Pelican’s business and moved it up the value chain. Pelican’s new customers are more demanding – in a good way. They don’t just want packaging, but prefer a supplier to operate all the logistics, again pushing Pelican’s Bio-Thermal business into new and higher-margin areas. Pelican streamlined the manufacturing at the acquisitions, which produced savings it could invest in product and service improvements.
10. Doing the deal and making the deal work are two separate tasks: Too often, Faulkner says, middle market companies become overwhelmed by simply closing an acquisition and fail to plan the post-closing integration. A separate team dedicated to the latter can get a head start on integration while the other team finishes the deal. Buying Hardigg, the post-closing team identified 63 projects, each with its own savings or revenue gain to achieve. These were built into company-wide financial projections and the integration team managed them as vigorously as if working to close the original deal. Peer-to-peer meetings between the two companies helped speed the tasks. Talks with customers began before the deal closed. And on day-of-deal-announcement, Faulkner was there at Hardigg, beginning at 5:00 am, to greet all three shifts. Every worker got a 20-point Q&A anticipating anxieties and concerns (“Is my job secure?” “Will my benefits remain the same?” “Who will my boss be?”).
Pelican isn’t swearing off acquisitions, but for now it’s mostly concentrating on driving organic growth with the operations it already owns. An internal reorganization around the markets Pelican serves, instead of managing company-by-company, streamlines its structure. Behrman Capital, which holds investments longer than the typical private equity firm, expects to own Pelican for another number of years to reap the payoff of a bigger, better-run company. Faulkner, 55, is sticking around, too.
Faulkner’s a former professional rugby player from Wales. Among middle market CEOs I’ve spent time with, he’s remarkable for his combined focus on long-term strategic goals and his ability to bring a diverse team along on the effort. Yes, Faulkner brought in some new faces, but he also recognized the value of existing talent at Pelican. “When Lyndon came, we seemed to transform ourselves,” says HR chief Ellenmary Michel, a 19-year company veteran.
Plenty of other M&A lessons came up during my talks with Pelican and Behrman, but the ten included above seemed either crucial to the company’s particular success or different enough from the usual M&A advice to warrant inclusion. Batting six-for-six is a remarkable record and one a company of any size would be delighted by. Pelican is 40 years old this year, itself a notable achievement.