Acquisition growth strategies have always been popular because through acquisition, a company can ‘acquire’ far more than just additional revenue.
But acquisition and sale are not the only two options; merger is also a way to grow.
That’s the view of Matthew L. Caras, Principal and Managing Director of Leaders LLC, who believes that many in the industrial and specialty gases business would benefit from considering a merger as a means of achieving growth, both organic and through acquisition.
It’s a message that resonates right now given that Praxair, Inc. and The Linde Group seemingly stand on the verge of a $65bn merger of equals that would change the face of the global gases industry.
It’s a deal that would bring together two of the industry’s heavyweight players, creating a company with pro forma revenues of around $30bn prior to any divestitures, and projected annual synergies of $1bn.
With the prospect of the merger coming as part of a new phase of mergers and acquisitions (M&A) in the industry and just 12 months since Air Liquide completed the $13.4bn acquisition of Airgas, Inc., it has also raised the question, is organic growth dead in the Western markets?
That’s a notion that Caras is quick to dismiss in an interview with gas world, noting that M&A activity has always been there; whether in the background or foreground, during days of austerity and eras of burgeoning growth.
“Organic growth is far from dead in western markets. It may be slow from time to time, but that has always been the case,” he says. “Further, the fact that a lot of transactions are occurring within an industry often points more to the speed with which one can grow through acquisition than it does to a lack of organic growth prospects.”
“Even in industries where companies are seeing significant organic growth today (certain consumer product markets, for example), companies are growing through acquisition. Acquisition growth strategies have always been popular because through acquisition a company can ‘acquire’ far more than just additional revenue.”
Merging for growth
Just as organic growth is not dead, Caras is keen to dispel the often-held myth that to buy or sell out are the only two options facing those at a crossroads in their path to growth. Mergers, he argues, are another means of growth. It’s an angle he is eager to press on with because, “it is not one you will hear a lot about.”
“A point I would emphasise is that small and mid-sized companies often make the mistake of thinking that, when they are really struggling to achieve any degree of organic growth, they have to make one of two choices: either grow through acquisition; or sell. Most companies don’t understand that a true ‘merger of equals’ is a feasible alternative.”
This is a term that’s in vogue, of sorts, due to the aforementioned merger talks between Praxair and Linde; from the very start, both parties have stressed this as the posture of their discussions. And it’s a key aspect of the approach. The devil is in the detail, as Caras explains, “Note that when many acquisitions are announced, they are called ‘mergers’; it is a softer term that is meant to imply that the cultures of the two companies will continue to survive. In a true merger of equals, the two companies become roughly 50/50 owners of MergeCo.”
“Most small and mid-sized business owners assume that the issues involved in negotiating a merger – for example equity allocation, who will manage, and who will control the board – are insurmountable. [But this is] Not so.”
Leaders LLC advised Arcet Equipment Co. of Richmond, Virginia and Machine & Welding Supply Co. of Dunn, North Carolina in their 2013 merger of equals. The process of completing the merger took a long time, Caras says, due to the due diligence involved and a desire to ensure that all stakeholders were comfortable with the structure.
This deal allowed two well-managed independent distributors to achieve the benefits of merger, such as operating efficiencies, deeper management, and the adoption of respective best practices. Above all else, it allowed these two companies to remain independent, and family-owned and operated. And it allowed them to become bigger and better, more stable, resilient, profitable, and able to seize organic growth opportunities as well as opportunities to grow through acquisition.
“The point is that acquisition and sale are not the only two options,” Caras underlines. “Merger is a way to grow. And it often facilitates – where, for example, companies are in the same industry and operate in contiguous geographic territories, or operate in the same territory but have complementary products – to achieve organic growth that neither could have achieved on its own.”
It’s a mantra that Caras believes often goes overlooked, but that the potential merger of Praxair and Linde, while posing many other questions, also highlights on the biggest scale for the gases industry.