Acquisitions Offer Competitive Advantages for Equipment Owners

April 1, 2000
Business is about competitive advantages, said Gary Hull, senior partner in the firm of Buffalo Ventures, an investment banking group in Buffalo, New

Business is about competitive advantages, said Gary Hull, senior partner in the firm of Buffalo Ventures, an investment banking group in Buffalo, New York. One source of those advantages may be to consolidate or acquire other firms in the truck equipment market.

Most truck-equipment business owners feel that they will expand their business by one of several methods: increase sales, bring new products into their marketplace, or aggressively manage expenses, Hull said. "In other words, they will increase profitability by doing more of what they already do, hoping to gain several percent of profitability at the end of the day."

Hull said the key to strategic acquisitions is to understand that the acquiring company is buying into a profitable cash flow stream and, if done properly, should gain more than one or two percent of net profit. "You are looking at the leveraged money and the return that is being gained from the equity money invested," said Hull.

What Makes an Acquisition Hull listed several reasons for buying another profitable business. A few of these include:

*Attractive returns from invested capital *Risk is diversified into small components *Larger markets provide greater purchasing opportunities *Greater purchasing opportunities increase pricing elasticity *New markets create newer avenues of distribution for sold products *Possibilities for acquiring complementary manufacturing distribution channels *Accelerated growth in revenues and net earnings.

Many business owners find complementary benefits to acquiring another operation. "Yet few companies in the truck and equipment business make strategic acquisitions," said Hull. Some owners convince themselves that they can't afford or understand the acquisition of another business. "We hear plenty of excuses," said Hull, "including 'Who would run this business while I'm trying to buy another one?' or 'How could we possibly pay for the new acquisition?' " These issues should be addressed; nevertheless, they should not stop a business owner from acquiring another company, if that will better his business situation.

Specific reasons that Hull cites include: *Owners feel that they don't have the time or expertise to handle a complicated transaction

*Lack of money to make the acquisition

*The target company has a valuation that is too high for the opportunity

*Transaction costs are too high

Few business owners have the time to actively oversee another business, Hull said. This can be overcome by hiring professional investment bankers to find investment opportunities for the acquiring company.

Another concern focuses on how the acquiring company will find the money to purchase the target company, said Hull. This is usually remedied by understanding the nature of leveraged takeovers. "There are not any hard and fast parameters but, in general, some of the money is borrowed and secured using the assets of the target company. The residual of the money needed to make the acquisition comes from the purchaser's equity. However, some of that equity may be derived from borrowed funds.

"It's not that difficult to fairly accurately value a target company," said Hull. "Most transactions that actually close are naturally, realistically priced for both buyer and seller." Hull adds that experienced investment bankers can, in many cases, quickly eliminate deals that are not realistically priced.

"Its just a fact of life that fees are involved for services rendered," said Hull. "However, in many cases professional advisors find ways to make the deal close, as opposed to inexperienced operators trying to make their way through the intricacies of arranging a transaction."

Usually, once the buyers and sellers understand a few of these basic tenets, then deals can take place, said Hull. "Unfortunately, many business owners let their lack of understanding get in the way of improving business chances."

Consolidation Opportunities Hull cites opportunities in today's truck and equipment business. "Sometimes a good consolidation opportunity is present in mature industries," he said. "These industries need to gain the competitive advantages of lowering their materials purchasing cost, and they also need to improve their ability to be a price leader in their special market arena."

Fragmented industries also pose an opportunity for consolidators, said Hull. "Where a lot of smaller manufacturing or retail functions are focused on trying to obtain the same market for goods or services, an opportunity for one giant to emerge as the leader of the pack is available."

If you look at the tire industry, the office supplies business, funeral services, and many other industries as a whole, it is easy to see the benefits of market consolidation to a few key players, he said.

Why Consolidation Works Industry consolidation creates competitive advantages, said Hull. "Anytime there is an ability to cut cost-per-unit during the manufacturing process, it results in a competitive advantage." Along with this, there are other cost-cutting issues.

Opportunities to cut the distribution cost-per-unit-sold are also important. "Selling and distributing also carry costs," said Hull. "If some of those can be knocked out by a consolidation, then the cost savings and increased marketing ability will create the competitive advantage for the new entity."

Because of the financial advantages that develop, larger companies attract better and more professional managers, said Hull. "The greater the strength of the company, the greater is the company's abilityto attract a better management team. The two things continue to feed off each other."

Overall, consolidation will come into this industry, said Hull. "The real question is, how will the opportunity be answered by the existing players in the industry?"

About the Author

John Nahas