Monday, January 23, 2012

Thinking about M&A Strategy

The McKinsey Global Institute has just published a study that looks at different M&A patterns or strategies that large (non-bank) firms employ to grow the business.  The blow matrix shows how McKinsey thinks about what firms are actually doing.  Not all strategies are created equal, and McKinsey is quick to note that different industry segments have tended to different strategies. 

It is perhaps not a big surprise that the largest companies are the most likely to use acquisitions to grow, as organic growth in mature markets (which large firms dominate) have difficulty growing at faster than the rate of inflation.

Smaller companies are relatively more likely to focus on organic growth or on "selective" deal making, where usually few deals are done, which deals may be transformative (target represents a significant share of acquirerr market cap).  McKinsey has found that companies that employ a programmatic approach to acquisitions do best.  This may be due to the expertise gained in evaluating and integrating such deals, or it may reflect good discipline in purchaing without overpaaying.

HELE is a bit too small to qualify here, but it too could be said to be selective or perhaps "programmatic".  It has looked diligently for additional reveneu and has only really been able to generate organic growth with the OXO brand (thought OXO itself was one of a series acquisitions.


  1. Very interesting I think you should do the M&A strategy.

  2. My own view is that HELE has decided to become a programmatic acquirer. They have diligently retained all earnings in the business to grow it, and while they continue to talk about product innovation and organic growth, the top management is focusing more on growth through acquisition.

    Though there have been a few cases where they have overpaid they have been fairly successful thus far, and are now benefitting from the increased cash flow, which in turn increases the size of the deal they can do.

    This is, of course, the danger - deals keep getting bigger and even if the core business is healthy, you can grow yourself into that big, bad deal, that wrecks the company (see Time Warner), or nearly does (Bank of America).

    I would prefer to see them stick with bolt-on deals around $100m or so - never committing more than one year of operating profit to an acquisition, so that if it goes completely sour, there is no real risk to the core business. On the other hand, this limit would have prevented the acquisition of Kaz, so perhaps I am being a bit restrictive. Certainly, the company is not overlevered. But it is increasingly financing the business with (low rate) shorter term financing.

    Using credit lines does give the company flexibility to repay the debt as the cash comes in, but it also risks a liquidity trap, becuase it is easier for banks to cut or cancel credit lines when times are tough, so I would prefer to see more long-term financing, even if that meant higher rates.

    We shall see what happens next with the company. If Kaz continues to perform well and the PUR Water transaction can be bolted on (with the related cost reductions), operating and net income will rise and the company will be in a position to reduce net indebtedness below $200m before the end of the year.

    Another acquisition is likely, however, so overall indebtedness is likely to rise beyond the range I would prefer.