M&A in the Metal Service Center Industry a Case Study

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M&A Activity

MetalMiner is pleased to invite Paul Glover of  the consulting firm The Glover Group started  in 1992 to help companies to survive the WorkQuake™ of the Knowledge Economy by improving workplace performance and increasing job satisfaction. Jay Frischkorn, of Strategic Profitability Consultants co-authored this piece. This is part one of a three part series structured as a metal service center merger and acquisition case study.

In late 2007, the Management of a Metal Service Center, with facilities located in the southwest, decided to expand their operation through the acquisition of a metal service center company operation that was approximately one-third the financial and workforce size of the Acquiring Company.  During the fifteen-year period prior to the decision to grow through this acquisition, the Acquiring Company had expanded its operations in specific geographic areas by acquiring two other metal service center operations.

Reasons behind the acquisition:

The Management of the Acquiring Company made the decision to expand through this acquisition for three reasons:

  1. The Acquiring Company felt increasing pressure from its primary competitor and decided to protect and increase its market share by establishing its presence in a new geographic area before its primary competition did so;
  2. The acquisition target had been in business for over thirty years and had a growing customer base and an excellent bottom line; and
  3. The acquisition’s cost would be partially offset by not having to incur the cost and time delay of constructing a new facility to support the Acquiring Company’s expansion into the new geographic area.

Financial Due Diligence

Based on their extensive and successful experience in the metal service center industry, including their past experience at having made two successful acquisitions, and after conducting the necessary financial due diligence, the Acquiring Company’s Management Team was confident the acquisition met all of the financial requirements necessary to define the Acquisition Target as a “good buy and, once acquired, the Acquisition Target would be quickly integrated into the Acquiring Company’s existing operation. However, the Management Team’s primary criteria for this acquisition to be deemed successful, was that the Acquired Company’s profit margin and market share could not be reduced after the acquisition closed.

Cultural Differences

While the acquisition’s economic considerations met the required financial due diligence, the Acquiring Company and the Acquired Company’s cultures were diametrically opposed.

The Acquiring Company’s culture was open and transparent:

  • The Management Team shared appropriate operational and financial information with the workforce.
  • Training programs for Supervisors and Managers were ongoing.
  • Supervisors were required to have good interpersonal skills and operated as Theory Y managers.
  • Each Core Employee had a Personal Development Plan in place.
  • Core Employees were encouraged to exercise independent judgment in decision making.
  • New Employees were hired based on both their ability to perform the work and fit into the Company’s culture.
  • Wages were primarily based on pay for performance with Employees paid significant quarterly bonuses based on the Company’s profit.
  • Health care and other benefits (i.e. holidays, vacations) and working conditions met or exceeded the industry average.
  • The workforce was stable with a turnover rate of eleven percent annually.

The Acquired Company’s culture was closed and dictatorial:

  • The Acquired Company was family owned. The father and two sons, third generation owners, operated the company in a command and control fashion.
  • No financial information was shared with the workforce.
  • Operational information was shared solely on a need to know basis.
  • Favoritism was the order of the day at all levels of the company.
  • Supervisors were Theory X managers, selected for their ability to get the job done through intimidation and by instilling fear in the workforce.
  • There were no training or development programs for Supervisors and Managers.
  • Employees were not allowed to exercise independent judgment in any way.
  • Wages were lower than the industry average.
  • Compensation was not based on performance and Employees did not share in the Company’s profits.
  • Health care and other benefits (i.e. holidays, vacations) and working conditions were maintained at below industry average.
  • The Company used a “churn and burn hiring policy and had a turnover rate in excess of sixty percent annually.

The extreme cultural differences between the two Companies was known by the Acquiring Company’s Management Team. However, based on the Acquiring Company’s success in integrating the two prior acquisitions into its culture, the Acquiring Company’s Management Team did not believe these cultural issues would present a significant barrier to the Post Acquisition Integration of the Acquired Company.

Part two will appear tomorrow and covers post integration merger issues and results.

Paul Glover and Jay Frischkorn

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