Mergers: a method to the madness

Modern Brewery Age, July 21, 2003 by Karl Edmunds, Tim Coughlin

Wholesalers seeking growth opportunities are increasingly contemplating mergers.

Looking at larger acquisitions, and faced with unwilling sellers, many owners conclude that a merger is the only option. Although there are a variety of factors that make a merger a viable and attractive option, undertaking and completing a successful merger is, in many ways, more challenging than an outright purchase or sale.

The forces of consolidation have resulted in many wholesalers exiting the business, but there still are quite a few that face questionable futures. Most of these operators are well aware of the situation, due to the persistent economic forces that are driving the industry's consolidation. Such owners know that, to survive in the long term, they must gain scale and improve the fundamental economics of their businesses. Ultimately, this means either participating in the industry's consolidation or getting out.

The preferred growth option for most owners is acquisition. The problem is an acquisition requires not only a willing buyer, but also a willing seller; and in this industry, willing sellers are in short supply. Too often, beer distributors won't even discuss selling unless they are losing money every year, can no longer tolerate supplier pressures, or are being driven to sell by personal circumstances. Frequently, owners flatly reject opening purchase offers they freely acknowledge are well above fair market value. Their desire to stay in the industry simply tromps financial considerations. Without a willing seller, acquisition is not an option but a merger might be viable.

Even those lucky enough to have a willing seller still must come up with the money. Additionally, as consolidation transitions into its next phase, potential transactions are, in general, larger--and larger transactions mean acquisitions require more debt. This doesn't necessarily mean that acquisitions have a higher percentage of debt or are more leveraged, only that a larger debt is required for the average acquisition. When a would-be consolidator steps back and looks at the pile of debt (even with money as cheap as it is these days), signing a huge promissory note and giving a personal guarantee often prompts a second thought. At that point, avoiding debt looks pretty good and a merger begins to seem a relatively attractive option.

Pursuing a merger can be a complex, difficult, and time-consuming effort. Before potential merger partners get too bogged down in details, they should step back and ask two simple questions:

(1) Why am I pursuing this merger?

(2) How do I feel about my would-be partner(s)?

"Why Am I Pursuing this Merger?"

If the only answer to this question is "to get bigger," then look out! Bigger does not necessarily mean better. Those wholesalers who are pursuing growth simply because they heard that "so and so" from the brewery said you need to be moving X number of cases to stay in business for the long term are chasing that growth for the wrong reason.

There is no magic volume threshold for long-term survival. Does a profitable wholesaler growing at twice the industry rate in a 15,000-square-mile rural market, really need to grow simply because the business is selling less than a million cases? What does a consolidation like this do for this wholesaler and his suppliers? If there are any economic benefits, they might well be offset by the dilution of the wholesaler's focus and local market presence. The decision to consolidate must have economic justification.

"How Do I Feel about My Would-Be Partner(s)?"

This is about as straightforward as it gets. If you don't like them, don't trust them, or can't work with them, then becoming partners probably is a bad idea. If your gut tells you something is not right with a would-be partner up front, then something very wrong ultimately may arise. On the other hand, if a year of tough competition merely has produced some animosity, but you still respect that competitor's character and business sense, you probably can build a sound partnership. The bottom line is: can you share control of the business with the would-be partner?

Getting Down to Details

If two or more owners have concluded that a merger is financially compelling and the potential partnership is acceptable, it then makes sense to start getting into the details. This is when potential mergers often flounder. This is because each owner, justifiably, is looking out for his own best interests. Each wants to ensure the most favorable outcome for his company--resulting in fruitless protracted merger negotiations. What often breaks the logjam is a structured process facilitated by an independent third party.

When we are engaged to play an independent role in facilitating a merger, we typically lay out a sequential process that potential merger partners progress through incrementally. The goal is to focus owners on issues in order of priority, and to establish decision points at which owners can elect to proceed or terminate merger discussions. Although this process is never identical, it can be broken down into the following areas: