M&A Forum offers strategy tips for buyers and sellers

A.O. Smith CEO, business owners offer insights [PHOTO GALLERY]

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Ajita Rajendra has given out his cell phone number to thousands of customers. If one of them calls him, he will return the customer’s call by sundown in their location, even if he’s across the world.

Rajendra, chairman and chief executive officer of global water heater manufacturing firm A.O. Smith Corp., attributes the Milwaukee company’s success to its focus on five fundamentals, one of which is customer service.

“We are obsessive about our customers and what they want and what’s important to them,” Rajendra told the audience gathered for the annual BizTimes M&A Forum on Friday at the Milwaukee Marriott Downtown.

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Rajendra, the keynote speaker at the 2017 M&A Forum, described how he and other leaders at A.O. Smith have transformed the company over the past 20 years, divesting the automotive business that once made up 60 percent of the company’s business, as well as motors, fiber pipes and other products manufactured at A.O. Smith that weren’t core to its mission.

Since 1996, A.O. Smith has grown from $600 million to $2.7 billion in sales and has made $1.4 billion in acquisitions. Rajendra has helped shift the company’s revenue source to exclusively water technology, and has targeted fast-growing markets, such as India and China. Its growth strategy includes geographic growth, adjacencies, and protecting and growing the core business, Rajendra said.

“A wonderful thing about the water heater market is about 90 percent of it is replacement, and it works—people take one cold shower and then they replace their water heater,” Rajendra said, to laughter. “And it doesn’t matter what the economic conditions are.”

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He addressed potential risks associated with acquisitions, such as a deal in which Rajendra and his team closed the deal one evening and went to dinner to celebrate.

“We walked in the next day as the new owners of the company and every hard drive had disappeared,” Rajendra said.

He also talked about when it hasn’t made sense to pursue an acquisition for some new product lines, such as air purification, which A.O. Smith launched in 2015.

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“In this case, rather than an acquisition, we wanted to do this greenfield and build our own,” Rajendra said.

A.O. Smith’s most recent acquisition, of Texas-based water filtration company Aquasana for $87 million in August 2016, on the other hand, brought direct-to-consumer sales expertise in-house that A.O. Smith didn’t previously have, he said.

Following Rajendra’s remarks, two panel discussions were held.

In “The Uncertainties of Selling and Life After the Sale,” Andrea Wolf of Bank Mutual Corp. moderated a discussion among Tom Campion, managing director of Chicago-based Merit Capital Partners; Scott Happ, CEO of Plano, Texas-based Optimal Blue; Fritz Frazier, founder and former CEO and owner of West Allis-based Winter Services Inc.; and Jim McCormack, chairman of Brookfield-based Diversified Insurance Solutions.

“We were getting bi-weekly offers to sell,” McCormack said. One of the buyers was more serious than the others, and he considered it, but “it would have meant 30 to 50 percent of my associates would be gone.”

The panelists described their emotional state and fears when it came to a potential sale of their companies.

“I had one concern when we were approached by a potential buyer—the potential distraction that it might cause our executive team,” Happ said.

“The biggest concern was probably getting it out on the street, impacting my customers and it falling through,” Frazier said. “I took everything in my life and put it in this business. Failure was not an option for me.”

In many cases, the treatment of the employee team an owner has built is an important concern, Campion said.

“A lot of times, their name’s on the door and they want that preserved,” he said.

“One thing that smoothed the transition for employees was the whole executive team had agreed to stay on for a substantial amount of time,” Happ said.

Happ said his team played it cool and made it clear Optimal Blue was not for sale until it was clear the price would be at a premium. He advised business owners to hold to their goals.

“Just because you’re putting a lot of time and energy into it, don’t compromise. Unless you agree, don’t settle (on price),” he said.

In terms of transitioning out of the company after selling it, McCormack said it’s important to have a plan for what you’re going to do with your time moving forward.

The second panel discussion, covered options for business sellers through a case study of a business owner considering an exit. The panelists included Steve Heinen, managing director of Omaha, Nebraska-based First Capital Partners; Larry Burnett, shareholder and corporate law practice co-chair for Milwaukee-based Reinhart Boerner Van Deuren s.c. and Dave Rolston, president and CEO of Milwaukee-based Hatco Corp. The discussion was moderated by Ann Hanna, managing director of Milwaukee-based Schenck M&A Solutions.

In the case study, business owner Ted Briggs needs $7 million to pay out a lawsuit settlement and back taxes. He wants to work at the company for another five years, health permitting, but he needs capital. He has a mediocre EBITDA and revenue and a generally strong management team, but needs an effective chief financial officer.

“We’ve got the ability to do something here to take care of your problem, and it might take a recapitalization as a holding place,” Burnett said. “You need to have a process in place, you need to hire a good investment banker to evaluate all your options.”

Heinen agreed that this should be a two-step transaction, first to provide immediate capital and then to take a “second bite of the apple” when the company has been improved upon.

“He’s just in a jam,” he said. “The pressure of that needs to be removed and then we can talk about other things.”

“ESOPs can be done in multiple steps or a single step,” Rolston said. “It would be similar to the recapitalization, he could take some money off the table.”

“If he’s still got five years in him, he can get that multiple at a different time, when the business looks better,” Heinen said.

A management buyout is a possibility, but would have limited ability to leverage the value of the company in this case, Burnett said.

“I would solve my short-term problem with a conventional solution and then I would take a deep breath and look at all my options,” he said.

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