The Lure of the Deal
Local Companies Use M&A to Grow Revenue and Enter New Markets
January 1, 2017
by Ken Schachter • firstname.lastname@example.org
Health care products distributor Henry Schein Inc. topped Long Island's dealmaking scoreboard in 2016, according to newly compiled data.
The Melville multinational's nine announced acquisitions and investments edged out Broadridge Financial Solutions Inc.'s eight, according to data from Protegrity Advisors LLC that were supplemented with input from companies and Newsday research. The data include mergers and acquisitions, venture capital investments and joint ventures by Long Island-based for-profit companies.
Local executives said they see mergers, acquisitions and other deals as a path to new product lines, new geographic markets, fresh intellectual property, added revenue and workforce talent. Dealmaking has strengthened Long Island companies by improving their competitive position.
Henry Schein has been the most busy local deal-maker in recent years. It led the field in 2015 with six announced deals, and over the past decade with 48.
That 10-year total compares with 27 for runner-up Hain Celestial Group Inc., a Lake Success-based natural foods manufacturer, and 23 for Broadridge, a provider of investor and corporate governance communications services also based in Lake Success.
Henry Schein, Broadridge and Hain Celestial, ranked Nos. 1, 4 and 5 among Long Island's public companies based on 2015 sales, use mergers and acquisitions — or M&A — as an integral part of their business operations, executives and analysts said. The same holds true for some of the region's other public companies, including 1-800-Flowers.com Inc., Lifetime Brands Inc. and Leviton Manufacturing Co., and for private companies such as NPD Group Inc. and Medical Depot Inc.
Deals by nonprofits such as Northwell Health, the sprawling health care giant, were not included in the database that accompanies this story.
The database also doesn't include some deals that weren't announced; however, public companies are required to disclose "material" transactions to investors, so the largest and most important deals get revealed.
LI bucked U.S. decline
The number of completed M&A and other corporate transactions in the United States through Dec. 26 slid by about 19 percent compared with 2015, said Bruce Newman, president of Ronkonkoma-based M&A advisor Protegrity.
However, higher deal valuations increased overall dollars invested nationwide to $2.3 trillion in 2016 from $1.2 trillion in 2015.
Based on preliminary data, the number of M&A deals and corporate investments made by Long Island-based companies through Dec. 26 increased 20 percent to 62 transactions from the same period in 2015, bucking the nationwide decline in completed transactions, Newman said. Some businesses didn't disclose transactions or transaction details, he said.
Long Island's unusually high concentration of "lower middle market" companies — with revenue of $5 million to $100 million — adds to local M&A activity, Newman said.
"Despite Long Island's relatively high labor and housing costs ... we estimate there are about 9,300 businesses in Nassau and Suffolk counties with revenue between $5 million and $100 million," he said. That compares, for example, with Ohio with 11,500 like-sized businesses, but a population "nearly four times" that of Long Island.
Continued low interest rates will help drive deals in 2017, Newman said.
Dealmaking is a key component of Henry Schein's business model.
Mark Mlotek, a Henry Schein executive vice president and its chief strategic officer, runs a team of about 10 people who comb the world for potential acquisition or joint-venture candidates that will open new markets or augment existing ones for the distributor of supplies to office-based practices of doctors, dentists and veterinarians.
Henry Schein works to consolidate its "fragmented" industries and uses a disciplined approach to acquisitions in an effort to add growth that roughly matches that of the company's existing businesses, he said. "We try to have a healthy balance of strong organic growth complemented by strong inorganic growth," meaning growth by acquisitions, he said. In 2015 the company got 5 percent growth from its existing businesses, and 4 percent growth from acquisitions. "We try to get to 50-50."
Though Henry Schein's "Wall Street model" calls for it to allocate $300 million to $400 million to stock repurchases and $250 million to $300 million for acquisitions, the money for making deals is not included in the budget, he said. When Mlotek wants to make a deal, he goes to the company's investment committee for clearance.
On average, Henry Schein, with annual revenue of more than $10 billion, does about a dozen M&A deals a year, Mlotek said. Not all of those deals are announced in a news release or a filing with the Securities and Exchange Commission.
Before joining Henry Schein, Mlotek was the company's outside counsel and a partner at the major Manhattan law firm Proskauer Rose LLP. In 1994 Henry Schein chairman and chief executive Stanley M. Bergman persuaded Mlotek to join what was then a private company with only "a few hundred million dollars" in revenue.
"He had a vision and a strategy," Mlotek said of Bergman. "He started to make inorganic growth part of the agenda. There have been about 250 transactions" since then.
But Mlotek said putting that vision into practice requires tenacity. "There's no magic to it."
The M&A team runs financial models to determine the worth of a business, though Mlotek concedes that "it's as much art as science." When Mlotek's team believes the price has gotten too high — as was the case with an undisclosed target company a year ago — Henry Schein will walk away.
"We're OK not winning everything," he said.
The dealmaking phase, however, is the easy part, he said.
The real work begins after the acquisition, he said, "making sure the deal works" by merging cultures and integrating information technology systems and other infrastructure, a process that requires effort from virtually all corners of the company. "I believe that's the secret sauce."
Mergers gone bad
If M&A can be a powerful growth engine, it also can be a weapon of wealth destruction. Corporate annals are full of mergers gone bad followed by massive write-offs as acquirers reconsidered the value of the target companies. Among the best known: Time Warner's 2000 merger with AOL, in which the successor company took a write-off of al- most $99 billion in 2002 as AOL's subscription revenue dried up. In December 2009 the companies separated.
Richard Daly, chief executive of Broadridge, which employs more than 2,000 people on Long Island, said his company shies away from large M&A deals and gravitates toward those worth about $50 million that carry a smaller risk for shareholders. The deals generally add 1 or 2 percentage points to annual revenue growth, he said.
"We don't think through divine intervention we're going to find something that's going to be the next iPhone," he said. "We do it the old-fashioned way, one yard at a time."
Daly said the biggest M&A challenge for the company, which handles 6 billion financial prospectuses, mutual fund reports and other communications, each year, is integrating cultures.
"Engaging the human spirit is critical ... in making M&A successful," he said.
A spokeswoman for Hain, a maker of organic and natural foods and personal care products, declined interview requests because the company is in a "quiet period" after a delay in releasing quarterly and year-end financial results. Auditors are examining whether revenue from certain U.S. distributors was recorded in the correct period.
New sales channels
Zain Akbari, an analyst at Morningstar, a Chicago-based financial researcher, said that Hain has acquired companies in part to open new retail sales channels.
"It helps to buy that relationship, especially if you get some good brands along the way," he said.
Port Washington-based market researcher NPD Group covers industries from apparel to video games. Chief financial officer Tom Lynch said the private company has grown to a 2015 revenue of $307 million, primarily through organic growth.
"Generally, acquisitions are not a core part of our strategy," he said "When we do acquisitions, we're filling in industry gaps."
For instance, NPD's acquisition of Carlsbad, California- based EEDAR, announced in August, gave it access to a data- base of about 1,500 attributes for video games. That database is used by video game publishers, who run simulations to find popular attributes that will appeal to their target demographic, he said.
It also gives NPD, with 1,350 employees in 20 countries, a leg up in its coverage of the industry. "We want to know more than anybody else," Lynch said.
Richard Kolodny, president of Port Washington-based Medical Depot, a manufacturer of medical products including beds, electrotherapy devices and powered wheelchairs, said the company forecasts 2017 revenue of nearly $1 billion, and one-third of revenue growth can be attributed to M&A.
"We've been sensitive in terms of finding acquisition targets that have a similar culture and passion for growth," he said. "In most of our acquisition targets, we've kept the management teams."
Kolodny said the company uses M&A to expand geographically and add products and distribution capabilities.
"We are probably the largest private company in all of Long Island ... that nobody knows," he said. At Henry Schein, Mlotek said his team will continue its quest for acquisitions.
"It starts with Stanley," he said of Henry Schein's CEO. He "has the same vision that there's mountains to climb."