Case 1: Airgas is in a fight for its life. In February, Air Products made a hostile bid for Airgas. It has been getting more hostile since. The investor analysis by Air Products is at www.airgasoffer.com. And here are the documents Airgas has produced for its investors to fight the offer: http://investor.shareholder.com/arg/airgascontent.cfm.
At the heart of the matter is Air Products’ plan to streamline, saying it would yield a $250-million annual cost savings by the end of year two. That looks good on paper but could in fact eviscerate the value that the Airgas model has built. That model focuses on local and regional markets. Airgas grew through 400 acquisitions since 1982, and now has annual sales of $4 billion. It estimates it has 25 percent of the packaged gas and welding hardgoods market, where more than 900 independents own 50 percent of the market. Airgas built 12 regional divisions that make up Airgas’ distribution business, each with a president to support local markets.
While it has struggled – as all consolidators have – with issues of integration, Airgas has done a good job building a corporate support structure for back-office, technology, logistics and marketing functions, while supporting the local customer-focused service culture that existed before being acquired by Airgas. It’s also interesting that Air Products got out of the packaged gases distribution business several years ago by selling it to Airgas.
Case 2: In 2007, Home Depot sold its HD Supply division to three private equity groups for $8.5 billion. As part of the deal, Home Depot paid $325 million for a 12.5-percent stake in HDS. In February, Home Depot announced that it wrote off its investment in HD Supply to zero. Ouch. It comes at a time when HDS is trying to revise its credit agreements and struggling to rebuild sales. It’s a blow at a bad time and in fact doesn’t realistically value the company.
Airgas and HD Supply were built by strategically assembling strong companies with high value in their respective industries. Both companies are now wrestling with tough issues unique to this part of the rebound cycle. That’s the nature of competitive markets.
But it’s important to recognize the potential destruction of value to the customer and shareholders when functional distribution models get caught under the wheels of finance, M&A and turbulent times.