COVID-19 forced most companies to discard their M&A playbook. Gone were the days of such normal practices as hopping on an airplane to meet in person, getting quick approval from a board of directors to proceed with pursuing a deal or even shaking hands to seal the deal.
Acquisition opportunities had to make sense by every imaginable metric — especially on the balance sheet — and each potential deal was scrutinized to the point where many simply fell through during the first few months of this global pandemic.
But a handful of mergers and acquisitions did reach the finish line during this crisis, including some market-shifting moves from publicly traded companies. Count Lawson Products Inc. among that group. The Chicago-based company earlier this month announced the $35.3 million acquisition of Partsmaster, a Greenville, Texas-based MRO solutions provider.
It marked the largest deal in the company’s history, and to better understand Lawson’s appetite for acquisitions, even during COVID-19, MDM spoke with Mike DeCata, president and CEO, and Brian Hoekstra, who joined the company as vice president, mergers and acquisitions about a year ago — and just a few months before M&A activity came to a standstill.
In this wide-ranging Q&A, DeCata and Hoekstra dish on everything from the importance of financial stability to why cultural alignment is paramount to the hallmarks of an attractive target.
MDM: Brian, you joined Lawson last fall to lead the company’s M&A initiatives, and then most activity dried up. How has the pandemic changed your approach to deals?
Hoekstra: COVID-19 hasn’t been fun for anybody, but it hasn’t changed the way that we are approaching M&A. We’re still looking for businesses that make sense from a strategic perspective. We’re certainly not trying to do a small roll-up of the industry or anything like that, but we’re looking for businesses that make sense. We’re looking for businesses that have the high-touch sales model, are serving maintenance needs, are customer-based, are selling consumable products. We’re continuing to look for opportunities that fit our filters. It’s challenging to find those opportunities and to come to agreement on what valuation looks like in this environment, but for those strategic opportunities that make sense, we’re going to continue to pursue them.
MDM: We saw deals dry up particularly in March, April and May and our monthly M&A Roundups were quite anemic. Did the last six months of COVID-19 drastically affect the marketplace for acquisition opportunities or limit the targets that you had your eyes on?
Hoekstra: People may not have been quite as willing to come to market when everything was upside down, but we’re continuing to see deal flow, we’re continuing to see opportunities floating around out there. Activity did slow down a bit during the midst of the crisis, and certainly for folks who hadn’t already been out in the marketplace, I didn’t see a whole lot of new stuff coming. As you said, there wasn’t a lot of activity to round up in the roundups.
DeCata: I have to congratulate Brian because he closed the Partsmaster deal in less than a year of when he started — and it was by far the largest deal in the history of the company. The way we went about it, the thoroughness, the professionalism, the holistic, fulsome approach we took to this acquisition was far more comprehensive than the previous ones we had done. That was a large credit to Brian’s experience prior to joining us.
MDM: How, and why, did Lawson pull off this acquisition in the middle of a global pandemic?
DeCata: We had been in contact with [Partsmaster] a long time ago and for the last two years we’ve been touching base with the parent company. But when everybody else was preserving cash, and worried about the end of the world, because of the processes we had put in place prior — including the financial infrastructure — and the actions we had taken to manage the unknown, we were very comfortable in continuing to pursue our acquisition strategy in the middle of the pandemic. I think it speaks to our preparation in advance of the pandemic, including our financial infrastructure and our bank relationships — all of those things paid dividends for us. With Brian’s thoroughness and experience along with the processes and infrastructure we brought into this period, it gave us the courage and the willingness to continue on the path that we were on before the pandemic. I’m quite positive we will be very, very well rewarded because we had the courage to do this. I believe it will be the lowest-risk acquisition of the seven or so that we’ve done. I believe this one will come off the most seamlessly with the best integration and the best financial success, human resource success and customer success of anything we’ve ever done prior to this. But it did take a little holding your breath and re-examining the confidence you have in your own value proposition to do it in the middle of a pandemic.
MDM: At any time — especially when the pandemic started worsening in March or even later in the due diligence phase — did Lawson consider backing out?
Hoekstra: I’d be lying if I said I wasn’t nervous at various points in time as we were continuing to talk about this opportunity. But as Mike indicated, from a strategic perspective this deal just made a whole lot of sense to us. And we continued to work it throughout the depths of the downturn and then as we saw it moderate a bit.
DeCata: The other thing that influenced us to such an extent, was that Partsmaster and Lawson go to market very, very similarly. What we knew, and we had known for many years, is that if we were able to put the two companies together, the customers would be the biggest beneficiaries along with the sales reps. Our SKU count and product category availability are about double what Partsmaster’s SKU count is. And they add some truly outstanding private label products, some highly differentiate products, a commitment to operational excellence and customer service, as we do. Both the Lawson and Partsmaster customers will benefit and both the Lawson and the Partsmaster sales teams will benefit by having a broader portfolio of products to sell, which will result in higher commissions for our sales reps and their ability to more fully serve their customers.
MDM: Was the due diligence process delayed just because of the simple fact that you guys couldn’t hop on a plane and visit the Partsmaster team in Texas?
Hoekstra: One of the things that I’ve learned throughout the pandemic is all the tools that are available in general these days make it not necessarily ideal but possible to do a lot of that work remotely. The video calling and the communications capabilities that are out there are not ideal, but they do work well.
DeCata: The only hard thing was not so much in the strict sense of diligence, but rather just getting to know people. It’s easier if you already know each other to have a video call. But when you’re meeting people for the first time on video, that’s a lot harder. It’s easier when you’ve sat and had dinner together and you’ve gotten to talk about your values, your philosophy, what your aspirations are for the company. In person, it’s easier to get to know someone’s family and kids — the personal side. It makes the hard work of diligence and negotiating and all the hundreds and hundreds of fine points all a little easier. We didn’t have that luxury, but to Brian’s point, I don’t think we missed that much in the process. This was different than other processes, but the technology was not that much of a burden, and of course, we did it with a lot less travel, so if anything, it might have been a cost reduction.
MDM: How important is cultural alignment in M&A for Lawson, and how much did that play a role with the Partsmaster deal?
DeCata: Relative to every acquisition, culture is really, really important, maybe even paramount. We know this company; they know us. We traded sales reps over the years. We’ve both been in business for a long time. That matters a lot. Integrity matters a lot. The underlying, underpinning values of a company matter a lot because the integration is where the rubber meets the road, and that’s going to happen through teams coming together and trusting each other and working together — each with a degree of humility and respect, but also bringing forward each company’s best practices. Both companies will have best practices that, together, we’ll want to adapt. One of the first actions Brian took when he joined us a year ago was a small acquisition we were looking at. Brian — with an extremely high degree of courage — said, “Guys, I know I’m brand new here, but I wouldn’t do this deal. These guys don’t fit.” They did fit financially, they fit as far as the business, but their culture was not a fit. And we give Brian tremendous credit for the courage to kill something a couple of weeks into the job. And he was 100% right. Yet, it took a high degree of courage to say, “This is also important.”
MDM: Brian, what did you see in that target that made you speak out against the deal?
Hoekstra: I think it just went to the notion that they didn’t think about the business in the same way that we think about the business. In that particular instance — as we were just discussing with Partsmaster — we did have the opportunity to sit down and talk to people face to face, and you get a good feel for them and how they think about the business. Ultimately, when you get around to the integration, if people just don’t approach things the same way, it becomes hard to see eye to eye on where the decision needs to go on a longer-term basis. It was a red flag in my mind, and that one probably wasn’t going to make a lot of sense for us — unlike this Partsmaster opportunity, which fits the mold.
MDM: What is Lawson’s appetite for M&A moving forward? Has it changed at all following the pandemic, increased following what you see as a successful Partsmaster deal?
DeCata: Our appetite hasn’t changed, which is to say we still have a real appetite for more acquisitions. But we’re also pursuing our other two growth strategies, adding sales reps and enabling our sales reps to be more productive. This is a three-part growth strategy. All three legs of the stool stand independently. But I would argue that [the Partsmaster acquisition] does give us a little bit more credibility. We’ve done a number of [deals], and every one of the acquisitions we’ve done, we enter the process with the aspiration to make it a successful deal that can be a reference for the next deal. If your aspiration is for everything you’ve done to be a reference for everything you’re going to do, that’s a very high standard. You can’t be casual and cavalier. This is our largest acquisition, and I believe it will open more people’s eyes to the fact that everything we’ve been saying for about five years — we’re still saying it. If they didn’t believe us before about a willingness to do more and larger acquisitions, they probably are more likely to believe that we are, even in this environment.
MDM: For readers of this Q&A who might be looking to be acquired, what’s your message in terms of setting themselves up as a target to an acquirer like Lawson or a different company in this space? What are some hallmarks of an attractive seller?
DeCata: I would look for a track record with consistency, which would be the same thing anybody would say. If you had a terrible five years, and all of a sudden you have a spectacular year and this is the year you want to sell, that will raise red flags. If anything, COVID has taught us that unpredictable things happen in the world. Very few of the companies in our space are public, many are family-owned, and so what used to be discussions that Brian and I would have with potential sellers, their orientation was, “Well, I’m having a lot of fun this year. When I’m having less fun, we should get together.” That’s probably not the right strategy because the price we pay is probably going to be less. But the even bigger lesson learned from COVID is with no notice, crazy things can happen that can delay your retirement plan for years. Accepting the fact that there are a lot of unknowns out there and the world is hard to predict. I would advise someone to be candid about their willingness to deal with the ups and downs of long cycle activities in their planning. If you’re not ready to be in your business five years from now, you should be thinking about what you’re doing right now because the world is unpredictable.
MDM: Do progressive companies that have adopted digital tools and analytics capabilities rise to the top of your target lists?
DeCata: Yes, but more importantly, I think that the more analytical companies are probably the more profitable companies. They use their resources more wisely because if an idea doesn’t work, they kill it more quickly than somebody else would. And they invest wisely because they analyze if the investment is returning as we hoped. The analytics orientation process results in a better, stronger, more profitable and more attractive business. When we acquire someone, they become part of a public company with a public company rigor that goes into protecting shareholders. All of those are things that would be considerations. Candidly, in our space, most of the companies are smaller, very few are public that we would acquire. There probably isn’t such a large population of target companies that we could say, “Well, you’ve got to be analytical and you got to do this, and you’ve got to do that.” That further reduces the target set to a point where it might not be workable.
MDM: Will you look at how companies navigated the COVID-19 crisis when considering future targets?
Hoekstra: Certainly, we’re going to look at it. And then we’re going need to understand what’s going on, we’re going to need to understand the drivers. Obviously, at a high level, we understand what happened to our business, but we’re going to have to understand what happened to theirs and how they got through the process and how they came out the other side.
DeCata: There are other things we would want to focus on as it relates to this situation, including leadership and if there was an even hand at the tiller. We’ll also look at product composition and is it repeatable. Someone who had a huge uptick in PPE — is that PPE business sustainable or is it a one-off? You wouldn’t want to overvalue someone for something that isn’t repeatable, but you also wouldn’t want to penalize someone for the same type of reason, someone who took a deeper dip for activities out of their control. In both cases, you need to normalize things a little bit. Now, the reaction of management is sustainable, because there will always be future crises, and the management’s ability to accommodate and be resilient matters a lot. But the short-term spike in numbers up or down — you’d want to look at it and not let either of those unduly influence the attractiveness of a company.
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