Mergers and acquisitions are far from being uncommon among tire and rubber companies. But they're also far from being bad news for the industry.
Jacob Peled, Executive Chairman of Pelmar Engineering, feels that M&As actually benefit businesses in more ways than one. During the Tire Technology Expo held in Hannover, Germany, from March 5-7, Peled shared his thoughts on how mergers and acquisitions have shaped and strengthened the industry over time.
Peled's talk brought up a recent M&A trend – a high interest in areas that weren't all that popular a decade ago. Specifically, he mentioned off-highway tires, which have been the focus of a lot of M&A deals in recent years. In a short window of time, Titan International Inc. acquired Goodyear's farm tire production in North and South America, Trelleborg purchased CGS/Mitas, Solideal was acquired by Camoplast, most of Pirelli went over to Chem China, and Yokohama bought the Alliance Tire Group.
But the most eyebrow-raising deal in recent years was Michelin's purchase of Lehigh Technologies Inc., a company producing micronized rubber powder. Many were initially at a loss as to why an industry giant would acquire a recycling company. But the pieces began to fall in place when Michelin acquired conveyor belt maker Fenner P.L.C. and OTR tire maker Camso.
Michelin was basically diversifying into material handling, construction, agriculture and power sport. Its first acquisition, Lehigh, happened to be among the top material suppliers for these industries.
The building blocks of a merger:
Acquisitions like the ones Michelin has been involved in illustrate how M&As can go beyond individual business interests and impact the industry as a whole. They can facilitate the transfer of knowledge and technology, besides influencing marketing and distribution.
In Peled's words: "Mergers and acquisitions is an art. You need to have vision."
Elaborating on how a merger comes about, Peled brought up some key principles that must hold true for every deal. First of all, both parties must want the deal. They must also benefit equally from the merger. And most deals don't go through without executive management's involvement and agreement.
For some of us, the idea of in-person meetings may seem old school. But Peled is a firm believer in starting the M&A process with a personal meeting in a neutral place. This allows both sides to look each other in the eye and get the basics hashed out.
Step two involves drawing up a memorandum of understanding (MoU). This document defines the scope and limitations of the deal, and sets the terms for pricing, payment and confidentiality. The latter typically includes a non-disclosure agreement, and in a lot of cases, a non-compete clause as well.
The next stage is a period of due diligence, which according to Peled can make or break a deal. This is a crucial time when both parties weigh prices and go through legal, commercial, technical and financial terms in detail. Once due diligence has been conducted and everyone's on the same page, the definitive agreement is prepared, the contract is signed, and the deal is closed.
Peled also mentioned that most major M&A projects involve the creation of a new company or entity. Creating a new legal entity allows both parties to start with a clean slate. It makes sure the interests of both parties are met, while at the same time keeping the deal free from the influence of existing mechanisms.
The Pelmar chairman feels that the parties involved should discuss the terms of forming a new entity as early on in the M&A process as possible, preferably during the initial MoU itself. From his personal experience, not doing this can result in loss of time and effort, and could even cause deals to fall through.
What drives an acquisition?
By far the most obvious reason for acquiring a company is to get hold of its technology and know-how. Traditionally, transferring technology has been an enormously expensive exercise. Acquisitions make it a little more affordable by quickly closing technological gaps.
"Someone tried to explain to me once that this is similar to buying a cow for a glass of milk," Peled shared. "This is of course not accurate, but it is an important factor."
An acquisition is also a means for reducing time to market. This is an undeniable benefit, even if it isn't exactly measurable. Developing a market from scratch is no mean feat, and asks for a great deal of time, effort and resources. Companies often look to save these resources by acquiring another business that has already developed the market in question.
Plus, companies that are acquired often have hidden value that isn't obvious at first glance. There's a widely held notion that acquirers end up with more deficiencies than advantages. Peled couldn't disagree more.
"There are many positive issues which have a higher value than the book value," he said. "It can be seen in capital expenditures, tooling, past overhauling and instrumentation."
Of course, acquisitions tend to be disruptive in nature. But this can be a good thing. Calling rubber industry acquisitions game-changing, Peled spoke about how they can speed up the development of revolutionary products, production processes, machinery and tire construction.
26 major M&As went through last year, and 27 in 2017. The Pelmar chairman expects a lot more of these deals to take place over the next few years, with businesses across the industry participating in them.