When profits are popping and buyers are flush with cash, buying an LBM operation gets more expensive. And when that happens, buyers often try to get comfortable with the offer they're making by looking to something else.
That something else is synergy—the intrinsic value that a buyer can create only through the combination of two companies and that comes into existence only post-acquisition. Synergies include such obvious examples as eliminating duplicate administrative positions or combining the licenses for various software or operating systems. Potentially more valuable synergies include cross-selling of the buyer’s products through the seller’s sales channels (and vice versa). For example, if the acquiring LBM distributor has a truss manufacturing operation and buys a distributor that outsources trusses, a valuable synergy can be created. Going forward, the buyer can capture all of the margins that are currently being paid to the outsourced truss manufacturer.
The presence of synergies is always a positive for a deal and the buyer that is chosen will probably be the one that spies the most synergies, along with other sources of value. But the value of such synergy isn’t calculated as some multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization—a popular measure of cash flow). Rather, the successful buyer will likely apply a higher EBITDA multiple to the company’s existing EBITDA because of the synergies and other value perceived in the deal. While synergies are always positive, only a foolish buyer would undertake an acquisition where all of the potential synergies they identify have to come to fruition perfectly in order for the deal to make sense.
Just as synergies represent hidden sources of value for buyers post-transaction, competitive factors can erode value, but not always. In the recent US LBM acquisition of Lampert Lumber, it was announced that Lampert would continue to be run independently after the deal. Doesn’t this mean that fellow US LBM holding Lyman Lumber will be competing with Lampert after the deal? Yes, it probably does. Have other large building industry companies thrived despite such post-acquisition competition? Yes, they have. In most such cases, market pundits predict much more channel, culture and other conflicts than actually occur.
Separate companies with common ownership can stick to their targeted gross margins just as much as completely separately owned companies. Also, two former competitors that find themselves with the same owner are able to implement materials purchasing best practices across both organizations. With thousands of SKUs being sold, there should be ample opportunity for increased purchasing power with vendors—another type of synergy.
Another potential benefit of allowing companies to compete post-transaction is that neither company suffers the demise of their brand name in the minds of their customers. Many customers prefer to think that they’re dealing with a local company in a “business as usual” manner, despite an acquisition. Other customers have negative feelings about dealing with big corporations. Just ask Wal-Mart. Seeing a unified brand name everywhere they look can have the opposite impact of that which is intended.
In every acquisition, it is important to try to explore
and identify all potential synergies. If buyers don’t identify synergies, it is
not possible to capture them after the transaction. On the other hand, avoiding
any possible impression of internal competition after a transaction isn’t
necessarily the optimal outcome either. Lots of synergies and a rational level
of internal competition can make for a very successful transaction.