STAFDA 2014 Session Preview: Mike Marks and Jim Miller

Merges and acquisitions — how they affect the competitive landscape.

Mike Marks, Indian River Consulting Group
Jim Miller, Supply Chain Equity Partners
Mike Marks of the Indian River Consulting Group and Jim Miller of Supply Chain Equity Partners will discuss mergers and acquisitions from 1:00 -2:30 and again from 3:00-4:30 p.m. on Sunday, Nov. 9, 2014.

All STAFDA members have seen and experienced major change in this industry due to the recent waves of mergers and acquisitions. It doesn’t matter whether you are a distributor, rep firm or a manufacturer, these changes have impacted you.

Consolidation is usually driven by market dynamics that are outside of any individual firm’s control and often have profound consequences. Channel members who try to compete by doing the same things better often lose out to those firms which respond to the market evolution by doing
different things.

The key impact of these actions has been the changes in how we all compete in our individual markets. Manufacturers used to be able to succeed by providing a clear product offering of high quality with adequate levels of service. Competition was about getting the right distributors, developing the right programs and product differentiation.

Rep firms won by getting the best lines and providing volume to their principals by working with the best distributors. Distributors used to win by attracting and developing top sales talent and then out-servicing competitors at the customer levels.

Consolidation has moved manufacturers into each other’s business with broader product offerings and an almost religious quest for market share. Distributors have many more competitors as broad line “box movers,” non-traditional specialty suppliers and online merchants move into their markets.

Rep firms have been challenged at both ends, including mergers between rep firms. The net result for many has been a race to the bottom — on product and service quality and particularly, price.

That is the bad news and a big reason why many
lifestyle businesses remain frustrated and stuck with
lower returns for more work. However, there has been
an interesting upside in all of this as the market pressures have forced many members, including even some very small firms, to shift from entrepreneurial to professional management. Fewer manage on “gut” and more
manage on “analytics.” The falling cost and growing power of technology have supported this transition for many and made it easier.

We have all seen examples of STAFDA members in this transition. They have raised their game with things like adding application specialists, project management teams, outbound telemarketing efforts and real E-business solutions with mobile apps that work for their contractor, industrial and retail customers. These include strategic pricing programs that take margin control away from sales reps, data mining, consignment inventories for key customers, private label product offerings, shifting from self-directed sales reps to management-directed ones and building business strategies.

Moreover, technology has better enabled accountability for all of the above. What is interesting is that there isn’t any one path forward. Each distributor or rep firm making the transition finds its own way to create new value to their customers and suppliers.

Perhaps consolidation’s biggest impact has been the realization by small, but progressive, distributors that acquisitions are both an effective growth strategy and
can also be an effective defense strategy. They aren’t just for big companies any more.

Most STAFDA members have gone through the process of adding a new sales rep in an open territory with challenges of guarantees and front-end loaded costs. Acquiring a firm in an adjacent geography is actually very similar in that both are investments for growth. Regional consolidation can also provide defensive measures through increased density and economies of scale, superior service capabilities, eliminating particularly troublesome competitors, etc.

The big surprise for first-time acquirers is where the money comes from. To the uninitiated, the initial reflex is, “I can’t afford it,” but the real answer is much different. Growing your organic business is mostly driven by watching an income statement. This means finding sales opportunities, trying to keep margins up and watching costs all the time.

Acquiring a company is done with a balance sheet and a reasonable debt level. You even get to use the balance sheet and assets of the company that you are acquiring to support the debt. The real interesting part is that you can pay off the debt with the profit from the company that you just acquired.

And if your acquisition campaign requires incremental equity in addition to or in lieu of debt, there is literally a stockpile of equity waiting on the sidelines to invest in quality distributors — probably more equity than any time in history, and currently such equity is as cheap as it has been in history. It does take due diligence and proper planning, but it is no longer only a game for the big guys. Even rep firms are merging and the same rules still apply.

Jim Miller and Mike Marks teach distributors how to structure and execute acquisitions in a full-day workshop at the University of Industrial Distribution at Purdue every year. For those that missed the course in March, they are presenting a STAFDA-specific version at this year’s convention. They will share examples and a how-to approach that many will find both surprising and interesting. The math and economics work for both manufacturers and reps.

Jim and Mike plan to speak about three things that are important to STAFDA members when thinking about an acquisition:

  1. How do you choose the right firm so you are actually adding to your shareholder value and not just buying someone else’s problems?
  2. How do you determine the right price to pay, create the value creation plan, and then design the correct deal structure if the acquiree executives stay on with you going forward? All of these pieces should be created at the same time as they are interrelated.
  3. How do you do proper due diligence and integration planning?

Whether you are an acquiree, an acquirer or just want to be left alone, it is critical to understand how the money actually works. Actually, being left alone is really not an option in today’s marketplace. The consolidation trend will continue, and it will impact your company one way or another. Having this foundation gives you the insight to predict how competitive tactics change when you go up against a recently acquired competitor or the impacts in the real world if you choose to be acquired.

Jim and Mike are going to present this session twice on Sunday, November 9. This is a high level presentation designed for STAFDA executives. Although 90 minutes is not enough time to make you an expert, it is enough to help you understand whether this is a game you can plan and to keep you from making rookie mistakes.

The session will provide a solid understanding of how the acquisition process works and how to position your firm to compete in a consolidating industry. You may determine that your company is fully capable of being an acquirer and decide to take the next step in this journey. CS

Mike Marks is a co-founder of the Indian River Consulting Group. Jim Miller is a co-founder of Supply Chain Equity Partners. Both Marks and Miller are University of Industrial Distribution faculty members. Mike Marks can be reached at; Jim Miller can be reached at