Hillenbrand says due diligence is the most important investment of its international acquisition process
When Hillenbrand Inc. acquired German-based Coperion in December 2012, treasurer Ted Haddad got an unexpected bonus: a chance to enjoy his tie collection. Haddad, a tie-lover who is spending the better part of this year in Stuttgart to help integrate Coperion into Hillenbrand’s industrial equipment manufacturing group, says he feels more at home with the German business dress code than he does, well, at home. “On a typical day in the U.S., I am the exception; in Germany, I am not,” Haddad says. The German phone system, however, is another story entirely. Given the varying quantity of numbers involved depending on where the call is from and to, “I still have great challenges figuring out just which digits matter when dialing here,” he confesses.
Parsing what’s familiar and what is decidedly different is one of the most elusive tasks of cross-border acquisitions. While many elements may seem similar to the domestic acquisition process, they are rarely the same. From due diligence to banking covenants to ongoing currency considerations, pursuing a non-U.S. target requires a willingness to learn and plenty of boots on the ground, even for deal makers with deep experience on the domestic front.
“In one fell swoop, the $545 million Coperion transaction made Hillenbrand a global and growing contender.”
For that reason, such deals remain relatively uncommon. Of the 4,327 acquisitions that U.S. companies made in 2012, just about 25 percent involved foreign companies, a ratio that has stayed fairly stable in recent years, according to Mergermarket data. Instead, many companies—particularly middle-market firms such as Hillenbrand, whose revenues were just shy of $1 billion last year—seek partnerships with local companies or joint ventures to get a foothold in a new market before considering an outright acquisition.
For Hillenbrand, however, Coperion was an unrivaled opportunity to take a quantum leap. Best known for its struggling casket business, the Batesville, Indiana, company has been trying to diversify its portfolio of products and geographies for the past several years. In one fell swoop, the $545 million Coperion transaction made Hillenbrand a global and growing contender. The deal is projected to double the percentage of revenues from international sales to 45 percent this year while increasing overall revenues by a healthy 60 percent. It gave Hillenbrand a strong foothold in Europe, but also in China, Russia and India, among other emerging markets. In fact, the acquisition was large enough to shift the balance of power back at headquarters. The industrial equipment manufacturing unit’s revenues are projected to crest at $1 billion this year, shrinking those of Hillenbrand’s traditional casket business to only a third of the combined entity.
”It’s exactly what we wanted to accomplish,” says Scott George, Hillenbrand’s head of corporate development. He found Coperion (and the two previous domestic acquisitions, K-Tron and Rotex, that comprise the business unit it is joining) in his former role as Hillenbrand’s investment banker with P&M Corporate Finance LLC, but soon after switched sides to take his first corporate job with Hillenbrand in January 2012. “This was a once in a lifetime opportunity,” he says. What was particularly attractive was that Coperion had already done the time-consuming and difficult work associated with establishing operations in tough-to-enter markets such as China, Russia and India. Starting from scratch in any of those countries would have taken at least $1 million in start-up costs and as long as 18 months, George estimates, and with uncertain returns. “With a greenfield investment or a joint venture, you never really know what the end result will be,” he says.
For all its promise, the deal came with plenty of risk. The fact that Coperion derives half of its $750 million in annual revenues from China, for one, meant that the due diligence process had to be even more intense and well-organized than normal. “Hillenbrand conducted very thorough due diligence on all three acquisitions, but without question, the challenges were a lot greater in the case of Coperion,” George says. For example, the risks associated with buying Chinese companies are well-recognized, including the frequent existence of multiple sets of books that can be used to obscure the true financial condition of the company, and a pervasive culture of bribery that could create violations of the Foreign Corrupt Practices Act (FCPA) for U.S. companies. To identify, evaluate and mitigate those risks, however, still requires careful analysis and specialized expertise. “You can’t just go in, ask a few questions and expect that you can rely upon the answers you receive; you must also retain expert advisors who can make sure you’re really getting the right answers and not assuming liability for past practices,” George says. It’s also important to project forward: “We have heard horror stories about companies that have made acquisitions in China and made their operations fully compliant with U.S. laws, only to find that two-thirds of their revenues go away because customers don’t want to do business with companies that are not allowed to pay bribes,” he adds.
To get comfortable with FCPA and other acquisition risks, George initially assembled a cross-functional group of about 20 people from within Hillenbrand to perform initial due diligence of the operations. Once the letter of intent was signed in July 2012, Hillenbrand added outside advisors from law firms and Big 4 accounting firms to the process, for a grand total of 60 people who worked nearly full-time for several months on various aspects of the due-diligence process. Once a week, each would report back to a designated due diligence team leader in the “war room,” a sealed and secret portion of the Hillenbrand headquarters, tracking progress on a chart that laid out all of Coperion’s identified risk factors. “We spent a lot of time and money on due diligence,” says George. Indeed, Hillenbrand has recorded more than $11 million in acquisition costs related to the deal so far for all stages including due diligence.
Those war-room efforts allowed Hillenbrand to put the myriad risks it faced in perspective, make adjustments to terms when warranted, and then proceed with the deal. In October 2012, the company announced the acquisition to the world, propelling a 10 percent increase in its stock price. Though the deal put pressure on Hillenbrand’s credit rating—Standard & Poor’s cut it from triple-B to triple-B minus upon the deal’s announcement—financing it was relatively easy. The company covered about 20 percent with cash on hand and then exercised the accordion feature within its existing credit facility to draw on the resulting $700 million (plus a related $200 million term loan) for the balance.
Negotiating an industry-specific trade credit facility in Germany with a syndicate of European banks to support ongoing operations was a significant learning experience, however. For one, the Euro 150 million facility, designed to provide the letters of credits and other guarantees needed to fund projects, was larger than anything Hillenbrand had ever taken on at home for that purpose, according to Haddad. And while executives followed familiar steps—identifying the right partners, developing a term sheet, obtaining commitments, negotiating terms, and closing—“We had to bridge many different banking and legal terms and conditions that exist between the U.S. market and the European market,” Haddad says. He estimates that understanding those differences and then negotiating on them added weeks to the process. Based on his experience on this transaction, Haddad says European banks are generally looking for a higher volume of information more frequently than U.S. banks. As a treasurer, he was willing to accept the heavier reporting and compliance burden in exchange for retaining more flexibility to access the arrangement across Hillenbrand’s international footprint and obtain more favorable covenants.
A big decision for any company bidding on a foreign target is what currency to use in the offer. Hillenbrand chose to negotiate the deal in euros and accept the foreign exchange risk, says George, because the company felt it could save money by hedging the risks itself, rather than paying more to cover the seller’s risk for a deal denominated in dollars. Even so, the euro’s fourth-quarter spike last year meant that the deal grew from $530 million to $545 million between its October announcement and December closing. And the purchase price is only the first step in learning to conquer new currencies. “The basic approaches to hedge these exposures were familiar to us, but the scale changed,” says Haddad. One advantage to acquiring a foreign company that was already global is being able to plug into a developed network. Coperion “had existing skills, processes and hedging partners related to foreign currency” that Hillenbrand incorporated into its treasury operations, says Haddad. “It would have been a much taller order for us if we had to build all that from scratch.”
The new currency mix affects not only revenues but also cash management techniques. While foreign operations may be very profitable, U.S.-based companies often have trouble moving those profits to other countries (including the U.S.). “Trapped cash” is a particular problem in China, says a Bank of America Merrill Lynch banker, where companies not only face taxes and penalties but must also seek permission from the central bank to take their earnings home. The fact that Hillenbrand’s international footprint had so quickly expanded prompted management to add cash pooling systems that enhance controls, visibility and liquidity across borders, while also reducing the company’s net foreign currency risk, says Haddad. That will help to some extent, though China’s complex regulatory environment means it is unfortunately not one of the countries where cross-border pooling can be applied, he notes.
Post-merger integration requires many skills and, not surprisingly, Haddad has many colleagues to work with. Approximately 50 people drawn from Hillenbrand headquarters, Coperion, and the business unit Coperion is joining will be supporting the integration for about a year, says George. Several other executives, including a senior attorney and another financial executive, are charged with being physically on site at the new operations in Germany. That presence is critical, both to establish relationships and for more basic reasons, like time zone differences. Ties aside, Haddad says working from Germany provides “a huge advantage” to him, compared to trying to connect with European colleagues or bankers during the two to four hours their workdays might overlap.
It will take at least until the end of 2013 until Coperion is fully integrated, says George. Meanwhile, he is keeping his eye on the approximately 250 companies in Hillenbrand’s current M&A pipeline, the most appealing of the several hundred leftovers from its three significant deals in less than three years. “We wouldn’t want to buy all of those, of course,” says the former banker. “But we take this program very seriously.”
Persistence Pays Off