The Acquisition Equation

by Joshua Lipsky
Senior Editor
Whether your company is larger and looking to expand through strategic acquisitions or smaller and trying to make it attractive to potential suitors, there are some fundamental business principles to follow.
Smithfield Foods’ DISCIPLINED approach to acquiring and integrating aCQuisitions has led to its superior value creation Domestic Growth
Gwaltney of Smithfield, Ltd. 1981

Patrick Cudahy 1984
John Morrell & Co. 1995
Lykes Meat Group 1996
North Side Foods Corp. 1998
Quick-to-Fix Foods 2001
Moyer Packing Co. 2002
Packerland Holdings 2002
Stefano Foods 2003
Cumberland Gap 2003
Farmland Foods 2003
International
Schneider Corp. (Canada) 1998
SBS (France) 1998
Animex (Poland) 1999
SFGP (France) 1999
Norson (Mexico JV) 1999
Mitchell’s Gourmet Foods (Canada) 2001
AFG (China JV) 2001
Campofrio (Spain) aquired 15% stake 2004
Smithfield Foods Ltd. (UK) 2004
Vertical Integration
Carroll’s Foods, Inc. 1999
Murphy Farms, Inc. 2000
Vall, Inc. 2003
Alliance Farms 2003
In analyzing this year’s Top Performers list, there is one obvious observation. The list this year is smaller than last year’s. While some companies fold, a main reason for the shrinking list is the continued trend of consolidation within the industry. The Food Institute indicates there were 415 mergers and acquisitions in the food sector during 2003, which is two more than were recorded in 2002.
While the most acquisitive segment within the sector was the supermarket industry, which registered 35 transactions in 2003, 16 more than in 2002, processor activity was substantial with 14 deals taking place, up from just four in 2002 and 11 in 2001. Some of the more notable 2003 acquisitions include Smithfield Foods acquiring the pork business of Farmland Foods as well as Global Culinary Solutions Inc., and 90 percent of Cumberland Gap Provision Co. Farmland Foods also sold its beef processing business to a group of investors led by U.S. Premium Beef Ltd. And down in Texas, Pilgrim’s Pride in “one of the most important events in our recent history,” says its annual report, acquired ConAgra’s chicken division.
As larger companies continue to diversify and enter new markets, it will become increasingly difficult for smaller, niche companies already in these markets to compete. How can a regional company that does under $30 million annually expect to compete with a billion-dollar company that has nationwide distribution systems in place and can afford to offer their product at a premium price? They can’t. So the question becomes, does the owner of a smaller company, whose net worth is already invested in the company, take on more debt in the hopes to compete with the larger companies, or do they sell out to a larger company? Those answers are left to the individual decision-makers. However, for a smaller company that is looking to be acquired, there are things that must be done to make it look as attractive as possible to potential buyers.
Adding Value
“At the core, if you are a smaller company you want to make yourself attractive by demonstrating the ability to add value to another company,” says Jay Novak, director and head of Food & Beverage Investment Banking for Los Angeles-based Houlihan Lokey Howard & Zukin. “You want to show that you have either a process or technology others don’t have or you have a product line that others don’t have.”
Fredericksburg, PA-based College Hill Poultry’s 2003 sale to Alma, KS-based Premium Protein Products is a perfect example of a company being bought because of its product line. In September 2000, Billy Robinson, president of Kreamer Feed purchased College Hill from the Shenk family, who had owned the company since its founding in 1929. In the spring of 2001 College Hill launched its antibiotic-free poultry line.
“The antibiotic-free line made perfect sense,” Robinson explains. “At Kreamer, we were already producing an antibiotic-free feed line. We saw the growing market for consumers looking for natural products, so it made perfect sense for us to capitalize on this trend.”
As College Hill expanded its line to include a commercial line, an antibiotic-free line, and a Halal-certified line, the company continued to acquire bank debt. In 2002, Robinson decided the best way to get rid of the existing bank debt was to sell the company. Robinson says it took about two years to prepare the company to be bought. In that time College Hill Poultry increased its real estate portfolio, its marketing initiatives, and its brand recognition.
The next step was finding a buyer. Robinson says he looked at two primary options, selling to a bank or selling to private investors.
Smithfield Scores
At $367.4 million, Smithfield was the successful bidder at an auction held Oct. 12, 2003 for Farmland Foods’ pork production and processing businesses.
“We have had a continued interest in acquiring Farmland Foods for nearly 18 months, and our patience has finally been rewarded,” says C. Larry Pope, president and chief operating officer of Smithfield Foods. “Farmland has a strong brand name, and excellent management team, as well as an outstanding working relationship with independent hog producers. The addition of Farmland to the Smithfield family further strengthens our distribution system and continues to broaden our product and brand opportunities for our customers.”
Smithfield’s approach to acquiring and integrating acquisitions has led to a sharp increase in share value, growing from 19 cents a share on Dec. 31, 1979 to $25.97 on March 25, 2004.
Major acquisitions of 2003
Acquiring Company: A group of investors led by
U.S. Premium Beef Ltd.
Acquired: The interest in the beef processing business from Farmland Industries.

Acquiring Company: Agri Beef
Acquired: Washington Beef

Acquiring Company: BC Natural Foods
Acquired: Pennfield Farms and Penn Valley Farms
Acquiring Company: Link Snack Inc.
Acquired: Taylor Country Farms and King B
Acquiring Company: Skylark Meats
Acquired: O’Brien & Co. Inc.
Acquiring Company: Smithfield Foods
Acquired: The pork business of Farmland Industries, 90 percent interest Cumberland Gap Provision, and Global Culinary Solutions
Acquiring Company: Strauss Veal Inc.
Acquired: Silverton Ridge Farms
Acquiring Company: Perdue Farms
Acquired: Cagle’s Inc.
Acquiring Company: Pilgrim’s Pride Corp.
Acquired: The chicken operations of ConAgra Foods Inc.
Acquiring Company: Tyson Foods
Acquired: Choctaw Maid Farms

“We worked with both,” he says. “It’s important to have options. We had worked for a long time with a specific bank, only to have the deal fall through at the end. Fortunately though, we had also been working with Premium Protein Products’ Bernie Hansen.”
Hansen, with his Flint Hills Foods line, supplies Hormel Foods Corp. with its line of Always Tender ready-to-eat entrées. While the Hormel relationship has been very successful, Hansen did not have a poultry line. Robinson says that Hansen came to College Hill because he was impressed with the brand recognition College Hill had forged for itself. Robinson adds that Hansen made assurances that he would not change the company’s name or strategy.
“We needed financing and Bernie needed a chicken company,” says Robinson, who now serves as the company’s chief operating officer. “It has been a perfect fit. Both sides are very happy with the merger.”
Potential pitfalls
While Robinson remains with College Hill by choice, Novak cautions that proper management succession is vital in positioning a company to be acquired. Novak says that a potential buyer needs to be able to look at the company and know who will be running the company once the owner takes his payday and leaves.
“I’ve seen it happen more than once,” Novak says, “presidents are forced back into work because of improper succession. If you are looking to sell and get out, you must make proper management succession a priority.”
Another priority is food-safety compliance. If a company wants to make itself attractive to potential buyers, it cannot afford to have a suspect food-safety program. Initially, companies do not want to buy other companies, only to have to spend more money bringing their food-safety program up-to-date. Even more severe, what would happen if a company acquired another company and then six months later the company has to recall product as a result of a Listeria or Salmonella detection? It is no longer the smaller company’s reputation that has been tarnished, but the new parent company’s. That’s a mistake that is too costly for any company to make.
Another all-too-common mistake is allowing emotions to get in the way of making smart business decisions. Two companies can get into a fierce bidding war for a property, only to have one of the companies drastically overpay because they did not want to loose out to a competitor.
“Joe Luter [Smithfield Foods’ chairman and chief executive officer] demonstrated that you have to be smart as well as bold when making acquisitions,” says Jerry Hostetter, Smithfield’s vice president of investor relations. “When the IBP bidding got out of hand, he walked away, which was smart. He also walked away with about a sixty-million-dollar profit from the IBP shares Smithfield had already purchased. Luter demonstrated that Smithfield wouldn’t overpay for a company. With acquisitions, there can be a tremendous amount of testosterone, but you can’t let that interfere with making smart business decisions.”
Growing in a Stagnant Market
While profitable, the veal industry has shown no significant signs of growth, as retail veal sales have remained in the $600-to-$700 million range for the past five years. Within the industry, there are about 17 veal packers, without a clear leader.
If you’re a veal producer, the question is how do you grow your business if the industry isn’t growing? For Franklin, WI-based Strauss Veal it was the decision to diversify into another niche market. Strauss Veal had been in business with a supplier that had just bought Chicago-based Silverton Lamb.
“As we got to know Silverton Lamb, we realized that they were really unhappy with the company that had just acquired them,” relays Randy Strauss, president of Strauss Veal. “We were also looking to acquire a lamb company, and Silverton was a perfect fit. They were close in proximity and the base was there for some strong synergies. Our decision to acquire Silverton allowed us to keep doing business with the other supplier as well as letting Silverton leave an unhappy situation. It was an ideal situation.”
After acquiring Silverton, Strauss made the decision to move the lamb facility to Milwaukee and put the products under the Strauss label. Strauss retained Silverton’s upper-management personnel and hired 65 new employees.
“We were really underutilizing our Milwaukee facility, so we made the decision to bring Silverton up to Milwaukee,” Strauss explains. “Although we moved the company and changed its name, we made a conscious effort to retain both our and Silverton’s loyal customer base. That’s the danger with niche products. You don’t want to grow too large and risk alienating your customers. It couldn’t have worked out better for us, though. Our original Strauss customers are now buying lamb and Silverton’s customers are now buying veal.”
Pilgrim’s Bold Move
Strauss Veal moved into another niche to increase its sales. Pittsburg, TX-based Pilgrim’s Pride 2003 acquisition was based on the principle that if you can’t grow the market, you can grow your marketshare.
In November 2003, Pilgrim’s Pride completed its acquisition of ConAgra’s chicken division. Paying about $660 million in cash and stock made this acquisition the largest of the year and one of the largest in the industry’s history.
Prior to the acquisition, Pilgrim’s Pride was the third-largest poultry producer in the country, with 8.5-percent marketshare. With the acquisition, Pilgrim’s marketshare blossomed to 16.3 percent and Pilgrim’s not only fortified its position as the undisputed number-two poultry producer in America, but also became the number-two producer in chicken.
While growing marketshare was a driving force behind the acquisition, it also was a strategic move, as there was very little overlap in market focus, distributor relationships, and geographic locations between the two companies.
“This acquisition represents a major step forward in our strategy to continue adding value to all of our products and services,” says O.B. Goolsby, president and chief operating officer of Pilgrim’s Pride. “The addition of ConAgra’s specialty prepared chicken products, well-established distributor relationships, strong consumer brands, and Southeastern processing facilities enable us to provide customers at every point on the distribution chain with the broadest range of quality value-added products and services available in the market today. The acquisition allows us to build on our customer base without sacrificing our customer service commitment. It also allows us to seek new customer relationships that will be healthy and beneficial for both parties.
“Our increased size and scale will also give us the ability to compete more effectively in a consolidating marketplace and further enhance the technological leadership and cost efficiency for which we are known,” Goolsby adds.
Pilgrim’s desire for nationwide recognition served as motivation for the acquisition. Pilgrim’s Pride made the decision to bring in ConAgra’s successful chicken brands — Pierce, Easy Entrées, and Country Pride — to take advantage of the brands strengths while simultaneously establishing their own name in new markets. Increased recognition also enables Pilgrim’s Pride to depend less on commodity chicken markets and prices.
“The ConAgra acquisition will allow our prepared foods category to grow through the better capacity utilization of the acquired plants,” Goolsby explains. “This is needed because of the increasing demand for our prepared products.”
Pilgrim’s Pride retained Blake Lovette, who served as president of ConAgra Poultry Co., and placed him on Pilgrim’s board of directors.
Novak explains that, in acquisitions, often acquiring key management people is just as important as acquiring the brand. When announcing the ConAgra acquisition, Goolsby praised Lovette: “His extensive experience in the poultry industry will be a tremendous asset to the integration and our business overall.”
No matter what side of the acquisition equation you find yourself on, it is vital you remember to act smart rather than quick. Take the time to work with an investment banking group to be sure that you are either getting the most for your company or getting the most for your dollar.