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The inside scoop on M&As: Plenty of big companies have learned the hard way how difficult mergers can be

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From left, Jeffrey Altschuler, CEO, and Robert Harmelin, EVP, Allied Beverage Group.
From left, Jeffrey Altschuler, CEO, and Robert Harmelin, EVP, Allied Beverage Group. - ()

Most mergers and acquisitions (M&As) aim to boost a business' reach while carving out excess costs. But shepherding a company through a successful M&A takes a lot of work, and there are plenty of corporate carcasses lining the landscape. Some are victims of regulatory restrictions—remember last year when the Madison-based pharmaceutical Pfizer Inc. had to drop its $160 billion planned merger with Ireland-based Allergan Plc (AGN.N) after the Obama administration changed some tax rules—while others can stall from a simple inability to agree on terms.

It can get even trickier when the companies involved are large, multi-generation family businesses. But when a few manage to pull off multiple M&As, you know they’re on to something good.

Jeffrey Altschuler is the CEO and a third-generation co-owner of Allied Beverage Group, a $1 billion a year Carlstadt-based wholesale wine and spirit distributor. Allied executive vice president Robert Harmelin is also a third-generation co-owner of the company, which merged on August 31 with the New Jersey subsidiary of Breakthru Beverage Group, a national distributor. Breakthru Beverage New Jersey is now operating under the Allied banner.

Allied itself was formed from three family owned business—all launched in 1933 following the repeal of Prohibition. F&A Distributing Co. merged with longtime competitor Baxter Group Inc. in 1996 to establish Allied Beverage Group; and Allied, in turn, merged in 2000 with Jaydor Corporation, keeping the Allied name.

Part of the reason for Allied’s success through multiple generations and multiple mergers is that “current Allied management and their predecessors have always been open to new ideas,” Altschuler explains. “The combination with Breakthru Beverage New Jersey [which now operates under the Allied brand] gives us increased scale. “We now have more than 1,200 employees, including salespeople, administrative, warehouse and others serving more than 8,500 commercial customers in the state.”

Behind the scenes

An employee stocks shelves inside the warehouse of Allied Beverage Group in Carlstadt.
An employee stocks shelves inside the warehouse of Allied Beverage Group in Carlstadt. - ()

How has Allied been able to make these multiple mergers work while keeping them under a family business umbrella? At the core, “Keeping it family owned is a good idea,” says Altschuler. “A family owned business can take a long-term perspective since we’re not driven by quarterly results.”

And about those successful acquisitions: “With each acquisition, it wasn’t a matter of just saying ‘you have to do things our way,’” he says. “Instead, we examined each corporate culture and selected the best practices from each company.” Altschuler illustrates his point by noting that the former president of Breakthru NJ, Jon Maslin, “is staying on as a senior executive with Allied.”

Many family businesses fail or get sold after the second generation, “but through our M&As, we have maintained family involvement and a shared set of values” while adapting to market changes and reinventing the company’s culture, says Harmelin. “An advantage of being family owned is that you tend to have the same values and goals, and there can be less discord than what you see in a non-family business.”

Some fourth-generation family members are already involved with the company. Harmelin’s daughter, Sara, is a field sales manager in the on-premise division; while Aaron Silverman, son of third-generation Allied partner Michael Silverman, is a brand development manager.

“We encourage our offspring to do other things first to get a comprehensive business background,” says Altschuler. “And then they can decide if they want to come back.”

Checking the details

Of course not every M&A goes smoothly. Sometimes, a planned M&A can get torpedoed because of decisions that were made long ago, notes Robert W. Anderson, a shareholder with the Westfield-based law firm Lindabury, McCormick, Estabrook & Cooper P.C.. So a potential seller may wish to review its books and records long before putting up a “For Sale” sign.

One suggestion: do some housecleaning, and scour around for any loose ends. That’s because for a buyer, a “big part of an M&A involves due diligence; understanding what they’re buying and how the target company fits in with the acquirer’s business operations and goals,” says Anderson. “If they see a lot of issues, like unsigned contracts, or potential tax and other liabilities, they may back away from the deal.”

“We advised a Central New Jersey seller who put his medical device company on the market for about $35 million,” he recalls. “A potential buyer was interested, but it turned out that, for a number of reasons that went back for years, the target company had set up dozens of affiliated entities, and each entity had multiple stakeholders.”

By the numbers: Bigger is better

During the 12 months ended August 31, overall M&A volume in the U.S. fell by 9 percent to 13,313 transactions with an aggregate value of $1.9 trillion, according to FactSet, a Norwalk, Conn.-based financial information and analytical applications company. But the largest deals gained steam, as the number of transactions valued at $1 billion or more jumped by 17.9 percent with a total value of $1.9 trillion, and a 23.4 percent volume gain for the $500 million to $999.9 million class, which accounted for an aggregate of $173.5 billion of value.

“Low interest rates, steady economic growth and a strong stock market have provided a favorable macro-economic backdrop for M&A,” according to a report issued by global law firm White & Case. “Meanwhile, the disruptive impact of technology across all industries has prompted a flurry of deal activity, as established companies react to new business models and customer habits.”

Protect yourself against unanticipated events

When two or more parties negotiate an M&A transaction, they generally assume that neither company will experience a major disruption in the near future.

But imagine you were set to acquire a company—say a toy supplier—whose major customer was Wayne-based Toys “R” Us, which recently filed for bankruptcy. Wouldn’t you have second thoughts about the deal?

“A situation like that is considered an ‘intervening event’ that could, at the very least, prompt the acquirer to take a second look at the purchase price,” says Sean Aylward, vice chair of the Corporate and Securities Group at the West Orange-based law firm Chiesa Shahinian & Giantomasi.

“Because of issues like that, it’s important for both sides to include specific terms and conditions in the definitive agreement that give the parties the ability to modify the terms of the deal, or to withdraw with minimal or no penalty, if there are material impacts on the value of the business.”

The deal, which was structured as an asset sale, eventually went through, “but it was a nightmare tracking everyone down, getting them to agree with the sale, then allocating the proceeds among the entities. It took months to clear up, and was an obstacle that could have torpedoed the sale,” Anderson says. While there may be reasons for more complicated structures, he says, “it’s better to try to keep things simple and keep good records.”

Cybersecurity can be another issue, he adds.

“Buyers want to see if the target firm has policies in place to guard against breaches and handle the fallout in case there is a breach,” Anderson explains. “Large companies like Equifax and Target that have been hacked have the resources to deal with the fallout, but some studies indicate that up to half of smaller and middle market companies that are breached go out of business in a year.”

Tax concerns also matter, and there can be a 180-degree difference between what buyers and sellers want, Anderson cautions. “A buyer may want to structure the deal as an asset purchase, instead of buying the stock of the target corporation itself, since the acquiring company may be able to step up certain of the target’s assets to a higher value. This may let the surviving firm take a higher depreciation write-off against taxable income.”

He notes that buyers “will also want” some kind of claw back provision that would require the seller to refund a portion of the purchase price if its representation of condition was not accurate at the time of sale. “But during the negotiations, a target company may try to limit the time a buyer has to exercise this right, and may try to put a clause in that exempts errors that are de minimis, or minor,” Anderson says.

Finally, the way the target company’s earnings were computed can be a sore spot, Anderson adds.

“Many times, business owners run their operations in a way that legitimately minimizes earnings, so they won’t have to pay as much in income taxes,” he details. “But that can hurt your sales price when you try to sell your company. A buyer will typically review three to five years of tax returns, so think about this when you get to a point where you’re seriously looking to sell your business.”

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