M&A advice goes a long way for Whitestone

A mergers and acquisitions advisory firm has gone back to its roots to focus on deals in the fluid power industry, and they are banking on a team that has both operations and transactions experience in the sector to help it succeed.

Whitestone Associates L.L.C. has been around for more than a quarter-century and in recent years had provided M&A services in a variety of industries, but decided it would be best to concentrate on the wide variety of firms involved in the fluid power world, including both OEM manufacturers and distributors, according to Frank Gallucci, the firm's founder and senior managing director.

"We think we are the only ones in the M&A world that has that exclusive focus," he said. "There are a bundle of companies that can work here, but we are working here exclusively, and we are here working with the support of a team that have been operating guys first, and that is probably what distinguishes us."

Gallucci said transactional experience—like those held by staff at traditional financial firms—can be viewed as somewhat of a commodity, but that Whitestone can look at potential transactions from an entirely different experience, and that's what will help it be successful in this space.

In fact, many in the hose industry will recognize the name of one of Whitestonee's newest team members, Jeff Finch, a senior director who spent more than two decades with Eaton and Aeroquip. Finch joined Whitestone in May 2017, and he also brings the viewpoint of one who has been on both sides of the M&A equation. He was with Aeroquip when Eaton purchased them, and then as an executive at Eaton he was heavily involved in a number of acquisitions and the integrations that followed.

"It's a totally different experience if you're the buyer or you're the seller," he said. "You remember all the bad things that happened to you and not so much the good things."

Members of the Whitestone team have seen the fluid power field from both the manufacturing and distribution perspective, with some involved as owners of distribution firms.

"I think the experience is critical because we understand the language, we understand the products, we understand the markets, we understand the applications and the channels of distribution," Finch said. "These are things you don't get unless you spend decades in the industry. If you're just doing deals for the sake of doing deals, you can understand the financial aspects, but you really don't get into the heart of the matter in terms of what it took for the distributor to grow the business, or what kind of channel rules and regulations given manufacturers have."

Gallucci said one of the most important elements of any deal in the post-acquisition integration is how well the two companies fit together. "This is not a transaction skill, but this is a management skill. We can provide our client with a road map or a caution sign as to what might be difficult or not difficult. We don't think you could do that if you don't have operating experience."

Seller-side perspective

Finch defined the fluid power sector as not just hose, fittings and rubber components, but also the hydraulics, cylinders, motors, valves and other components. "It's a huge industry that's made up of lots of major OEMs, lots of distribution channels, and it is experiencing consolidation."

He said there are a number of experienced buyers in the marketplace, but most sellers have no experience peddling their businesses, particularly among distributors who have spent their lives developing their companies.

"What we do is engage with them to evaluate their business and help them provide a value to it," Finch said. "We understand the financials and we understand the forward worth of the business. Then we help them market the business to various interested parties. And basically we walk them through that process so they make an educated decision in terms of how to generate the best value for their business."

Gallucci added that Whitestone's clients often are in closely held businesses, or the second or third generation of family owned enterprises, and they don't have management or other family members to continue the firm's legacy. It's not just as simple as putting out a "For Sale" sign and waiting for buyers to appear.

First, Whitestone does an internal due diligence, determining what needs to be done before putting the business on the market. Then the M&A advisers put on their "Buyer's Hat," trying to determine who would find the business attractive, according to Gallucci.

Whitestone typically represents sellers, partially because the economics are more compelling, he said. The firm's business model is based primarily on success fees, though some projects also include retainers.

Finch said it's typically more challenging to find someone wanting to sell than to locate those looking to buy. "If we represent a seller, we know we have a ready, willing and able seller," he said, "and then it's relatively straightforward to go find a group of target buyers that might be interested."

Team members use the relationships they've developed over the years to find prospective clients, along with attending trade shows and association meetings (for example, Finch has been at the annual NAHAD convention the past two years).

Gallucci said much of its business has been word of mouth, but Whitestone is working harder to try to develop its brand now that it's dedicated to serving the fluid power space. "We've managed to make a living over a quarter of a century, but we are extending that now," he said.

Mergers to continue

Both executives expect M&A activity to stay strong in fluid power, as some companies will find it hard to find sufficient growth organically and will need to supplement that with acquisitions. On the flip side, there will continue to be a natural progression as businesses age out and will need to be sold.

Gallucci said Whitestone is particularly excited about the factory automation sector, where there are a lot of small businesses that might benefit from combining with larger entities.

And Finch said the tradition of buyers looking to buy similar businesses will give way to firms looking to diversify by adding new capabilities. "It's where dumb products become smart, and where you use things that people haven't even applied in the industry yet that's probably the frontier that keeps it fresh," he said.

The evolution of private equity's role will be another trend to watch. Strategic buyers used to dominate the M&A landscape, Gallucci said, but private equity has never been more active. "We spend a lot of time entertaining calls from private equity, and reaching out to private equity when we're on the sell side," he said.

And the agenda of PE buyers has changed somewhat in recent years, with holding periods becoming longer, and purchased firms sometimes becoming the foundation of a buy-and-build strategy. "It becomes an interesting question as you see many of these rollups or bolt-ons occur as to what's the end game, or if there is an end game," Finch said. "I think some get caught up in buying and getting bigger, and don't have a clear sense as to what they're going to do when they're done."

Many variables go into determining what type of buyer is best for a client. Those can include geographic and product questions, manufacturer alliances and financial expectations, along with making sure there's a proper cultural fit.

"We don't just blanket it out to a bunch of buyers because we're probably wasting our time and theirs," Finch said. "We try to target it down based on understanding the virtues of the company we're representing and then matching that up with the best buyer."