HANOVER, Germany—Mergers and acquisitions definitely are a disruption in the tire and rubber industry, but they also serve many useful purposes, including the transfer of knowledge and technology.
That was among the points made by Jacob Peled, executive chairman of Pelmar Engineering Ltd., during his talk on the state of M&A in the tire sector at Tire Technology Expo 2019, held March 5-7 in Hanover, Germany.
In recapping some of the trends among deals in recent years, he said many of the purchases have come in areas that not long ago weren't so popular, such as ag and off-highway tires.
"The movement in M&A related to off-highway tires is by far the most distinct in the tire and rubber industry, and indicates the high interest in tires that only a decade ago were considered 'primitive' with minimum technology involved," Peled said. "This certainly is not the situation now."
Among the acquisitions he mentioned were Goodyear selling its farm tire production in North and South America to Titan International Inc., and also licensing the name; Trelleborg's purchase of CGS/Mitas; Camoplast's purchase of the former Solideal; the Chem China acquisition of the majority of Pirelli; and Yokohama's deal to buy the Alliance Tire Group.
One deal that Peled said surprised many was Michelin's 2017 acquisition of Lehigh Technologies Inc., which produces micronized rubber powder. They wondered what the industry giant was doing, buying a recycling company.
But then Michelin went and purchased conveyor belt maker Fenner P.L.C. in 2018, along with acquiring OTR tire maker Camso. The deals are the foundation for a new business segment within Michelin that will focus on material handling, construction, agriculture and power sport.
And Peled said one of the top suppliers of materials into those industries is Lehigh, so the purchase makes much more sense in that context.
Evolution of a deal
Many M&As go beyond the companies themselves, Peled said, and have a large influence on the tire industry as a whole. Often times, the acquisition itself isn't as important as the influence on the flow of technology and the impact on marketing and distribution.
"Mergers and acquisitions is an art," he said. "You need to have vision."
The actual process of M&As is pretty simple, but there are certain principles that generally come into play. Peled said both sides must really want the deal; the two sides need to benefit more or less equally; and executive management typically is involved and on board with the accord.
The industry veteran also is a big believer that the process has to start with a personal meeting in a neutral place. "You want to meet them and look them in the eye," he said. "Then the process will start. Some say in the modern day, you don't need that. That's not true."
The next step is a memorandum of understanding. This document gives certain scope and sets the borders of the deal. It sets the terms of price and payment terms, and also confidentiality. That normally includes a non-disclosure agreement, and often a non-compete clause as well, according to Peled.
That is followed by a period of due diligence, where the parties may discover the price is too high or too low. He said items that must be covered include legal, commercial, financial and technical details. "If due diligence is done properly, there's a good chance the deal will happen," he said.
That is followed by preparation of the definitive agreement, including the final time table to conclude the deal, followed by contract signing and closing.
In most cases in major M&A projects, a new company/entity is created, the Pelmar chairman said. Often that is part of the MOU. The main reasons to form a new legal entity can be a desire by both sides to avoid skeletons in the closet, and the "ability to combine the interests of both sides in a new and fresh format, without too much influence of the existing parties to the deal."
Pelmar, he said, has encountered a great loss of time and effort in talks to agree on minor issues related to formation of a new company, especially when done in a later stage of the process. The firm even had one deal that fell through because of those types of discussions.
One typical reason that causes companies to make purchases is to obtain technology and know-how that it didn't previously have. In the past, Peled said the price of transferring technology was extremely high, and acquisitions helped spread it around.
"There are several recorded transactions, even recently, which are based on the wish of the buyer to shortcut a technological gap," he said. "Someone tried to explain to me once that this is similar to buying a cow for a glass of milk. This is of course not accurate, but it is an important factor."
Acquisitions also can be a tool to shorten the time to market. "The value of such consequence is high, but not easy to calculate," Peled said. "The effort of developing a market requires often a lot of time and funds. This can be saved by acquiring the company that already has developed the market."
Many times, acquisition targets have latent value, assets that aren't readily apparent and are hiding behind depreciation.
"It is common to think that the acquirer often discovers deficiencies rather than advantages," he said. "This is not true. There are many positive issues which have a higher value than the book value. It can be seen in capital expenditures, tooling, past overhauling and instrumentation."
Acquisitions also can be game changers in the industry. In the rubber industry, this can take such forms as: raw materials with revolutionary physical and chemical properties; production process/machinery with evolutionary qualifications; and tire construction that is totally different from existing ones.
"With M&A, when one company buys another, there is an impact on both companies and the industry in general," Peled said. "Very often it completely changes at least one of the parties."
He counted 26 major M&A deals in 2018 and 27 the year before. He expects activity to be strong for the next several years, with participation at all levels of the business.