Making An Acquisition In A Recession

Last Wednesday 22nd April my company Severn Delta acquired the business of PitRok Ltd. and in particular ownership of the PitRok brand of natural deodorants. Given that at a glance this has looked like something of leap for Severn Delta, not to mention that we have made the acquisition in the teeth of a recession, I thought a few words on the subject were in order.

1. How does this make sense for Severn Delta?

The logic is three fold:

a) The distribution fit is good. Both Severn Delta and PitRok sell fast moving consumer goods into UK multiple retail. The overlap is strong with three exceptions - one where we are stronger by a long way and two where PitRok is stronger. The net effect is the opportunity to broaden the distribution base in both directions.

b). We have acquired the PitRok brand and this will increase the % concentration of branded business vs contract manufacturing.

c) Price and ease of absorption are attractive. We have bought at a reasonable price a small business with strong cash flow and a low level of complexity that makes it straight forward for us to take over and absorb administratively into Severn Delta.

That caveat is of course that any acquisition features some of Mr Rumsfeld's "unknown unknowns" or as Sig put it me that in any acquisition you are:

" walking out into the dark night and there is no flashlight strong enough".

So we will see how we get on!

2. Don't you know there is a recession on?

Yes. But this is a factor in favour of the acquisition rather than against. Firstly because this makes the price perhaps more favorable than at other times (although we have paid a fair valuation of the business) and secondly because even though the bank margin may be higher than in previous years it is some of the cheapest money we have ever borrowed and our total borrowings are still low compared with our early history!

A third point is that it strengthens the business as a whole. It gives us greater market breadth, additional cash flow, distribution reach and a new brand in the stable with range extension possibilities that lie within our competency reach.

3. But aren't you a textile company?

Yes and no. We manufacture textile consumer goods but many of these are in the form of moistened wipes with personal care formulations, so we already have a number of skin care products in the portfolio that are not so far from a deodorant.

We work under the regulation of the European Cosmetics Directive already, and our preference for natural and organic components rather than petrochemical alternatives is again a good fit. Our new "ABSOLUTION" by Sarah Smith is an example.

More importantly we have grown our Sarah Smith brand from zero to a level where it is twice the size of the PitRok brand, doubling sales twice since launch in late 2005. We will aim to apply the same methodology to PitRok to ensure its longevity as a strong, if niche brand and hopefully delivery some growth into the bargain.

Ambushed!

Yesterday afternoon I was ambushed by three members of my staff. To be precise three of the four most senior members of my staff!

Before departing for the USA almost a month ago I had refused to sign off a purchase order that required my authorsiation. It doesn't matter what it was for but at the time I felt we were jumping the gun. We didn't need the goods or in this case service in question at the time. 

A month on the deadline from the customer has come forward and we now need to press the go button. Hence the ambush. 

The lesson: by stalling to the last possible moment the cash in question will have had an extra 30 days reclining in my bank account before being paid to the supplier in question.

Don't spend it unless you have to.

Don't spend it until you have to.

And,

Pay when you have to and not before.

7 Thursday Thoughts By Way Of A Catch All Catch Up Post

1. The recent trip to Chicago to exhibit at the International Home & Housewares Show 2009 was a good, worthwhile. We came away with a greater quantity of leads than three European shows provided collectively. A big thank you is due to everyone we met. We had a great trip.

2. While in Chicago we had dinner with a friendly competitor (we compete next to each other rather than head to head - same market different niches if you like although there are areas of cross over). It was a good evening. Worthwhile kicking around the same issues and seeing how two similar (although they are 5 times our size!) businesses tackle the same issues. E.g. They installed SAP last year, we "rolled our own" ERP software with open source tools!

3. Oddly I have a sense, despite all the warnings to the contrary from "export-experts" that it may well be more straightforward for us to build business in the USA than it is in some of our closer to home European neighbours. Our open, straight, keep-it-simple approach seemed quite at home.

4. Sarah Smith Kitchen Classics, a new product we launched this Spring is already selling as well as the Original Sarah Smith "Ultra Cloth". GOAL!

5. The parts of my business that are suffering from recessionary demand decline are the exact opposite to the ones that the economists tell me should be suffering. For the sake of clarity: the sexy pricey stuff is doing very well thank you, the low price value end is looking a little soft. Make of that what you will.

6. Innocent have sold a stake to Coca-Cola because Pepsico tore a chunk off their business last year with Tropicana Smoothies. Up until then their flim-flam heavy cuddly marketing2.0 with added antioxidant aren't we lovely healthyisms (but just don't ask us to substantiate our claims) has served them very well indeed BUT once the big guns come to town a big chum with big guns is worth having around. My opinion. Nothing added. Nothing taken away. :-)

7. Ian Tomlinson was a friend of my brother.