The Story of Arc3 Gases: A Merger of Two Family-Owned Businesses
It all started just as you would expect. One of the owners of a business based in Virginia, who is active in the industry and always out and about, had lunch with a key sales and operations guy from a similar business based in North Carolina. They had known each other for years; each respected the other and his business. One said to the other, “You know, we ought to get our businesses together … wouldn’t that be something!”
With small businesses, especially family-owned businesses, that’s usually as far as the conversation goes. In this case, however, each went back to his ownership group and posed the question. Excited by the potential strength of a combination of these two businesses, operating in contiguous states with almost 50 retail locations on the Atlantic seaboard, and fueled by an intense desire to have their businesses remain independent in an industry that has seen intense consolidation, the owners cautiously decided to explore the possibility. But they were uncertain about where to start and how to do it.
An owner of one of the companies called Leaders LLC. He had heard good things about this firm, which is a mergers and acquisitions firm that does a lot of work in their industry—the industrial gas industry. When we received the call, we listened as the owner described the companies’ mutual desire to have a discussion about combining the two companies. His years of business experience had created good commercial instincts. But he and the others wanted to proceed carefully.
Rather than outlining the way in which we could represent this company’s interests as its M&A advisor, we suggested something novel. We explained that we could be more effective assisting both companies with their objectives if we served in a neutral capacity. Rather than representing one party’s interests and advocating for those interests, we would facilitate the merger discussion in an impartial fashion—without favoring the interests of one company or the other—and provide valuable M&A advice in that context. The owners of each company embraced the idea: It would be efficient and enable the discussion to proceed with Leaders managing it carefully, one step at a time.
That was the origin of the 2013 merger of two longstanding, independent industrial gas and welding supply distributors, Arcet Equipment Co. of Richmond, Virginia, and Machine & Welding Supply Co. of Dunn, North Carolina. Prior to the merger, the Ellen and Dillard families owned Arcet, which was founded in 1946; the Aldredge family owned Machine & Welding, which was founded in 1925. Maintaining the legacy of family ownership and management was a major objective of both companies in the merger. Their true, 50/50 merger of equals formed a new company named Arc3 Gases, Inc. The balanced structure of the merger ensures that the family ownership and management heritage of Arcet, on the one hand, and Machine & Welding, on the other, is maintained, while at the same time positioning the combined businesses to build upon their shared market position.
A merger is distinguished from an acquisition in that in a merger, the owners of each company have a substantial equity interest in MergeCo, and the owners of each company have a meaningful say in decisions made by MergeCo. In a true merger of equals between two privately owned companies, the owners of each company have roughly equal ownership in MergeCo. This is so notwithstanding the relative value of each company prior to the merger.
The benefits of a merger are well known. Operating efficiencies are achieved, management becomes deeper, and best practices of the respective businesses are adopted. Perhaps the two companies are in the same industry and operate in contiguous geographic territories; or perhaps the two companies sell into the same markets, and have complementary products or distribution channels. In short, a merger presents the opportunity to become bigger and better, and to become more stable, resilient, profitable, and able to seize organic growth opportunities as well as opportunities to grow through acquisition.
Further, in industries that are experiencing significant consolidation, like the industrial gas and welding supply industry, with acquisition of independents by majors sometimes making it more difficult for independents to compete, the merger of two independents enables businesses to achieve the growth required to compete in an industry as an independent. There are also reasons that may be specific to particular companies that can make a merger, where sale is not desired, a valuable opportunity. For example, a company may lack successor management, or it may have an owner who wishes to exit, but the company does not have the resources to provide for the exit.
Given the acknowledged benefits of a merger for two privately owned companies, why are mergers so rare? Why is it that the owners of small companies rarely consider a merger as a business strategy? One of the main reasons is that the threshold issues that arise in connection with the consideration of a merger are overwhelming to most small business owners. Who will control MergeCo, and how will decisions be made? Who will manage it on a day-to-day basis? How will equity in MergeCo be allocated? Will the cultures of the two companies be compatible? How will owners exit MergeCo in the future? If family-owned companies are involved, how will future generations be treated?
Another reason that the owners of small businesses rarely consider merger transactions is that the best targets are often competitors, so they are concerned that the initiation of the discussion will be perceived as a weakness or a signal that the company has a problem, or they are concerned about sharing confidential information.
Interestingly, another common concern is that the merger discussion could become tense and possibly adversarial, and the respective ownership groups don’t want to risk damage to their longstanding and important business and social relationships. And, of course, there are business owners who think that no business can be run as well as they run their own business, and thus the notion of merger as a business strategy is dismissed.
Interestingly, while we usually advise companies in our role as their M&A advisor, it is clear that we can sometimes provide more value if we serve in a neutral capacity in connection with a business owner’s consideration of a transaction. As neutral, relying heavily on our transactional experience, we are able to create a process for addressing the threshold issues, and then successive issues on a step-by-step basis, in a fashion that is manageable and low risk for the parties to the transaction.
We can focus the owners of each business on their respective interests—so that objectives, rather than positions, become the subject of the discussion. It’s remarkable how often objectives can be achieved when parties are candid about their interests. And it’s amazing how often interests dovetail.
In the context of the merger of two small, privately-owed companies, a neutral has the ability to do what a representative or advocate for one company or the other cannot do: Facilitating—and improving—the negotiation by continuing to keep the discussion focused on the important issues; preventing focus on an individual who is perceived as being unreasonable; providing options and alternatives; ensuring that decision-making is informed; intervening to preemptively prevent anyone from becoming adversarial; ensuring that the term, “deal breaker,” is not in anyone’s vocabulary; ensuring that lines are not drawn in the sand by keeping every door open; reducing escalation, and eliminating ego as a factor in the discussion; providing insulation for the owners; and providing the ability for each company to “caucus” with the neutral to review options and test ideas outside the presence of the other company.
The October 2013 merger of Arcet and Machine & Welding—a true merger of equals between two strong, family-owned independent industrial gas distributors—was a landmark moment for these families, their businesses and the industrial gas industry.
Matthew L. Caras and Brian T. Deveaux are the Principals of Leaders LLC, a mergers and acquisitions advisory services firm that also provides neutral negotiation facilitation services to family-owned and other privately held businesses. For more information, you can reach Matt at 207-318-1893 or [email protected], or visit Leaders LLC’s website.