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The Whole or the Sum of Its Parts?

Even though what you desire is wrapped in a much larger, more expensive corporate package, it becomes impossible to take …

Even though what you desire is wrapped in a much larger, more expensive corporate package, it becomes impossible to take one’s eye off the prize. That’s how Luxottica Group Spa felt about LensCrafters.

Back in ’95, the Milan, Italy-based Luxottica-world’s largest eyewear manufacturer-developed a three part strategy to expand its business. It had to market more designer eyewear in the U.S., its sunglass business, and a foundation to retail eyewear globally. The vehicle it chose to do that was U.S. retail chain, LensCrafters.

The problem was, LensCrafters was tucked into the big retail conglomerate, U.S. Shoe Corp. After considering the options, Luxottica bought U.S. Shoe for $1.4 billion. It soon proceeded to sell off all the pieces of the company except LensCrafters, the object of its desire. During the acquisition, Nine West bought U.S. Shoe’s footwear business and then, after the deal concluded, Luxottica, which wanted a clear focus on eyewear, sold U.S. Shoe’s women’s wear stores.

But why buy the whole company? In many situations it’s because the acquired company prefers to be sold outright, not in bits and pieces; sometimes, too, the acquisition and divestiture of the non-core businesses is more cost effective than the purchase price of one subsidiary.

Both were factors in Carpenter Technology Corp.’s $312 million acquisition of Talley Industries, which concluded this past February. Carpenter, based in Reading, PA, manufactures and distributes stainless steel, titanium, and other specialty alloys, and what it wanted from Talley Industries of Phoenix was its steel rolling facility in Hartsville, S.C. But for tax reasons, Talley was only interested in selling the corporation as a whole.

Carpenter executives decided the acquisition of the Hartsville plant was critical enough to purchase the whole and spin off the parts not strategically connected to Carpenter, says its chairman and CEO Robert Cardy.

Talley was like a mini-conglomerate with other businesses in such diverse fields as airbag device and brass button manufacturing. “Each one was good, profitable, and had market niches,” adds Cardy. “It seemed to us, that if we could hook them up to a strategic buyer, it would put the purchasers in a better market position.” Carpenter ended up keeping two Talley units: the Hartsville plant and Amcan Specialty Steels, a metal distribution company. Carpenter says he expects the rest of the Talley units will be gone by September. Although no prices were disclosed, of the first two firms divested, the achitectural and engineering firm tallied revenues of $84 million in 1997, and the button manufacturer, $37 million.

While the eventual price tag on the nine Talley units won’t be totaled until all are gone, Cardy says his company is acquiring the Hartsville plant for less than it would cost to build it. “To construct a hot mill like Talley had would have taken us a couple of years and somewhere between $180 million and $200 million. We couldn’t afford two years. We had need for that capacity.”

Carpenter already announced it will invest $6.8 million in the Hartsville plant to increase annual capacity from 40,000 hot-rolled tons to approximately 78,500 tons. Not counting the Talley acquisition, Carpenter sales should hit $1.1 billion to $1.2 billion in 1998. The impact on revenues was immediate. In the company’s fiscal third quarter ended April 21-first quarter after the acquisition-diluted earnings per share jumped 34 cents to $2.32 compared to the year before; net income climbed 55 percent; and net sales bounced up 31 percent. In the first full year after Luxottica’s purchase, revenues were up 33 percent.

There’s no sure way of knowing that buying a whole company to get an individual subsidiary will pay off in the end, but weighing replacement cost to create the subsidiary versus the cost of the whole enchilada should give some clue. Also, it’s important to ascertain market desirability and expected price for the units of the acquired company to be divested. Another key is to have a well prepared, and flexible, exit strategy.

Are there cautions in buying big to end up with a small addition to the company? Cardy, who has made about a dozen of these deals in the past six years, notes that the process is a tough road and he wouldn’t do it again unless it was absolutely necessary. “We had to raise a lot of money for the cash deal and that forced us to do a road show to sell equity. Now we are going through the process of selling these units. It ties up a lot of executive time.”

He adds, the value of this type of deal really hinges on the importance of the strategic part of the acquisitions. “You have to make sure the result is worth the journey.”


Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron’s, Global Finance, and Corporate Finance.

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