Analyzing Cross-Border Acquisitions

Should your company go global?

By Adam Ismail

Everyone has heard about Royal Numico’s acquisition of GNC and wondered how it would globalize the industry. The fact is, since that time, international acquisitions have been up over 75% from the same period last year. It is an alarming trend and you probably don’t want to miss this boat.

Think about what your company needs to really grow aggressively. Is it distribution, stability, access to new products or even access to new markets? Ultimately shareholder value should drive a business’ decisions and international acquisitions can provide a company with more value than domestic M&A transactions. Numico instantly acquired wider distribution in the U.S. and a number of new products, while GNC gained international distribution of its products. To quantify it, GNC management believed that the $1.8 billion offer for the company gave its shareholders greater value than the company could generate alone. Numico was willing to put out that much cash because GNC had operating profits in excess of 13% of its revenues and it believed it was worth even more as a joined company.

When Arkopharma was evaluating its strategic operations more than a year ago, it realized that by being limited almost entirely to the French market, it risked being exposed to geographic market fluctuations. Everybody re­members what happened to the U.S. market last July and swings like that can put hundreds of companies into bankruptcy. At that time the U.S. market was the fastest growing market in the world, but Arkopharma had only a very small presence and had no ac­cess to anybody who really understood the market. Health from the Sun had a seasoned and skilled management team and broad dis­tribution in the natural foods channel. For both of them, a partnership was far more valuable than going their separate ways. In fact, Arkopharma has even launched its own branded supplement line since the acquisition.

At the same time, many big play­ers are rethinking their nutraceutical strategies. Pharmacia & Upjohn decided to exit the nu­trition sector completely by selling its nu­trition and Chinese nutrition divisions. Most analysts have said that future success is going to depend on science-based marketing. Baxter Deutschland and Fresenius, which purchased the two units re­spectively, saw this as an opportunity to bring more science to the sector and ac­quire knowledge quickly.

If you are a domestic company and do little business outside the U.S., then it may make a lot of sense to partner with someone abroad. A foreign entity could not only give you that distribution, but could also generate revenues for you by launching its prod­ucts into the U.S. as well. In addition, in places like Germany or Japan where nutraceuticals are more widely accepted, companies may have the capital to fund research and clinicals on your products. For example, everybody in the industry is saying that functional foods will be the new delivery form; a transaction with a Japanese corporation could give you that knowledge, because in the advanced Japanese market there are very few products still in pill form.

In another example, Danone Groupe, the French food giant, invested $5 million into Lifeway Foods. In return, Dan­one has access to probiotic technology, which is very synergistic with a number of its products. This transaction not only gave Lifeway new marketing re­sources, but also access to Danone’s U.S. distribution.

For years now, people have been saying that the world is getting smaller. The U.S. market is in a strange position, because it is the largest nutrition market in the world, but it is not nearly as ad­vanced as European and Japanese markets. With the recent cross-border acquisitions, the state of the industry has begun to change the dynamics of what it takes to succeed. New technologies and products will come to the U.S. marketplace—will your company be able to take advantage of it? Consider the possibilities of the world beyond our borders.

NW

Adam Ismail is a financial analyst with Health Business Partners (HBP),Warwick, RI) a boutique investment bank that works exclusively with companies in the natural products and complementary health services industries. HBP also provides capital to businesses in these industries as well as tracking financial data in the natural products industry and providing M&A and strategic ad­vice, in addition to direct investments. HBP can be reached at 5784 Post Road, Warwick, RI 02818; 401-885-4670, Fax: 401-885-4686; E-mail: [email protected]; Website: www.healthbusiness.com.