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M A X W E L L R E P O R T By Steve MaxwellFactors for Success in the Acquisition GameIn the last issue, we reviewed the current status of mergerand acquisition activity in the broader water industry. Aspromised, this time we’ll take a quick look at what it takes tobe successful in employing an acquisition-based growth planin this industry.Many firms have tried the acquisition game — in fact, virtuallyall the companies in this business will tell you they areinterested in making acquisitions. There’s a certain excitementinvolved in mergers and acquisitions — the “thrill ofthe chase” that often seems to consume CEOs and investmentbankers in the pursuit of a deal.But the truth is many acquisitions are not successful in thelong-term. Academic studies have shown that over time asmany as half or two-thirds of transactions are ultimatelyjudged to be failures. Too often the focus is on chasing andclosing the deal, rather than on the less glamorous and morelaborious process of successfully integrating the new acquisitionin to the existing business. Nonetheless, there are clearlya few companies that have mastered the process, and whichhave continuously and successfully grown through acquisitions.Among the companies that we follow in the accompanyingtable, a few names come to mind. Danaher, Tetra Techand ITT have certainly been active, and generally successful,acquirers in the water industry for many years.Why do firms undertake acquisitionbasedgrowth plans? In American business,there is an inexorable appetitefor growth — that mantra has alwaysbeen that “if you’re not growing, you’redying.” Few companies are content tosimply maintain the status quo. And ifyou want to grow, there is always the“buy vs. build” decision — should you undertake a faster andperhaps riskier plan of growth via acquisition, or should yougo the more conservative and probably slower route of internal“grassroots” or organic growth? That is a key questionthat faced by CEOs every day, and many opt for the formerapproach.The key reasons for or primary drivers behind acquisitionbasedgrowth programs typically include the following:• A means of strategic growth or expansion: this is themost often-cited reason for an acquisition — the ability toquickly grow or strategically transform a business. But thiscan be a little bit too vague. CEOs often cite this as thedriver or justification for a deal, but they’d better have apretty specific and defined plan in mind.• The ability and desire to consolidate capacity in a fragmentedindustry: this type of thinking has driven a lot of theWATER DOLLARSCompany Price % of52-wk hiRevenue EBITDA Market Cap. Enterprise Val/(000,000)EBITDAEBITDA/RevenueROEPerformanceTSG IndexAmeron (AMN) $66.84 92% $516 $64 $622 7.5 12.4% 6.5% 9.8Badger Meter (BMI) 41.99 94% 253 47 630 13.4 18.6% 18.0% 16.9Calgon Carbon (CCC) 15.5 84% 445 88 868 9.6 19.8% 14.0% 15.6Danaher (DHR) 43.18 99% 12290 2390 28,197 12.5 19.4% 11.0% 15.7Dionex (DNEX) 89.89 99% 420 101 1,569 14.9 24.0% 25.0% 21.5Energy Recovery (ERII) 3.89 53% 51 6.2 202 24.4 12.2% 1.7% 13.7Federal Signal (FSS) 5.72 56% 734 50 355 11.5 6.8% 3.3% 7.5Franklin Electric (FELE) 36.13 94% 661 96 831 9.3 14.5% 9.0% 11.8Gorman-Rupp (GRC) 28.84 92% 264 39 490 11.6 14.8% 11.0% 13.1Insituform (INSU) 26.18 92% 845 106 995 9.5 12.5% 9.0% 10.9ITT Corporation (ITT) 48.51 84% 11000 1590 8,877 6.0 14.5% 17.0% 12.4Layne Christensen (LAYN) 28.14 92% 929 92 563 5.9 9.9% 5.0% 7.7Lindsay Manufacturing (LNN) 58.3 98% 345 42 700 15.0 12.2% 10.0% 12.6Mueller Water (MWA) 3.05 51% 1370 102 473 10.8 7.4% -13.0% 4.4Nalco (NLC) 26.5 91% 4010 748 3,657 8.6 18.7% 32.0% 18.3Northwest Pipe (NWPX) 19.34 55% 390 48 174 5.3 12.3% 8.0% 9.4Pentair (PNR) 34.39 87% 2870 405 3,405 10.2 14.1% 8.0% 11.7Tetra Tech (TTEK) 21.33 76% 1410 152 1,322 8.0 10.8% 11.0% 10.0URS Corporation (URS) 39.32 74% 8890 515 3,185 6.2 5.8% 7.0% 6.2Watts Water Tech. (WTS) 35.4 96% 1270 181 1,310 7.9 14.3% 7.0% 10.9Total 48963Financial data as of October 22, 2010TSG Index: November, 2010 12.0920 Water Utility Infrastructure ManagementNovember/December 2010
deals in the water industry, from the U.S. Filter era, right up to the present. Thegeneral idea here is that by combining organizations, one cannot only reducecompetition, but also accomplish cost-cutting and improve productivity viagreater economies of scale.• A quick and inexpensive way of growing the business: a lot of deals aresimply ways of growing the revenues and market share of the acquirer morequickly. When you cut through all the rhetoric and PR, there may not really beany big strategic premise. A lot of deals occur simply because interest rates arelower and credit is cheap, because the target company has a lot of cash to helppay for the deal, because currency exchange rates are favorable, or because thetarget company’s stock price took a short-term dip.• The ability to improve a target company’s performance: this approach isdriven by the acquirer’s belief that it can grow the revenues, reduce the costs,and generally improve the performance of the target company. Many times alarger company may be able to help a smaller or start-up business in terms oftechnological expertise and know-how, research and development budgets, orenhanced marketing and distribution channels.Clearly, every acquisition is different, and there may not be any iron-cladrules for ensuring the success, but there are a lot of important guidelines. Thosecompanies that have been successful in evaluating, implementing and thenintegrating acquisitions typically adhere closely to a number of general rules orcriteria, such as the following:• A detailed plan and timetable for integration of the new company — thismay not be the exciting part of the process, but it’s the part that’s likely todetermine success or failure. It should include the establishment of teams,schedules and specific responsibilities to make sure that the projected synergiesare actually accomplished. Sometimes this can include detailed post-dealinterviews with various parties, on-line “deal rooms” and regular review meetings— activities which may go on for years. Many successful acquirers will tellyou that the real work of an acquisition begins the day after the closing. Lotsof deal-hungry companies, however, forget this critical fact and go straight onto the next deal.• Careful and thorough communication plans — one of the biggest risksin any acquisition is that key people get disillusioned and leave, not only inthe acquiree, but sometimes also in the acquirer. People don’t like uncertainty;it’s better to tell people the news — even if it’s bad — than to keepthem in the dark.• Systematic attempts to learn from past acquisition successes and failures.“Serial” acquirers have a formal process and review effort to make sure that theylearn from their mistakes, as well as their successes.• Attention to cultural and human resource issues — transactions are not donebetween faceless bureaucracies — companies comprise living and breathinghuman beings and if the people aren’t happy, or if the two teams aren’t a goodcultural or personality fit, then the deal is probably not going to work very well.This is obviously only a very brief overview of what is an extremely complex anddetailed process — a process that often takes years to fully implement. Every dealis a little bit different and a strict cookie-cutter approach doesn’t work. But, at thesame time, there must be a rigid set of guidelines that are followed — success israrely achieved by simply throwing two companies together and hoping for thebest. And of course even the most careful and detailed planning and implementationwill not guarantee success if you overpaid to begin with.Steve Maxwell is Managing Director of TechKNOWLEDGEy Strategic Group (TSG), aBoulder, Colo.-based management consultancy specializing in merger and acquisitionadvisory services, and strategic planning for the commercial water and environmentalindustries. Maxwell is author of the annual Water Market Review, and is alsothe editor of a recent book entitled “The Business of Water.” He has advised dozensof water firms on strategy and transactional issues, and can be reached at (303) 442-4800 or maxwell@tech-strategy.com.[EDITOR’S NOTE: This regular column tracks and evaluates the performance andfuture potential of 20 key publicly traded water companies. In each issue, Maxwellpresents key investment data, and summarize major investment opportunities andstrategic trends in the broader water industry.]November/December 2010Water Utility Infrastructure Management 21
Page 4: CONTENTSNOVEMBER/DECEMBER 2010COVER
Page 10 and 11: CTAMCertification of Trainingin Ass
Page 12 and 13: FROM THE PUBLISHER’S DESKMunicipa
Page 14 and 15: NEWSWEFTEC 2010 Sets New Exhibition
Page 16 and 17: NEWSThe project is the fastest, mos
Page 18 and 19: W A S H I N G T O N R E P O R TWate
Page 22 and 23: Seeing theUndergroundNew Technology
Page 24 and 25: To install the new 20-in. diameter
Page 26 and 27: Blue Gold RushMilwaukee Turns to It
Page 28 and 29: The Backbone of Clean WaterInfrastr
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Page 40 and 41: CALENDAR2011January 18-21 Utility C
Page 42 and 43: COMMENTARYDesign-Build-OperateAlter
Page 44: For more information visit www.uimo

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