Making Deals Flow

To avoid the usual snafus, Flowserve attacks merger integration swiftly and with overwhelming force.

For Flowserve Inc., the numbers coming out of Europe were troubling. The Dallas-based manufacturer of industrial pumps, valves, and seals was in the throes of integrating its largest acquisition ever–the $775 million purchase of Ingersoll-Dresser Pumps (IDP) last August–and the shipments were behind schedule after two plants had been merged into one.

Renee Hornbaker, CFO of the $2 billion company, needed to know why.

As a member of the seven-person integration steering committee, she grilled the integration team member in charge of closing a U.K. facility and moving its production capacity to the Netherlands. The problem, she discovered, was that it was taking longer than expected for workers to learn the systems around the new manufacturing lines, which created an order backlog.

Within 48 hours, the committee authorized more training; by the end of the quarter, the Dutch plant had caught up on its back orders. For Hornbaker, it was just another integration emergency resolved.

“Merger integration is war,” says the deal-making veteran who, while in public accounting, worked on the 1988 leveraged buyout of Beatrice Inc. by Kohlberg, Kravis & Roberts. “You must pursue it relentlessly, and not let the day-to-day become a distraction.” She adds that “not a day goes by when there isn’t some discussion or analysis of our integration effort.”

Because for Flowserve, which completed eight smaller acquisitions in recent years, there is no alternative to winning this latest war. In what has been a fragmented industry, the successful integration of IDP, a former division of Ingersoll-Rand Co., is at the heart of the company’s effort to become the world’s leading provider of flow-control equipment used in various manufacturing processes.

“Flowserve got everyone to take notice,” says Merrill Lynch & Co. analyst Donna Takeda. “No one has done anything this life-altering before. People in the industry are watching to see if they can pull it off.”

Investors are betting the company can. Although restructuring costs continue to dilute earnings and plant-consolidation difficulties have hurt sales, the stock is up almost 60 percent since the transaction was completed last August.

MOST DEALS ARE DOOMED

A recent study by KPMG Inc. of the 700 most-expensive deals from 1996 to 1998 revealed that just 17 percent of them enhanced shareholder value. Flowserve itself was the product of a merger–the 1997 union between BW/IP Inc. and Durco International Inc.–that produced its share of headaches.

Hornbaker nevertheless remains convinced that Flowserve can prevail with IDP–partly because this latest deal represents a true acquisition, and even more because the company is so intensely focused on the integration challenges. “If you overpay, that’s fatal,” she acknowledges. “But most deals fail in the integration.” And the key to success, she explains, is to pay attention to the integration effort every step along the way.

Hornbaker is not one to let any detail slip by. Over the years, Flowserve has amassed an extensive, 65-page due-diligence checklist, and relies mostly on senior department heads to look under the hood. Specialists lend a hand with technical expertise, but Hornbaker believes that outsiders alone would miss some crucial details. Once, for instance, Flowserve thought a target had access to global markets, but learned that a major territory had been licensed. Another time, it uncovered substantial asbestos-related liabilities.

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