The deal is served: the ZAPI-Kollmorgen case

To expand internationally, to enlarge the product portfolio, to create new synergies: these are some of the goals that a company can achieve with an acquisition. Keeping one clear guideline in mind: the value of the new entity (acquiring company plus acquired company) must be greater than the sum of the value of the two companies taken separately.

But an acquisition is no walk in the park. The milestones marking the path represent a series of strategic and financial choices. Every step calls for an in-depth analysis of options and alternatives, not least of which is the final price on the deal. An excellent example is the acquisition of Kollmorgen by the ZAPI Group, an Italian firm (based in the Emilia region) that’s one of the world’s leading manufacturers of motion control systems for hybrid and electric vehicles.

A growing company embarking on the path to diversification has to know how to seize the moment, leveraging rapid reflexes to capture market opportunities the moment they appear. ZAPI has tallied up a long list of acquisitions in Italy and abroad since the ‘80s, proof of the ability of the company’s management to successfully drive growth via external lines. In 2013, ZAPI leadership found out that the US multinational Danaher Corporation was looking to spin off Kollmorgen, a business unit in the motion-control sector with subsidiaries in the US, Sweden, China and the Czech Republic.

The potential acquisition seemed to open up prospects for strategic growth for ZAPI. First, there was the possibility of realizing new products, pooling the in-house competencies of the two companies. Up until 2013, in fact, ZAPI had limited its range of products and services to 60kw maximum power level. Kollmorgen, on the other hand, counted high-voltage electric products in its portfolio. Joining forces could make it possible to offer more powerful solutions, up to 200kw, and to expand production to motion control systems for electric or hybrid buses and other heavy goods vehicles (HGVs). This was an especially attractive market with annual growth in the double digits. China and the US were particularly tempting, due to new emissions standards, spiraling urban traffic congestion, and rising fuel costs in these countries.

Diversification isn’t only about products; it might also mean geographical expansion if it encompasses new countries and production sites. Kollmorgen, with its factories in North America, Europe and Asia, could enable ZAPI to manufacture its products directly in these different facilities, in keeping with the motto: in region, for region. Some of the potential benefits: shrinking lead time; cutting costs in terms of logistics, warehouse, and supply chain; mitigating foreign exchange risk.

From a financial viewpoint, there are two main routes to take for an acquisition. The first is an asset purchase, which means buying the business of the target company directly (all or in part). The second, a share purchase, involves buying the stock of the target company and turning it into a subsidiary. In both cases, payment may take the form of money or stock (or a combination of the two). In the Kollmorgen acquisition, ZAPI bought 100% of the Swedish and Chinese subsidiaries outright, but only included certain activities of the Czech branch in the deal. As for the US production arm, instead, a newco was created.

To determine the price to offer in an acquisition, it can be useful to combine various valuation methods. One centers on the discounted cash flow (DCF), a valuation based on expected cash flow which makes it possible to estimate the value of the resources in question in light of a given future growth rate. Alternative approaches such as multiple valuation methods concentrate on the market valuation of businesses that are comparable to the target company, identifying a common variable that allows for a systematic comparison. In the case of Kollmorgen, the valuation based on market comparables generated a figure similar to the number obtained with a DCF with a growth rate estimated near zero. This discrepancy reflects the fact that multiple valuation methods do not fully take into account prospects for future growth in highly dynamic sectors, such as components for electric vehicles.

But the Kollmorgen acquisition was not the finish line for ZAPI, instead it was the driving force for continuing to pursue a growth strategy via external lines. In fact, in 2016 ZAPI acquired the Canadian company Delta Q-Technologies, a producer of high-frequency industrial battery chargers for electric vehicles, which pushed the company over the 400 million mark in turnover.

• An acquisition represents an effective strategy for rapidly accessing new fast-growing markets (product and/or geographical expansion), such as electric vehicles for industrial use. When there’s complementarity between the activities and the know-how of the two companies involved, this could stimulate synergies that create value and cut costs.

• In assessing whether or not to move forward with an acquisition, the first thing to analyze is the strategic dimension: the market context, the growth prospects that the deal would unlock, and the fit between the acquiring company and the target.

• But strategic analysis must go hand in hand with an in-depth examination of the possible structure of the deal, weighing the pros and cons of an asset purchase vs share purchase approach. Also, a valuation of the target company must take into account various methods, such as discounted cash flow and multiple valuations methods.