The Art Of The Acquisition

Peter McCausland is the chairman and CEO of Airgas Inc., the largest U.S. distributor and manufacturer of industrial, specialty and medical gases and related supplies. The $1.8 billion company has grown through more than 300 acquisitions over the past two decades and went public in 1986. McCausland founded the company in 1982 with the purchase of Connecticut Oxygen Corp. for $5.3 million. He talked to IndustryWeek recently about the company's strategy of growth.IW: Your company seems to have a high number of presidents, division presidents and corporate vice presidents when compared with other publicly held companies in this post-recession environment. As you have acquired companies, how have you gone about consolidating and streamlining and why is the current structure the best? McCausland: Most of our distribution business operates through 12 regional companies, which keeps decision-making close to our customers. We streamlined our current structure from nearly 40 "hub" companies formed during our acquisition growth. Today we operate nearly 800 locations, and keeping management of these branches within the region has allowed our businesses to respond to local needs. We have strong local leadership teams formed from a combination of those who have joined Airgas through acquisitions and those we have recruited. In recent years, we have added strong functional leadership to support our local leaders. This structure has allowed us to think nationally and lead locally. The combination seems to be working very well. IW: Acquisitions have allowed you to grow EPS, but the company also has a debt-to-equity ratio of about 1.06. Is debt the downside of the "roll-up" management strategy? How do you, as CEO, address it? McCausland: We watch debt very carefully and maintain a debt-to-EBITDA ratio of three to four times. One of the great things about this business is the strong free cash flow generated by the rent on nearly 5 million cylinders and bulk tanks. This free cash flow allows us to balance paying down debt, investing in growth -- including acquisitions -- and in the past year, begin paying a dividend. That is one reason our debt trades at rates of some investment-grade debt. We are doing a good job balancing growth with debt reduction as our free cash flow enables steady debt repayment. We can complete a major acquisition, pay down debt, reload and get ready for the next one. This drives earnings accretion and keeps us well positioned. We also take a very disciplined approach to acquisitions and will not overpay for an opportunity. IW: When considering an acquisition, what are the most important things your executive team weighs? McCausland: For the most part, we look for acquisitions that fit strategically with our core business. Our recent acquisitions have been in markets where we would like to have more density or to add strength in a core product line, like safety distribution. We believe integrating acquisitions is a core competency for Airgas. We have a good model for valuing potential acquisitions, performing the due diligence and planning the integration. Since more than half of the $8 billion industrial gas and welding marketplace is made up of 900 independent distributors, we expect to have plenty of opportunities to continue working our model as the market consolidates.