CASE STUDY : When acquisition works – The Nuplex story

There are plenty of examples in the New Zealand market of growth-by-acquisition strategies going spectacularly pear-shaped and usually they involve Australian acquisitions.
Think Telecom buying AAPT, The Warehouse buying Clint’s Crazy Bargains and Silly Solly’s, or Tourism Holdings buying the Britz motorhomes business.
But one New Zealand-based company has built up 30-year track record of successfully growing through acquisitions, averaging purchase year. Not only has it been able to establish itself profitably in the Australian market, but two years ago it took major step up into becoming global business.
Nuplex’s record isn’t completely blemish-free: in January 2001, it paid A$20.95 million ($23.5 million) for the Medihold medical wastes business. By September that year, it had to write NZ$11.9 million off its value, representing 60 percent of the goodwill paid. By August 2003, after protracted negotiations, it sold the business for just A$4 million and had to provide largely interest-free finance to the purchaser for two and half years.
But that failure should be kept in context. It was far from its biggest acquisition – it paid A$111 million for Australian Chemical Holdings (ACH) in 1998 and it has since paid $208 million plus assuming $13 million in liabilities in December 2004 when it bought Coatings Resins.
Medihold was Nuplex’s 18th purchase and its fourth significant purchase in Australia, showing that even an experienced acquirer can pick dud.
John Hirst, who became managing director just after the Medihold deal was signed, would naturally prefer not to dwell on the matter.
“It was bummer,” he says.
But in one sense, it was case of novices driving the acquisition. Hirst says the people involved had been successful at running similar business in New Zealand and had good credibility.
However, the Medihold business was that division’s first acquisition outside of New Zealand. Medihold was quite different business from the New Zealand operations, dealing in different products.
“They didn’t do it against background of knowledge of Australian conditions, Australian personnel, Australian industrial relations, Australian commercial law or even the sales practices in each state,” Hirst says.
“It was done on the assumption that everything was the same as New Zealand. Clearly, it wasn’t.”
The New Zealand people could and should have made use of the experience other parts of Nuplex had built up in Australia. They also failed to get adequate external arms-length advice in due diligence and arrange adequate peer review of the data, Hirst says.
A major complication was that the Medihold business was privately owned which made due diligence less straight-forward proposition.
Hirst cites the example of Nuplex buying an industrial waste business around the same time which had been part of larger corporation and was therefore much more transparent.
“Absolutely everything was done by the book,” he says. “What we could see was what we got.”
The Medihold experience was “a fairly harsh lesson. There were some pretty silly mistakes. We learnt some lessons which we’ve applied to number of acquisitions since then.”

From the floor up
Nuplex started life in 1951 as floor tiles company and went public in 1956. It got into the resins manufacturing business, which now accounts for nearly 80 percent of the company, in 1962 because import quotas and tariff policies back then were limiting the growth of the flooring business which relied on imported resins as key ingredients.
The resins the company makes these days are key ingredients in wide range of products from paint, printing ink, adhesives, textiles and paper. It still makes flooring and other construction products, although they are now small part of the total business.
Those same quota and tariff conditions had driven number of other New Zealand companies to start up small resin production units. By the early 1970s when the government started to dismantle protective barriers, it became obvious that fragmented industry in the tiny local market was unlikely to survive competition from large offshore manufacturers.
Nuplex decided to become part of the consolidation that was clearly needed and made its first acquisition of competitor in 1976. At the same time, the company started looking beyond New Zealand, making use of then offered export tax incentives to build up sales in Asia and to start selling resins in Australia in the late 1970s.
Through the 1980s, although steady stream of Nuplex’s customers were shifting to Australia, the company was constrained from following them by its then 65 percent shareholder Revertex. That was initially controlled by Monsanto and later Chem-plex which eventually sold out of Nuplex to local institutions in 1991.
Free to control its own destiny, Nuplex acquired small manufacturing base in Australia in 1993, building its experience of that market and by 1998 it was ready to launch takeover bid for ACH, then the largest resins company in Australia – which was in similar need of industry consolidation.
The Medihold experience didn’t deter Nuplex from making other purchases which included Asia Pacific Specialty Chemicals in July 2002 for A$49.7 million, the Coatings Resins purchase from Dutch company Akzo Nobel and the $44 million purchase of the Multichem/Polychem operations in November 2005. Its most recent purchase was relatively small – it paid A$20.3 million for the composite resins business of Australia-based Huntsman Chemical Company in January this year.
Over the same period it made number of smaller acquisitions and started up in China, buying local resins manufacturer there in mid-2004 and then expanding and modernising it.

Acquisition strategy
Hirst says there are three fundamental drivers behind Nuplex’s acquisitions. Firstly, need to create critical mass and to build efficiency; secondly, to enter new market segments aligned to the business it’s already operating in; and thirdly, to acquire technology that allows it to consolidate its position in its existing markets and to take it into new markets.
The Coatings Resins acquisition was about extending the company’s reach well beyond Australasia so that it could claim true global status, as well as giving it access to new technologies such as more environmentally friendly water-based resins.
That purchase has involved significant restructuring including dismantling top-heavy management structure in Holland, increasing production capacity and turning around loss-making operations in Britain – Hirst says Britain should be profitable within 18 months.
Nuplex’s acquisitions are usually slowly integrated over period, usually taking about three years but Coatings Resins will probably take about four years to complete, Hirst says.
“To some extent, that’s because of the distance,” and also the size of that acquisition, he says. As well, labour laws in Europe mean that it takes lot longer to lay off unwanted staff.
With previous acquisitions, Nuplex has been able to simply swamp them with its own people and impose its own culture immediately but it hasn’t had the resources to do the same at Coatings Resins.
Apart from putting few key people in critical roles, “you’ve got to spend lot of your own time in walking the talk, showing them there’s different way of doing things and not only is it different, but it’s successful”, Hirst says.
That means lot of hard work: Hirst says he spend 200 days year travelling.
While Nuplex is keen to impose its own culture on its acquisitions, it also has track record of retaining key people from the businesses it acquires.
Ercilia Barahona, for example, who heads Nuplex’s paper resins division, joined the company through the ACH takeover.
Hirst says one of the first things Nuplex does after making an acquisition is spend lot of time getting to know the people inside the new business and identifying key people, “people who may think and act more like we do, wh

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