An acquisition can bring a company many advantages. It can also be the means for transforming a company from yesterday s success into tomorrow's powerhouse.

We recently assisted WD40 Company (Nasdaq: WDFC) with an acquisition that provides three valuable lessons.

1. How an acquisition can transform a company.
2. How and why a public company can find happiness with a boutique M&A firm.
3. How transactions can spin off one another – in this case, one turning into three transactions – enhancing the ultimate deal.

History of a Highly Successful One-Product Company

For more than 40 years, WD-40 Company was a one-product, specialty chemical company with its own market niche and consistent value. The petroleum-based, multiple-purpose product was used as a lubricant, rust preventative, penetrant, cleaner and moisture displacer. By the late 1990s, it had become the 9th best-recognized brand in the U.S. with broad international distribution (see box below for more details).

At a glance
WD-40 Company (Nasdaq: WDFC)

• Garry 0. Ridge, President and CEO (since 1997)
• Net sales: $174,576,000
• Net profit: $16,983,000
• Employees: 227
• Distribution: 187 countries through 62 channels

WD-40 Company was generating enormous revenues per employee ($830,000 in FY2000). The public company had a consistent emphasis on paying dividends (producing cash) through all market cycles rather than creating shareholder wealth (equity). It was an unqualified success story, but its success could only take it so far.

Two trends forced the company to re-examine its philosophy. The domestic market was facing saturation (a can of WD-40 can last a long time) and the retail marketplace was consolidating. Fewer and larger customers were purchasing larger volumes and that was putting pressure on gross profit margins. In short, WD-40 Company couldn t continue generating the same success indefinitely.

A new CEO, Garry 0. Ridge, and Board of Directors concluded that strategic diversification was the way to move into the future. To maximize long-term shareholder wealth, WD-40 Company would set out to transform itself from a "brand fortress" to a "fortress of brands."

To maximize long-term shareholder wealth, WD-40 Company would set out to transform itself from a "brand fortress" to a fortress of brands."

Defining its goal, the company defined a fortress of brands thus: "Each brand must compliment the other, creating a whole that is greater than the sum of its parts."

The key: WD-40 Company decided to accomplish this through acquisition rather than R&D, even at the cost of its long-standing and consistent dividend policy.

Steps to a Transformation

The process started with initial acquisitions of smaller brands that benefitted from WD-40 Company's channels of distribution. In 1995, the company acquired 3-IN-ONE OiI™, a lower-cost, general-purpose lubricant. In 1999, it acquired the Lava™ brand of heavy-duty hand cleaners. Finally, in FY2000, WD-40 Company acquired Solvol™ soap in Australia and New Zealand because it represented a barrier to entry for Lava in those markets.

Those products were intrinsically linked, providing lubrication and hand-cleaning products for the do-it-yourself hardware, automotive and other retail and industrial markets.

All were small acquisitions, however, each with less than $10 million in annual revenues, compared to WD-40 Company's $146.3 million in FY 1999.

Then a transforming opportunity came along.

In FY2000, HPD Holdings Corporation, dba Global Household Brands, was acting on its future vision. An investor-owned entity, HPD acquired its brands (2000 Flushes™ toilet bowl cleaners, X14™ mildew and stain removers, and Carpet Fresh™ rug deodorizers) from another company and then built and repositioned them. Its next step, the owners believed, was to significantly increase its channels of distribution. That led it to approach WD-40 Company, among other possibilities, just as WD-40 Company was scanning the horizon for more brands to acquire. It was serendipity at its finest.

The HPD brands represented an opportunity far greater than WD-40 Company's other acquisitions, as HPD was generating about $70 million in annual revenue. In terms of brands and scope, it would be a transforming acquisition for WD-40 Company.

To Ridge and his leadership team, the possibility was exciting. There was obvious synergy with WD40 Company's existing brands in terms of cleaning products and high usage in the Rust Belt, as just two examples. The combined entity would be a true "household brands" company, opening more and bigger channels for all the brands, with particular velocity in the relatively untapped (for WD-40) grocery channel.

But would it be right? WD-40 Company was faced with making a decision on whether to proceed.

Enter the MA Firm

WD-40 Company is a brand management company that has always run lean and mean. That had been a key reason for its financial success, and high revenue and earnings per employee. A chemical company, but not a manufacturer, it had learned to succeed through outsourcing all but the most core functions.

With no corporate development arm, WD-40 Company oursourced those functions as well. There was no one on staff to take ownership of and advance acquisitions. A large accounting firm and investment banking firms had managed earlier acquisitions, but WD-40 Company wanted a higher level of personal relationship with its advisors. Ridge was looking for a combination of business management experience and deal experience, and he found it at Shoreline Partners.

WD-40 Company is headquartered in San Diego, as is Shoreline Partners. Ridge was introduced to our firm by one of his outside Directors and immediately found qualities he was looking for. Our professionals all have business experience at the senior management level. The fact that we were local was a real plus since Ridge wanted us to become de facto members of his management team.

We were charged with analyzing the potential opportunity. Ridge often said "I want you to talk me out of doing this," but there was more to it than that.

During our initial work, the scope expanded as a result of Ridge coming to understand our capabilities. We analyzed WD-40 Company s overall acquisition strategy and how the HPD acquisition might (or might not) fit. We developed a financial model to help evaluate the acquisition, and we reviewed public transactions for value perspectives. Based on our analysis along with management's, with affirmative direction from the Board, we were charged to proceed with the acquisition, including value, deal negotiation and structure, participation in the due diligence process, documentation review and closing.

As a smaller firm, we brought larger capabilities to the table, enhancing the deal for WD-40 Company.

The Core Deal and Two Offspring

The dramatic upsides to this acquisition were the synergies between brands and the channels of distribution. HPD's investor-owners believed that WD-40 Company had the channels of distribution to do more with its brands and WD-40 Company saw HPD as bringing strength and velocity in the grocery channel.

The dramatic upsides to this acquisition were the synergies between brands and the channels of distribution. HPD's investor-owners believed that WD-40 Company had the channels of distribution to do more with its brands and WD-40 Company saw HPD as bringing strength and velocity in the grocery channel.

Our analysis indicated that going forward could dramatically enhance WD40 Company's future opportunities for revenue growth and profitability. By not going forward, WD-40 Company would likely continue to under deliver shareholder value.

That said, there was one very significant downside to the proposition. HPD had a manufacturing facility, and WD-40 Company had no interest in changing its outsourcing model. Manufacturing, to a pure brand management company like WD-40 Company, is a distraction. But that was part of the HPD package.

From a deal perspective, we knew the manufacturing facility and business operation was an asset and should be treated as such. Where WD-40 Company saw a potential distraction, we saw a business that even had unused capacity. That challenged us with how to create additional value for WD-40 Company from the asset.

WD-40 Company had a long-term relationship with a fast-growing manufacturer it used to make other products. That manufacturer had approached WD-40 Company with a desire to expand its capacity. WD-40 Company was inclined to hand the HPD manufacturing business and facility to its existing our-sourcing partner for basically the fair market value of the real estate and equipment. We knew the value was greater than the hard assets.

We structured a second deal so that WD-40 Company could retain significant value in the HPD manufacturing business. A new joint venture was created between WD-40 Company and its oursourcing partner, which then acquired the HPD manufacturing facility. WD-40 Company owns 30 percent of the JV, which provides two added-value components beyond the original deal – a revenue stream in the form of 30 percent of the profits, and an asset that will almost certainly increase in value as the unused capacity is filled with outside product manufacturing.

With no added cost, WD-40 Company gained a sideline benefit it did not foresee as part of the core HPD acquisition.

Finally, once the $72 million deal closed on April 30, 2001, WD-40 Company took a hard loqk at the financing package it had been forced by time constraints to use to close the acquisition. The company engaged us to look for better terms for the HPD transaction, along with the ability to fund other future acquisitions.

We contacted bankers, including the original lead flnancier and alternate lenders. Our approach to the refinancing was the same as it would be for a sale transaction – we developed multiple interested parties to produce the best "transaction" for our client. As the intermediary, we could be tougher in our negotiations with prospective lenders than could WD-40 Company, which would have to work closely with the financing entity for years to come.

One goal was to dramatically reduce the pressure of short-term financing. Ultimately, WD-40 Company decided to use an alternate lender – Prudential Capital Group, a division of Prudential Financial. The refinancing was completed with a combination of a long term, fixed rate loan from Prudential and a smaller, traditional bank revolving line of credit.

Results Speak (Loudly)

How has WD-40 Company fared in its first "new" year? On March 27, 2002, WD-40 Company reported that second-quarter profits jumped 21 percent from the year prior. For the quarter ending Feb. 28, it had net income of $6.5 million compared with $5.4 million the year prior. Net sales jumped an impressive 34.6 percent.

In late breaking News, WD-40 Company announced on May 9 that it is acquiring Heartland Corp., makers of Spot Shot®, an aerosol carpet spot remover and leading brand in the carpet spot remover category. The price is $47 million funded through a combination of cash, stock and debt. The transaction, also handled by Shoreline, closed on May 31st, 2002.

Stock value has gone up as well. At the time the HPD Company transaction closed, the stock price was about $18 a share. Today, it is closer to $27 a share. The S&P, in the past year, is down about 10 percent. The transformation has also allowed WD-40 Company to cut its dividend and transform investor expectations from dividends to equity growth.

WD-40 Company's market cap has increased nearly twice what it paid to acquire HPD.

Perhaps most importantly, WD-40 Company has transformed from a specialty chemical company to a company that states, "We live under the sink, in the garages and in the toolboxes of the world."

Has Anyone Else Noticed?

As reported on March 31, 2002, Value Line raised its rating to the second-best level because of its acquisitions. Analyst David Gallen endorsed the decision to diversify by acquisition.

In this economy, this is a transformation that stands out for its stunning success.

Shoreline Partners LLC, is a San Diego-based, middle market investment banking firm that handles sales of privately held companies with $10 to $200 million in revenue and acquisitions for public companies. Managing Partner Phillip L. Currie can be reached at 858/587-9800 or via Email.