Kicking off our Spotlight on section, Finance Monthly turns its attention to Michelle Lewis – the Chief Strategy Officer for DistributionNOW Inc. In her current role she is responsible for strategy, corporate development and investor relations. Prior to this role, from April 2010 to April 2014, Michelle served as Senior Vice President of Strategy and Shared Services for the Distribution Services business unit of National Oilwell Varco. In the last few years Michelle has worked on over $7B worth of transactions in geographies ranging from the Texas panhandle to Atyrau, Kazakhstan. Prior to joining NOV, Michelle held various managerial or interim management roles in Consulting and Restructuring in the public and private sectors.
Due diligence is often seen as a ‘box-ticking’ exercise. How do you ensure you tailor your services to each individual process?
No two transactions are alike and neither is the due diligence (DD) required for any deal. While there is a base level of similar information that is required across functions like HR, Accounting, HSE, etc., each company that we look at has different issues and concerns and potential for opportunity that we need to pay particular attention to. As an example, there have been times when we hired auditors to essentially re-compile a company’s last few years of financials to ensure that they are accurate both for the Seller and for us.
One of the specific ways that we ensure DD is not a box-ticking exercise is that we codify the issues that arise during the DD process and assign ownership to resolve them. We then track the status of DD and any related issues that have arisen in our internal system. Before we close on a transaction, we also require each internal function (HR, IT, HSE, Accounting, etc.) to sign off that they have completed and/or resolved all of their assigned and required DD tasks.
What factors do you assess when you are considering acquisitions?
We assess three primary factors: Strategic fit, financial strength, and cultural match. Assessing strategic fit is fairly tactical and the easiest to complete. Does the company represent a high-value product line that we are seeking to deepen or broaden and add to a total solution? On a process map, that is a simple yes or no. If it is a yes, we move to the next step, which is a financial assessment. We use similar valuation models as others. We take into account various metrics to help us fully ascertain the health, risk and value of a company as it fits into our portfolio. These metrics include revenue, operating profitability, EBITDA margin, book value, cash generation, as well as comparable company valuations in the current market. Finally, there is a cultural assessment. Do we think and act similarly when it comes to how we operate? Is the company as fiscally responsible as we are when it comes to managing dead and obsolete inventory? Do they demonstrate integrity? Do they respect their customers, vendors, and employees, and how does that show up in the business? We have walked away from businesses that fit the first two criteria, but fell short of the third. All three are equally important. It’s like a three-legged stool. You need all three legs to balance.
What due diligence matters need to be considered when buying or selling an international business or division?
There are a lot of challenges with cross-border deals, from the tangible risks of FCPA, accounting and labour issues, to the softer, intangible cultural differences. Addressing these is important in any deal, but even more so when the transaction and people therein are located on the other side of the world. It is important to have trusted, global advisors, who have a local presence and can assist with understanding country-specific law, accounting and labour practices, as well as providing insight into the cultural norms. I wouldn’t dream of doing a deal in the UK without our preferred local law firm. They bring insight into the market and risks that only a local partner can evaluate. .
What are you looking to allocate capital towards?
We want to continue to utilize our strong balance sheet to allocate capital towards strengthening our market positions. We intend to do this through acquiring higher value added product lines and solutions that enhance our product offerings, as well as businesses that expand our supply chain services and downstream and industrial businesses or extend our geographic reach, particularly in the UK, Middle East and Asia-Pacific.
What are the benefits to joining DNOW? Why would a Seller come to you?
Most Sellers are firms, companies, families or individuals with whom we have worked with or competed against for many years. They are usually the number one or two player in their market or geography. Many of them have had a life event where they are now ready to monetize their assets, while still providing a future for their employees. They want to sell to a healthy company that they know will continue to invest and grow their business and the legacy that they have built, and joining the DNOW family provides them with just that opportunity.