For Frutarom, small is beautiful when looking at acquisition targets

26-Feb-2016 - Last updated on 26-Feb-2016 at 16:24 GMT

Frutarom's headquarters in Herzliya, Israel. Frutarom photo.

In US basketball lingo they call it playing small ball. Frutarom, which supplies flavors, fragrances and dietary supplement ingredients, has grown to one of the world’s largest companies in the category by acquiring many of the smallest firms.

Ori Yehudai, CEO of Frutarom, sat down with a group of visiting journalists at the company’s headquarters in Herzliya, Israel last week. The tour, sponsored by the Israel Export Institute, a public-private partnership, included NutraIngredients-USA.

Small is beautiful

Frutarom’s acquisition playbook is a focused strategy that has seen the company grow under Yehudai’s leadership from under the $10 million annual sales mark to a steepening growth curve that should see the company reach $2 billion in sales by 2020. The approach has also yielded an 18% CAGR in the 2000-2014 time frame. Yeduhai said one of the core pillars of that strategy is the notion that small is beautiful.

In the M&A game in the natural products, flavors and ingredients space the talk is often around top line revenue. The costs of making an acquisition are fixed, so the thinking goes, so buying a company under, say, a bare minimum of $10 to $20 million in annual revenue doesn’t pay. This is especially true when one considers the integration costs, for all of the mumbo-jumbo about synergies and so forth. These are big, hard piles of cash that are difficult to whittle down, so the standard thinking goes, so bigger is always better when looking at acquisition targets.

Yehudai doesn’t buy that argument. For him, the value of the company lies in its products or unique technology, and in the strength of the management team that brought those ideas to life. Top line revenue isn’t irrelevant, but nearly so in this scenario.

“Why are we buying small companies? They say it in a lot of different languages, but the message is same: It doesn’t move the needle. But we look at acquisitions differently. We look for small acquisitions that have unique technology and a unique customer base. That is part of our core strategy,” Yehudai said.

“We have done many of these. Book value to me is meaningless. If your performance is good, you create value,” he said.

Pace to quicken

Just as the pace of annual sales is increasing, so is Frutarom’s tempo of acquisitions. Yehudai said the company has completed 15 acquisitions in the past 12 months, and that pace will continue, he said.

“Frutarom is much stronger than we have ever been. We have a broader portfolio, a bigger customer base. We have a very strong balance sheet that will allow us to spend $300 million to $400 million over the next year or two. We have very strong support from our shareholders to continue this strategy,” Yehudai said.

One aspect of going small in acquistions is that the risk of an individual failure is less grave. The history of M&A in this industry as in others is replete with big acquisitions that subsequently had to be unraveled, leaving two rump companies that are weaker than before. But from Yehudai’s point of view, even this is not a consideration. You choose right to begin with, and you don’t lose, he said.

“We have not failed in any of our 53 acquisitions to date,” he said.

Spreading the risk

One aspect of the strategy is to create a broadly diversified company, Yehudai said. This can insulate the firm against market swings and against interruptions in raw material availability as the company seeks to go increasingly to natural ingredients, whose supply chains are subject to the natural vicissitudes of agricultural operations.

“We don’t see us as a pure flavor company but as a solutions provider. We are more diversified than other flavor companies and health ingredient companies. We don’t have any raw material that is more than 1% of the total,” he said.