A.O. Smith acquired Giant Factories, a Canada-based manufacturer of residential and commercial water heaters with trailing 12-month sales of about $105 million. Jim Stern, executive vice president, general counsel and secretary at A. O. Smith, said that although the deal went smoothly, there were some interesting aspects about it that kept both sides on their toes.
It wasn’t a fast process however, as the deal was nearly a decade in the making.
“It was owned by a father and a son and we had to develop that relationship over time,” Stern says. “When they were ready to sell, we were ready to talk with them. But because it had been in the family for 60-plus years, we needed to take it at their pace.”
Being a third-generation business, Stern knew it was going to be an emotional sale and wanted to ensure the owners were comfortable with the process. The second and third generation were the real drivers of the business. The second-generation owner is in his 80s and is still actively involved.
“When someone works at a company for 60-plus years they have a significant attachment to their baby, so we had to take that into consideration,” Stern says. “A. O. Smith is a 148-year-old industrial company, which still has Smith family control. We understand the family values and the family impact on business, so we wanted to ensure that they knew that what they had created would find a good home with A. O. Smith.”
The two companies were familiar with one another from being competitors in Canada.
“We'd see them at shows and different industry outings,” Stern says.
Once Giant was comfortable with the leadership and direction A. O. Smith had in mind, it was time to deal with the nuts and bolts of the acquisition. The due diligence was a bit of an issue, for several reasons.
“Doing a deal in another country during a pandemic had its own challenges,” Stern says. “Especially a country that primarily speaks a different language, right? In Montreal, they speak English, but there's a lot of French speaking as well.”
So, in addition to good counsel and accountants and tax folks to help with the transaction, Stern and his team had to make sure there was bilingual assistance.
There was also concern about confidentiality.
“We went to great pains,” Stern says. “It’s a family business and they know everyone in their company, and they are the patriarchs. They were very concerned about this getting out ahead of time and in the industry, so we kept our working group to a very limited amount. And we asked them for information on a need-to-know basis. With some of the more sensitive issues —being competitors — we waited until we got a number of the other aspects done."
That allowed the Giant team to gain confidence that the deal was, in fact, going to go through. Then A. O. Smith did its confirmatory due diligence.
As the process moved forward, Stern said it was vital that Giant trusted A. O. Smith.
“We talked a lot about who we were and how we did things and how we would run Giant going forward, in particular,” Stern says.
And they made a commitment to remain in Montreal.
“We wanted them to know that this wasn't just buying a competitor,” Stern says. “We love their capabilities as a manufacturer in Canada and in Montreal. And by accentuating the fact that we were going to continue to invest in the baby that they had created helped us, but I think not just talking about the fit but talking about how they're going to fit within our organization and be run going forward."
Most important to the deal was keeping the leadership in place. The gentleman in his 80s still comes to work each day.
“The amount of information and knowledge is right there in his head,” Stern says. “He's still involved in our business and his son will lead Giant. We, as a company, do not like buying companies where they throw the keys at us.”
Moving forward, A. O. Smith has big plans for Giant.
“As we committed to the family, we're going to invest in Montreal and we're going to spend time helping them produce better in Montreal,” Stern says. “In combining with Giant, we now have a manufacturing footprint in Canada again. I think the ability to serve the northeast of the United States with that footprint in Montreal will be helpful and continuing to produce energy efficient, electric water heaters and high efficiency gas products to serve the Canadian market and in the northeast of the United States is going to be good for our company and our shareholders.”