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Making acquisitions core to operations Back  
As one of Ireland’s leading public companies, CRH has consistently been the most acquisitive Irish company over the last number of years, with 75 acquisitions in the last 3 years alone. Finance spoke to finance director Harry Sheridan about the secret of the company’s success in finding acquisitions which increase shareholder value.
T he nature of the CRH business is such that it does not lend itself to growth by increasing exports from a home base in Ireland, the products do not travel well; they are characterised by large bulk and low value. Thus, Harry Sheridan (modestly, and prosaically) explains the reason why CRH is not just an Irish but an international world class exponent of the art of M&A. ‘As a result, CRH has developed a strategic vision of growth through establishing a strong presence across selected regional markets in Europe and the US,’ he says.

‘When looking to make an acquisition we are looking for operators with a strong local position, in regions which offer good prospects for growth. Acquisitions are typically mid-sized family businesses where we can create win-win situations for our shareholders and former owners, who in most cases remain to lead and grow their businesses within CRH,’ he says. Companies which are ripe for rationalisation are often thought of as obvious targets for acquisitions, but Sheridan says that the companies which CRH buys are attractive because they are already performing well but have the potential to do even better.

What then is the secret to making
the right investment at the right price ? According to Sheridan, CRH employs,
in the quantitative evaluation of targets, a combination of 3 financial criteria, discounted cash flow (DCF), cash payback and return on capital. Strategic and qualitative considerations should get reflected in the forecast numbers.

‘In improving the performance of operations, CRH management has developed a set of non-financial measures appropriate to the various product areas. The transfer of best practice is fundamental. This is best achieved by establishing appropriate benchmarks of performance and ensuring that they are measured properly which is dependent on first class management information systems,’ he says.

‘We now have a very broad product spread from basic materials like cement and aggregates to added value products to distribution activities. Each category has different margin and asset turn characteristics, but in the final analysis each is required to meet predetermined return on capital targets and produce a flow of cash that over time comfortably exceed our cost of capital.’
‘You could say that CRH is paranoid about measurement. We firmly believe that the act of measurement will actually influence performance,’ according to Sheridan. CRH’s ability to
be so active in acquisitions is partly as a result of the resources the company puts into acquisitions strategy.

‘We have 14 development teams around the world whose sole purpose is to look for acquisition and development opportunities. They liase with regional and product presidents in our various markets, in order to identify good companies and to conduct the acquisition negotiations,’ he says.
Because of the level of in-house resources which CRH devotes to M&A work, the company is not dependent on merchant banks or other corporate finance advisers for new opportunities. However, that does not mean that external advisers never come up with proposals which the company pursues.

It does mean that growing through acquisitions is not left to chance. ‘With the development teams we have invested in our own resources. This doesn’t guarantee deals, but at least it gives us a sporting chance of developing a good deal flow,’ he says.

Asked about the organisation of these teams in the field, Sheridan cites the example of the US, where CRH operates 5 product groups. ‘In addition to each product group having a development team a further investment in resources is made by establishing a team at the centre examining new product areas/opportunities.’ External advice on larger deals is often used. He cites the example of the recently acquired UK Ibstock Group where Dresdner Kleinwort Benson was used to consummate the deal. However, the basic evaluation as to whether the opportunity makes good sense still has to be done by CRH management. The Ibstock deal showed that CRH was prepared to go the public route when it saw value. In a dawn raid CRH gained control by buying 50.8 per cent of the company in a few hours just before Christmas. He emphasises, however, that ‘the company was very well known to CRH and researched in a very deep way since the previous February.’ In the future CRH is set to continue its acquisitions strategy, towards a position where 45 p.c. of the business is US dollar based, 45 p.c. Euroland based (assuming UK entry) and 10 p.c. emerging markets based. ‘Maintaining balance across regions is very important for the long term health of the Group,’ he says. ‘A the key policy is not to allow any area to predominate.’

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