Middleby's CEO on How to Make Successful Acquisitions

In the following video interview, Motley Fool CEO Tom Gardner speaks with Middleby CEO Selim Bassoul. Since becoming CEO in 2000, Bassoul has led a remarkable transformation at Middleby, the cooking equipment maker, turning the stock into a nearly 50-bagger over that time. In the video, Bassoul discusses his thought process for the success of an acquisition.

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Tom Gardner: So fundamentally, you're trying to gather ideas, learn what your competitors are doing right by their customers, so you can make sure to deploy those with your customers. You're not trying to take those customers away. And I guess fundamentally what's been happening at Middleby is as you've been growing, you've been buying some of your competitors. So the way you broaden your customer base, learning as you have and as you go, and then finding the smaller companies that you admire most, and acquiring them.

Selim Bassoul: In fact, most of our acquisitions have come from customers buying from somebody else. And they tell me, "Why don't you buy this company? They have a great technology and you don't have it in your field." So we go back and buy that technology because we don't have it in-house, and we're not ashamed to say that not all of the things invented at Middleby have been good, or sometimes we've gone on the advice of somebody who's buying a technology that we didn't have and have gone out and acquired CookTek, TurboChef, NECO.

Gardner: How many acquisitions have you made in the 13 years of your being -- ?

Bassoul: Over 40; around maybe 50.

Gardner: So let's talk about acquisitions, and I have some stats right here that I want to, if I were brilliant I would have remembered all these, but there have been studies by so many different organizations on the success rate of acquisitions. So the numbers turn out to be something like 15 to 25% of all acquisitions are value creating. A second statistic I saw of a landmark 20-year study is that 44% of all acquisitions are divested within seven years because they weren't successful.

So if you're making 40 acquisitions and the majority of acquisitions that companies make are not valuable, why have the acquisitions at Middleby succeeded? What is your checklist on making acquisitions? Because we know that there are CEOs that make acquisitions for a lot of reasons that might not be about long-term value creation, so why is it different at Middleby?

Bassoul: Well, I can tell you the reasons that we don't make an acquisition. Growth, or size, or buying a market. So all those three reasons, we will not go after an acquisition to buy a market.

Gardner: And most people would think that, in fact I really don't know where your answer is going here, so I'll just say most people would think when an acquisition is going to happen, it's about growth, size, or buying a market.

Bassoul: I think, Tom, there is a lot cheaper way to attack growth. I can discount my product and go after a market. I can go steal my competitor's engineers and get some type of a product emulation. We buy a company because we believe that they have two things that are important to us. One, they have the ability to be already a brand and a patented technology, that is already disruptive. That will take us many, many years to get to.

Number two, the ability to buy it and retain the management so that that management allows us to basically, with some capital infused by us and some DNA from Middleby, whether it's taking them internationally ... is that in five years or less, would like to have the multiples of that acquisition translate into a price of five times multiple or less after the acquisition integration. Would like also to be accretive in no more than 18 months.

So let's repeat the three things. One, it has to have a brand with a disruptive technology.

Gardner: That's patented.

Bassoul: That's patented. Number two, we need to be able to get within five years or less to a five times multiple or less after we realize the synergies and the integration benefits. Number three, it has to be accretive in 18 months or less.

The article Middleby's CEO on How to Make Successful Acquisitions originally appeared on Fool.com.

Tom Gardner owns shares of Middleby. The Motley Fool recommends and owns shares of Middleby. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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