What's Driving Industry Mergers And Acquisitions?

As many natural products stock prices dropped from their previous highs last year, company mergers and acquisitions were on the rise. Since fall 1998, five major transactions took place in the herbal extracts segment alone—Global Health Sciences acquired American Ingredients, Martin Bauer purchased Paul Muggenberg, Amway gained a stake in Trout Lake Farms, Botanicals International paired with Hauser, and East Earth Herb is now part of the Folexco family. Unusual? Not really. Those involved say it's par for the course.

"From January 1997 to December 1998 we recorded 121 mergers and acquisitions in the natural products industry. This quarter is picking up even more. It's a trend from marketing to raw materials. The reason is, it's a highly fragmented industry with small players—economies of scale become powerful enough that they generate consolidation.

It's happening faster than usual because natural products is at a crossroads of other big industries such as pharmaceuticals and foods. Either they're doing the transactions themselves or they're encouraging them just by their presence. These range from tiny deals to $150 million transactions.

Raw materials has seen quite a lot of activity lately. It means these companies can better compete because they can now supply larger customers like Kellogg's—volume and technical requirements for such large companies are substantial."

Roy Bingham
Managing Director,
Health Business Partners
Warwick, R.I.

"We were a small, privately held company for 20-plus years. We were watching the industry grow and saw how fast the demands for quality and marketing were increasing. Our company went as far as it could with our resources and then we needed to find a strategic partner. Essentially, we combined with our competition to make one stronger company.

Folexco brings us entry into the food and flavor industry and they get our technical resources. They're a company we have a lot of synergies with, and we're already enjoying having a larger corporate structure to rely on. When you have a small company, you tend to wear rose-colored glasses; you might not see the big picture and you sacrifice your company in the process.

Mergers and acquisitions are the natural life cycle of any industry ... it's the sign of a healthy industry."

Peggy Brevoort
President, East Earth Herb
(acquired by Folexco)
Eugene, Ore.

"You're seeing consolidation everywhere—it started at the retail end with Whole Foods and Wild Oats, then moved to distribution, raw materials and, now, manufacturing. It indicates the maturation of the industry. Part of it is the increasing competition, but it's also the need for clinically backed products. It's increasingly difficult to get on the store shelves, especially now that mass market players are interested in natural products. Consolidation provides capital for marketing and advertising.

Arkopharma brings us the ability to invest in marketing and advertising. They're also bringing new, clinically researched products to the market. Clinical trials are important for the credibility of a product and a brand—particularly for new customers who are used to buying pharmaceuticals."

Dave Kulow
President, Health From the Sun
(acquired by Arkopharma)
Winchester, Mass.

"There are a number of factors driving a merger for a manufacturer of our size. There's a lot of competition from the pharmaceutical companies as they can put out products quickly, fund clinical research and handle distribution. In the face of such competition, traditional manufacturers are looking for ways to build their manufacturing, marketing and scientific reputations.

In our case, the merger combined a company with a strong research and clinical background with one more business savvy and market driven. The Bayers of the world are getting into the natural products industry ... companies that don't respond to that will be squeezed out."

Jeff Avila
Marketing Brand Manager,
Irwin Naturals/4-Health
(merger of Irwin Naturals and 4-Health)
Culver City, Calif