In July, Lydall completed its acquisition of Texel Technical Materials, strengthening Lydall’s position as a global provider of filtration and engineered materials. Here, the lead in-house and external counsel explain how a large US firm producing specialty engineering products successfully merged with a much smaller company from French Canada that began by making blankets 49 years ago.
LEXPERT: This is an industry not well-known to the layperson. Can you explain what Lydall does, and what Texel does, and how quickly this market is growing?
Chad McDaniel (General Counsel, Lydall, Inc.): Many of Lydall’s products are a part of our everyday lives … but hidden in plain sight. Our products generally fit into two categories. First, we make thermal and acoustical products for vehicles that serve a critical role in providing heat and noise abatement. Second, we manufacture nonwoven filtration/separation products that improve air and liquid quality in commercial and industrial settings, along with insulation for extreme temperatures. ... While we believe most of the industries in which we operate will continue to benefit from increased volumes, we see the biggest potential in the automotive, liquid filtration and geosynthetic segments.
LEXPERT: Lydall is a big NYSE-listed company. Texel, with 300 employees, is a private company based in Québec that began in 1967 by making bed blankets. What was it about Texel that caught Lydall’s eye?
McDaniel: Texel was aligned with our longstanding objectives of diversifying our needle-punch expertise into attractive applications, acquiring complementary manufacturing technologies and creating meaningful scale; with Texel, Lydall is now among the top 10 nonwoven manufacturers globally. The industries Texel serves supplement Lydall’s focus in filtration/separation engineered materials. Also, Texel has a great reputation and a deep culture of growth, innovation and quality. Combining all of these qualities makes Texel and Lydall an exceptional strategic fit.
LEXPERT: Were external counsel newly hired to execute this deal, or did they have a long history with their clients?
McDaniel: I’m lucky to work at a company that values the role of the general counsel. The CEO and his leadership team consider me more than just a legal advisor; they look to me as a business partner in both a strategic and operational capacity. So, I was part of early meetings with Texel and participated in each management presentation that followed. Once the basic terms were agreed and a letter of intent signed, I hired outside counsel. After soliciting the recommendations of two US-based firms with which I have worked in the past, the decision to engage Stikeman Elliott — and John Leopold, specifically — was easy.
John Leopold (Stikeman Elliott LLP): Thank you, Chad, for the kind words. We are very fortunate to have excellent relationships with a number of US-based firms and lawyers, as a source of business referrals. And it is always especially pleasant when it affords us an opportunity to work with first-class, sophisticated M&A folks like Chad and the management team at Lydall.
LEXPERT: What was the focus of negotiations? Was it just price, or were other elements just as important?
McDaniel: In every M&A deal there is a typical set of elements that are often the focus of the negotiations, [including] price, liability limitations, etc. This transaction was no exception. One area both parties focused on was structuring the transaction in a way that maximized tax efficiencies for both parties. In the end, as in any deal, both parties gave a little and we were able to come to a structure that, in the aggregate, benefited both parties from a tax perspective. This is an area in which Stikeman’s tax attorneys were very helpful.
Leopold: If I had to pick a few [elements] that stood out in this deal, there was of course the tax structuring, as Chad mentioned, but that also played into discussions around the approach to signing and closing the deal. Lydall had a preference for signing and closing simultaneously, but Texel, as a private company, understandably had a concern about reaching out to third parties for consents and authorizations before having deal certainty. It was also a deal in which Texel had to juggle the interests and dynamics involved in having a disparate group of shareholders, including founders, related parties and institutional investors.
LEXPERT: Was there a moment that stood out for you, perhaps something unusual? And was language ever an issue?
McDaniel: As trivial as it may seem, picking the project name often provides the opportunity for a little comic relief. Our initial name for the project was “Cowpad,” after Texel’s filter media used in mat-pads for milk cows. But when we considered that “Cowpad” would be all over documents and presentations used to communicate with our lawyers, accountants, bankers and the target’s employees, we decided to make a change. But to keep linkage to the original name — and satisfy those concerned about superstition when changing a project name after launch — we ended up naming the deal “Project Pad.”
Leopold: I do know that it can often be a bit of a challenge for American clients when they do transactions in Québec for the first time, learning the ins and outs of Québec- or Canadian-specific legal rules, having to translate their presentations to employees, etc. But language was never really an issue for us; both sets of lawyers were accustomed to doing deals bilingually, and could operate fluidly in both French and English.
LEXPERT: What are some of the synergies you envision from this combination of very different businesses?
McDaniel: Texel’s manufacturing technologies, processes and raw materials are very similar to our capabilities prior to completing the deal. The customers and business segments they operate in, however, are completely different. Our legacy business primarily focused on air filtration media for power generation, cement and asphalt production and other industrial processes. In contrast, Texel supplies to a variety of other markets such as geosynthetics, liquid filtration, automotive and medical.
LEXPERT: You say you will apply Lydall Lean Six Sigma principles to the Texel business. Will you be cutting jobs or moving any employees?
McDaniel: The go-to-market strategy for each respective business will be preserved; both companies have strong leading brands. The application of Lydall Lean Six Sigma has numerous advantages, including freeing up existing capacity for future growth opportunities. As for jobs and moving people, being a global company provides our employees with more opportunities to advance their career not only at their current location. This is something we encourage and is equally extended to our new employees at Texel.
LEXPERT: What would you say was most memorable about this deal?
McDaniel: Most memorable? Easy … the first day, post-closing. Lydall’s senior leadership team was on site during an all-hands, all-shifts, all-sites meeting to welcome nearly 300 Texel employees into the Lydall family. Not only were we well received, but we felt quite at home. … The Texel employees were engaged, energetic and reflected a culture that is clearly aligned with Lydall’s. The positive energy was infectious!
Leopold: Having dinner with Chad and his family in Salzburg! At a key juncture of the deal, Chad and I were both in Europe only to discover at the last minute that we would be in Salzburg on the same day. Surreal moment as we sat together in a wonderful hotel overlooking the city, talking about some key deal points and spending some personal time together.
LEXPERT: Is this the first Canadian acquisition for Lydall? Should we expect more?
McDaniel: Yes, this is Lydall’s first Canadian acquisition. Our primary goal in any acquisition is identifying the right strategic rationale and fit. This can lead us in any direction … including Canada.
Leopold: We look forward to building on the solid relationship we established with Lydall on this initial transaction and having the opportunity to work with Lydall on future transactions in Canada, as well as collaborating with them on the integration and growth of the Texel business.
(For a summary and full list of legal advisors, visit lexpert.ca)