Airgas
A Strategy of Acquisition

OPPORTUNITY IN DISTRIBUTION

Gas cylindersIn the early 1980s the U.S. market for industrial gases was dominated by a few major producers — the Linde division of Union Carbide (now Praxair), Air Liquide, Air Products and BOC. These companies accounted for 60 percent of sales, delivering mainly to major users via large bulk shipments or pipeline. Gases supplied in cylinders and small shipments through independent “mom-and-pop” distributors accounted for the remaining sales to hospitals, welding shops and other small-scale users.

Many of the independent distribution companies were founded after World War II by veterans who took advantage of the G.I. Bill to obtain small business loans. By the 1980s some were eager to cash out and retire. Spurred by $3.5 million in sales in its first year, U.S. Airgas was eager to oblige.

THE STRATEGY

“Distribution is about density. . . It is a local business based on deals in local markets.”

Peter McCausland

U.S. Airgas saw that the industry was entering a period of consolidation and kicked the acquisition machine into gear. Through a series of deals, the company purchased distributors in a variety of locations. There was little competition, since most small companies were not interested in expanding outside of their geographic region, and big producers confined their efforts to major metropolitan markets. So U.S. Airgas went after secondary markets served by independents, especially those with excellent growth potential and a high density of potential customers.

Look for Density

Look for Density

Customer density around a production plant was considered the most important element in determining profitability, due to the short distance that heavy steel cylinders can be shipped before becoming cost-prohibitive.

Anchor and Add On

Anchor and Add On

U.S. Airgas would sometimes pay a premium for an anchor business in order to establish a foothold in a market. Then, it could acquire companies in the surrounding area. This "anchor and add on" strategy creating regional "hubs" around each anchor business.

Embrace Rural Markets

Embrace Rural Markets

U.S. Airgas favored rural areas. In the big metropolitan areas, the major producers were dominant, surrounded by many small, competitive companies with low profit margins. By contrast, in a place like Bowling Green, Kentucky, Airgas was able to buy a well-established company that was the largest in the area.

Keep It Local

Keep It Local

U.S. Airgas had no immediate ambition for a national presence. Acquisitions were opportunistic. Lacking the infrastructure to support business on a national scale, the company kept its operations local.

Buy Well-Managed Companies

McCausland and his partners sought to acquire well-managed companies. Local operational expertise was essential, ensuring both that acquisitions were viable and that they could run without too much involvement from U.S. Airgas. The partners also looked for profitability; for a sales mix weighted toward gases over equipment and supplies; for markets that were not dependent on any one industry; and for a potential of continued employment of key personnel.

EARLY COMPANIES AND HUBS

“When you’re acquiring companies as
fast as Airgas, guys who were direct competitors today can end up working side by side tomorrow.”

Richard Watson, Regional VP, Airgas Mid America

The acquisition of Oxalloy in January 1983 strengthened the Connecticut hub. In December 1983 came the purchase of Potomac Oxygen in Virginia, creating a second base of operations. In 1984 a Michigan hub came to life after Mid-Michigan Welding Supply, Valley Oxygen, and Wolverine Gas Products were all acquired within a three-month period. In 1985 acquisitions in Tennessee and Georgia formed two more hubs.

By becoming part of U.S. Airgas, companies achieved economies of scale, streamlined their operations and gained buying power. In return, U.S. Airgas got personnel with market knowledge, strategic relationships and loyal customers.

Acquisitions map
Jerry Baker and Tom Mason
Articles of incorportation in Delaware

WERCO AND AIRGAS: 1986

By 1986, U.S. Airgas’ sales had grown to over $35 million. The company believed the opportunity existed to roll up the industrial gas distribution industry, but it lacked the necessary capital. An ingenious solution came through a merger with the Welders Engineering Research Company (Werco). McCausland’s relationship with Werco dated back to his days as a lawyer for Messer Griesheim, and he had played an important role in Werco’s own acquisition strategy over several years.

With annual sales of $68 million, Werco was a medium-sized manufacturer of welding supplies and related products used in the industrial gas industry. McCausland and Werco’s owners agreed to combine the two companies through a reverse merger in which Werco acquired U.S. Airgas, but U.S. Airgas ran the new company, now called Airgas, Inc.

When the dust settled, the newly formed Airgas was a $100-million company. Werco’s chief executive, C. D. L. Perkins — who had earlier been McCausland’s boss at Messer — became the first CEO of Airgas, and McCausland took over a year later.

Werco merger memo