Phil Fracassa is CFO of The Timken Company, a 124-year-old manufacturer of engineered bearings and industrial motion products on an acquisition tear. This year, Timken has announced six takeovers. The latest, a Netherlands-based company called Lagersmit with products in the marine market, was announced this morning. The transactions are mostly midsize (up to $300 million), Timken’s sweet spot.
Fracassa is used to steering M&A deals. He started as vice president of tax at Timken in 2005 but his last position before CFO was head of corporate planning and development. “Having led transactions, prospected for M&A deals, and played point on various processes gives me an appreciation for developing a strong business case and having conviction around synergies and the ability to create value,” he told CFO.
In an interview in late November, Fracassa spoke about the characteristics and financial performance Timken prefers in M&A targets, how M&A has helped it diversify its portfolio, and why some buyers have been sitting on the sidelines.
CFO, The Timken Company
- First CFO position: 2014 (Timken)
- Notable previous companies:
- General Motors
This interview has been edited for length and clarity.
What does Timken look for in M&A targets?
PHIL FRACASSA: As a member of the senior leadership team, the CFO helps set the strategy — What areas do we target? What companies in those areas are particularly attractive to Timken? We look for a strong strategic sense. We require leading brands with strong management teams that are a strategic fit with our existing portfolio, and a cultural fit. The last [criterion] is more ‘the art of the deal’: Where can we generate the most value?
For example, earlier this year, we bought a company with a very strong U.S. presence; we see an opportunity to grow the business globally. We also look at synergy opportunities on the cost and revenue sides.
Once [a target is] a strategic fit, we make sure it’s accretive to earnings on day one and earns the cost of capital, which we think of as around 9% within three to five years, depending on the deal size.
What type of financial profile do you look for in acquisition candidates?
FRACASSA: We have a bias for companies indexed to higher growth markets — showing the ability to grow as fast or faster than our core business. [These] acquisitions can enhance our top-line growth organically and with strong margins.
We also have a bias for companies running operating margins like ours. We also ensure the company has a very strong ‘product vitality’ — a term we use internally. [It means] an innovation pipeline that can develop new products to meet customer needs.
How would you describe Timken’s approach to the different modes of growth — M&A versus organic?
FRACASSA: Organic growth and M&A work in tandem. We have transformed our portfolio since I joined Timken almost 20 years ago.
We were more than 50% serving the automotive market. Then, over the 2005-to-2015 period, we decided to target the most attractive markets we serve and then looked to pivot our efforts and resources towards those markets. Automotive is a very difficult market — our well-engineered bearings outlast the vehicle most of the time.
“Private equity has been a little less active, given the higher interest rates. The other element in the industrial space is a general concern around recession risk and recession uncertainty."
By intentionally shrinking that business, we went from being around 50% automotive to about 10% to 15% automotive today. At the same time, we grew more aggressively in the broader industrial sectors — markets like renewable energy, automation, metals and mining, agriculture, aerospace, rail, and machine tools.
That opened up more fragmented marketplaces with an opportunity to serve OEMs (original equipment manufacturers) and sell replacement parts in the aftermarket. In most industrial markets, many bearings and other components get replaced or refurbished during the machine's life, which drives a whole other revenue and profit stream at higher margins.
Do you get a sense M&A has slowed among industrials this year?
FRACASSA: As you know, the interest cost of doing M&A is higher than two years ago. Private equity has been a little less active as buyers, given the higher interest rates. The other element in the industrial space is a general concern around recession risk and recession uncertainty. … Some companies are sitting on too much leverage now, so they’ve exited the market, but I would say [the cause of the slowdown] has been general economic uncertainty.
From a seller’s perspective, it’s created a less attractive dynamic, but M&A opportunities have continued to flow [for us]. We have been working with various sellers all year, and we've had to work harder, but our hit rate has been quite good. And we are in a good financial position to continue to pursue M&A in 2024.