The hybrid M & A deal: as Dean Foods demonstrates, this is a compelling way to obtain new technology and products with minimal capital risk.

• Author: Kauppi, David
• Position: BIG DEAL

NO RISK, no reward is one of the oldest adages in business. This formulation of strategic risk was first expressed in written form by the Greek scholar Herodotus in 450 B.C.

In the realm of corporate mergers and acquisitions, the challenge for many companies is to obtain a highly desirable product or technology while risking as little capital as possible.

While growth through M & A continues to be a highly popular strategy, many CEOs and CFOs remain wary about making deals. In a recent survey of large corporation executives by Accenture, 45 percent reported their most recent deal failed to deliver all of the expected results.

One solution to traditional outright purchases is the hybrid M & A model. It is becoming increasingly popular.

In a hybrid M & A deal, a large public corporation takes a stake (typically 10-50 percent) in a smaller company (public or private). Generally, this equity infusion comes with a call option, a right to purchase the entire company at a later date at contracted valuation metrics.

The hybrid model has been successfully implemented by Cisco Systems, which began using it more than a decade ago. Between 1993 and 2007, Cisco made 119 acquisitions, many of them in start-ups or small companies with limited track records.

There are three key benefits for the equity parent in the hybrid model:

* Diversified investments minimize overall risk.

* Access to new technologies and products is obtained at minimal cost.

* Managed resources are not dissipated.

For example, a corporation willing to spend $250 million could invest it in an outright purchase of one established company or take a dozen $5 million to $25 million stakes in start-ups.

In the consumer products sector, we can look to Dean Foods, the leading U.S. provider of fluid milk and dairy products, for an example of a very successful hybrid acquisition.

Supermarket shoppers know Dean Foods through its many local brands, including Borden, Pet, Country Fresh, Meadow Gold and Horizon organic.

One of Dean's most successful acquisitions was White Wave, an organic foods company. It was founded in 1976 by Steve Demos, an organic foods pioneer. He introduced Silk soy milk in 1996, just as the organic foods boom was beginning. In 1999, Dean Foods purchased a 25 percent stake for $5 million. Helped by Dean's "smart money," sales soared to more than $250 million in 2004, when Dean purchased the remaining 75 percent of White Wave for $224 million.

Dean, acting in the Cisco...