January 1, 2012

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Buy, Sell or Hold

Companies Use Strategic M&As to Expand in Rough Economy

Heather Stewart

January 1, 2012

Merger and acquisition activity—along with every other economic indicator—took a nosedive as the Great Recession hit. At the peak, in 2007, the total value of M&A activity in Utah was a cool $4.5 billion. Fast forward a few years to 2010, and the total value had dropped to $2.8 billion.

In this still-tight economy, acquisitions are not so much about securing a great exit, or returning value to investors, but instead growing a business and enhancing its value.

Meeting a Demand

The publicly held ZAGG, Inc. made a splash with its line of invisibleSHIELD products. The ultra-thin, scratch-proof film keeps mobile devices in pristine condition. The invisibleSHIELD has been a hit, and the company’s revenue nearly doubled from 2009 to 2010—and it’s on track for similar growth in 2011.

With such a great product, ZAGG was somewhat “anti-case,” says Brandon O’Brien, CFO. Why should consumers need to carry around their devices in chunky cases when the thin invisibleSHIELD film protects just as well—if not better?

But there was just one problem. The company’s website was receiving hundreds of thousands of searches for “case.” Many consumers simply wanted a case, despite the benefits of the protective film.

ZAGG was not interested in diverting resources away from its core product to develop a case. Instead, it shopped around for a case company to purchase. And it didn’t have to look far: iFrogz, based in Logan, proved to be a complementary brand for ZAGG.

“iFrogz has been able to garner some great brandy loyalty and brand strength,” says O’Brien. With a line of cases, as well as a line of headphones, iFrogz’ products are sold worldwide on the shelves of top retailers like Best Buy and Wal-Mart.

In the acquisition, ZAGG purchased all the outstanding iFrogz stock for $50 million. The deal also included 4.4 million shares of ZAGG common stock, and the company assumed about $5 million of iFrogz’ outstanding debt.

The iFrogz customer base is somewhat different from ZAGG’s, says O’Brien. While ZAGG has positioned itself as a premium brand geared toward professionals in their mid-20s to 40s, iFrogz appeals to a younger audience of teens and college-age people. The iFrogz packaging features bold, bright colors and unique designs. “They really jump out at you on the shelf,” says O’Brien.

In the wake of the acquisition, ZAGG now has a “case” tab on its website. However, iFrogz will continue to operate independently as a division of ZAGG. With differing product lines and target audiences, O’Brien says the deal provides both companies with opportunities for cross-selling.

And with both companies located in Utah, the proximity will allow independence with oversight, he says.

“We’ve known these guys for years,” he adds. “As they grew bigger and we grew bigger, we crossed paths more and more often…Culturally, they’re very similar to us.”

Sparking Synergy

It’s a truism in business: sometimes two organizations working together can produce greater results than the sum of their individual efforts. Such is the case for Lifetree Clinical Research, which was purchased by New Jersey-based CRI Worldwide last year.

Founded in 2003, Lifetree quickly grew from an eight-bed facility to a highly specialized research facility with 60 beds.

“We were at a point where we had developed our core competency really well,” says Alice Jackson, founder and president of Lifetree Clinical Research. The company specializes in pain management and human abuse liability trials.

Meanwhile, CRI Worldwide had developed to a similar size as Lifetree, but specialized in central nervous system and neuroscience drug development services. When contemplating the acquisition, says Jackson, the two companies realized that their client lists had very little overlap. Lifetree’s clients were primarily small biotech and pharmaceutical companies, while CRI Worldwide catered to large pharmaceutical companies.

With each company specializing in different services, they could cross-sell to each others’ clients. And furthermore, each company could learn from the other, with Lifetree venturing into central nervous system and psychiatry trials.

The resulting growth has been phenomenal. The company has doubled its new clients, and “in the past 90 days, Lifetree has hired 50 employees,” says Jackson. She expects to bring on additional workers and, as the facility has newly expanded to 75 beds, she is looking for additional space.

Lifetree also plans to venture into comprehensive clinical trial services, expanding its offerings from its traditionally site-based services. However, the company won’t abandon its dominance in the human abuse liability sector, helping pharmaceutical companies develop medications for pain that are less likely to be abused.

“We are the thought leaders [in human abuse liability],” says Jackson. “We’re right in the sweet spot with the scientists, the staff and the pharmacy services.”

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