Frutarom’s Insatiable Appetite for Acquisitions

Uri Yehudai, the CEO of stock market’s star company, explains how the maker of flavors and fragrances has achieved a 340% return and how to manage a far-flung business in such distant places as Peru.

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“I came out a sucker,” Frutarom CEO Ori Yehudai said sheepishly when asked to explain the stack of “La’isha” women’s magazines in his living room at the Sea and Sun complex in Tel Aviv. It’s a little surprising to hear such an admission from the head of a company whose Tel Aviv Stock Exchange-traded shares have enjoyed 340% return on the road to a company valuation of 9 billion shekels ($2.3 billion).

“A sales representative called me. Usually I don’t answer such calls, but this time I did. She started to talk to me and said: ‘Do me a favor. I started work yesterday and haven’t sold a single subscription.’ So I told her: ‘You know what? Now you’ve sold one.’ She wanted to sell so badly, and I ended up the sucker.”

It is doubtful, however, that Yehduai could be considered a sucker. At his bachelor apartment to which he moved from Moshav Bnei Tzion in the Sharon region after a divorce 13 years ago, there is a half a cigar in an ashtray and his tan stands out against his starched white shirt. “The two things I love,” he says, “are the sea and the desert.” He can certainly bear the expense of a magazine that he really doesn’t need.

Anyone following the stock exchange over the years knows that during any given period there is a star company, a stock that produces huge returns and boosts the share indexes. The current TASE star is Frutarom, a different species of company, a manufacturer of flavor essences. The returns that the stock has generated have left the other firms on the benchmark Tel Aviv-25 in the dust. And among the global rankings of companies in its business sector, Frutarom is the sixth largest.

Frutarom, which is also traded in London, hasn’t invented a new drink flavor that has captivated the global market. It doesn’t have an exclusive tie to any global brand, such as Coca-Cola or Nestle. And the industry in which it operates is threatened by a shift to healthier foods containing fewer of the chemical additives that provide the taste and smell that all of us have become accustomed to find on processed food labels.

Nevertheless, over the last three years Frutarom’s net profits have more than doubled. Over the past decade its sales have more than quadrupled and its net profits have grown nearly five times over. Currently the company’s goal is to go from annual sales of $820 million to $1.5 billion by 2020.

There is one main reason for the company’s phenomenal growth: Over the last decade, the company has gone on a buying spree, acquiring more than 40 companies, including 17 in the past several years, among them companies in Guatemala, Slovenia, Russia and Britain. And in areas of the world where it hasn’t made acquisitions, notably Asia, it has established its own operations.

Frutarom’s strategy, involving buying up small and medium-sized businesses mostly for a few million dollars, requires it to face the complex task of creating a functioning entity that doesn’t become some big Tower of Babel in which no one understands one another.

Yehudai, who has been CEO of the company since 1996 and is responsible for this strategy, is also one of the major beneficiaries of Frutarom’s growth as a shareholder of the company in addition to the salary that he draws. “Half of my time is in meetings with company owners that I build ties and trust with,” he says, “so that when they decide that they want to sell, we will be the preferred buyer.”

How do you become the preferred buyer?

“I tell the story of our journey, give them examples of acquisitions that we have made in the past and put them in touch with companies that have already sold businesses to us and who will tell them ‘they are good people.’ Unlike financial investors who only look at the money, at private companies, I meet the owner, either him or his father, the ones who started the business from scratch 30 years ago and for whom it’s very important whom they sell to. And then link it to the fact that we really love to include the owner in an ‘earnout’ [in which a portion of the sales price is linked to the companies’ performance in the initial years after the sale]. And we can provide examples of people who sold 70% of their businesses to us and with the remaining 30% received more than what we paid for the 70%.”

Isn’t it exhausting dealing all day with acquisition negotiations?

“We’ve been doing it for many years and now it’s less horse-trading but rather experience in understanding what the expectations are and how to get to a win-win situation. Twenty years ago, it was a lot harder. We didn’t know what was important and what wasn’t, and we haggled over every detail of a 150-page contract. Now it’s easier and smoother, and it’s a matter of [differences of] culture.

“When you buy a company in a place like Spain, it’s a different culture than in Germany. The approach is a lot more of mañana, and things take months. It’s that way in Peru and Chile too. You get a response to an e-mail after two weeks. In Israel, the United States and Germany it’s different. The approach is to know up front what is accepted in the location and the culture.

“Currently a large portion of the contacts are being made in conversations on Skype from home, and as they say, seeing someone in jeans at home gives me a connection to them. Suits and ties are usually not their style. They are actually afraid of the giant global firms. When you start telling them your personal story that begins with being an entrepreneur at 17 and a half, before school, it helps.”

A story of value creation nearly without parallel

Frutarom was founded in 1933 at the initiative of Israel’s first president, Chaim Weizmann, who convinced a group of Dutch investors and scientists to immigrate to Israel and set up a factory in Haifa that produced concentrates for the food and cosmetics industries made from plants and fruit. In 1973, the company was transferred to its current controlling owner, the billionaire John Farber, who bought control of Frutarom’s parent company, Electrochemical Industries.

So what’s the key to a successful acquisition?

“Linking the executives and owners who are selling to us the future results of the company in the two to three subsequent years is the main key to our success.”

What is the difference, for example, between the merger of a company from Guatemala and a merger of a Slovenian company?

“One of the things that took us years to understand and learn was how you manage a global company with a multiplicity of cultures and understanding how to become the least systematic where each place is different. Frutarom’s business is ultimately local. Ninety percent of our operations are flavors adapted specifically to a certain product, for a specific customer in his language and according to his taste. That’s a business that is very different in Guatemala, China, Switzerland, France or the United States. When at the time I started looking into the markets in Latin America, markets where we have made three acquisitions, I tried to understand why the Mexican market was similar in sales volume to the Brazilian market, even though Brazil has double the population. And one day they explained to me that the amount of flavorings in food products in Mexico was simply 50% higher.

“In Israel too, Hashahar chocolate spread, for example, has a taste that the global industry says is like sand, but in Israel they don’t switch it. It’s not just taste. It’s also licensing and the various laws in any location. Our approach says we want people in our plant in Peru to feel connected to their CEO, who will be their leader and the standard-bearer of Frutarom Peru.”

When it comes to Coca-Cola, is it possible to crack the flavor formulas that others have developed?

“You can crack 90 to 95 percent of the flavor. In the case of cola, the chances of detecting the difference between it and a concentrate that we would produce are low. The difference between flavor essences is ultimately not analytical, but rather whether the consumer feels it. There is currently sophisticated analytical equipment designed to crack formulas, but you need the human touch of a development person. Developing flavor products is a combination of science and art.”

You speak of entering the world of healthy natural products, but the bottom line is that the trend in the West is consumption of less processed food, and you will not profit if people buy more vegetables.

“Correct. We can’t make money from people buying vegetables and drinking water, so I don’t drink water unless it’s with flavor extracts,” Yehudai quips, “but on the other hand, you see that the trend in the developing countries is consumption of more processed food and not just potatoes, corn and tomatoes. My grandmother, who came here from Russia, didn’t drink orange juice. She drank vodka and ate sausages, but her habits changed. That’s what is happening now in China and India. They are learning to buy gum and chocolate and to drink coffee or beer. And yet, the trick is how to make a product that is as close as possible to Mother Earth. The main trends in an aging world in which there are nutritional problems and obesity are that people want healthier food, but are not prepared to forgo the taste.”