Acquisition Case Active Generation

Case Study

THE acquisition OF ACTIVE GENERATION

OVERVIEW

In October of 2003, Kirkland Health Centers, the large Midwestern fitness center chain based in St. Louis, Missouri, was considering the acquisition of a smaller family-owned chain in New England. An appropriate acquisition would allow Kirkland to more fully utilize a recent marketing and billing facility that it had completed outside Kansas City.

In recent years Kirkland had refocused their equipment and staff to target middle-aged and retired health-conscious clients. The fitness centers offered dietary supplements, natural foods, and chiropractic services as well as equipment rooms and exercise classes. Management had been interested in expanding though an acquisition. The New England company, Active Generation, Inc., was the best opportunity because its layout, equipment and target client group were very similar to Kirkland’s, and its owners, a first-generation Lebanese family, had been interested in selling Active Generation so that they could create liquid estates for their heirs.

Kirkland’s chief financial officer had to develop an offering price for Active Generation that was low enough to make the acquisition’s contribution positive in the future. With similar operating characteristics, it was reasonable to assume that under Kirkland’s direction, Active Generation’s operating margin could be increased from 7.0% to 7.8%, principally from the combination of billing facilities and a consolidation of their combined training staff. Active Generation’s management had been considering retirement for some time and, unfortunately, had not been aggressive with respect to expansion. Kirkland management believed that Active Generation’s historical sales growth of 8% could easily be increased to 11%. After four years, however, Kirkland did not consider that growth would continue without further, significant investment in the Active Generation operation. Kirkland was not prepared to consider such a...