THE BIG GET BIGGER. HERE'S HOW THEY DO IT

Published: March 8, 1999 6:00 am ET

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Our panel:

Bradley Buechler, president and chief executive officer of Spartech Corp., a publicly held, Clayton, Mo.-based sheet extruder, and more recently also a custom compounder, profile extruder and injection molder.

Richard Crawford, chairman and CEO of Cambridge Industries Inc., a Madison Heights, Mich., auto supplier powerhouse. The company does nearly every type of plastics processing, with major positions in injection molding and compression molding of sheet molding compound.

Rick Durham, president and CEO of Huntsman Packaging Corp., a Salt Lake City firm that didn't exist a decade ago, but has grown — almost entirely through acquisitions — to be one of the world's largest film extruders.

Keith Harbison, president and CEO of Pretium Packaging LLC, a St. Louis blow molder that came on strong with five big acquisitions in 1998.

Sherman McKinniss, president and founder of Rotonics Manufacturing Inc., a publicly held Gardena, Calif.-based company and the fifth-largest rotomolder in North America.

William Spell, CEO of Eagle Pacific Industries Inc., a Minneapolis-based, publicly held pipe company that added captive PVC resin-making capacity in 1998.

Richard Wambold, executive vice president of Tenneco Packaging, the Lake Forest, Ill.-based unit of Tenneco Inc. The packaging unit is North America's largest thermoformer and eighth-largest film and sheet manufacturer, according to Plastics News data.

Our questioners were Editor Robert Grace, Managing Editor Don Loepp, and reporters Bill Bregar and Joseph Pryweller.

Plastics News: How did your company get started, and when did you take your first steps on the acquisition trail?

Crawford: I founded this company about 10 years ago, and we've been in an industry that has consolidated, I think, beyond anybody's anticipation.

When I first started, this industry had five suppliers doing more than $50 million in sales. I thought that if we could ever get to that point, we would be a major force.

Today in our industry you can't survive doing $100 million. The consolidation has been pretty incredible.

In the automotive industry, we felt that our customers were going to come to us requesting that we do the design and engineering on their modules and systems. So we set out on a path to get a lot of expertise in the one area that few people had — the structural and function side of plastics.

Today we are probably the most process- and material-diverse supplier in the automotive plastics industry. We do blow molding, extrusions, injection molding, compression molding, injection/compression. We do most things you can do to plastic.

We are really considered, primarily, a composites manufacturer. We probably are three times the size of the next-largest competitor of the composites plastic transportation industry, globally.

We started off in 1988 with the company doing about $4.5 million in sales. Most of the businesses we acquired were, at a minimum, underperforming.

Some of them were in bankruptcy and had major performance problems. And we built a business that should do about $600 million in sales this year. And in the next two years we expect to hit about $850 million, with business we've booked.

Harbison: We started our business in mid-1992 in the rigid plastic packaging industry. When we started with our initial acquisition, we had about $4.5 million in sales.

At that point, we talked to a lot of our customers to determine what they were looking for from their suppliers.

What they wanted was a supplier with all the major processing capabilities; all the major resins being processed; technical services — design, mold-building, decorating services; and really a company that could offer those on a nationwide basis.

At that time, our industry was extremely fragmented. It still is, but then there were very few companies over $100 million in sales, and too many to count that were in the $25 million-and-below range. So we saw an opportunity to consolidate the industry and bring in standardized quality and technical management, as well as bringing a little financial acumen to the table.

As we sit here, about 6+ years later, we've done 10 acquisitions, and we're at about $130 million in sales. We run 11 plants.

We have built our business around the customer base. As we look at additional acquisitions, we continue to focus on that. We have a few voids from a geographic presence, but otherwise we are continuing to implement the plan we put together at the beginning.

Wambold: We acquired Mobil Chemical Co.'s Plastics Division, which had about $1.1 billion in sales, for about $1.275 billion. Which we thought was outrageous at the time. But it's turned out to be a fantastic deal for us.

We're not a pure plastics business. We're really trying to provide a set of solutions for our customers — to be a one-stop shop. But we're selective on that list. We buy product lines and businesses that have good long-term prospects.

We don't look at ourselves as being in oriented polystyrene, although we're the No. 1 producer in our area. We don't look at it as being polystyrene foam products, although we're the No. 1 producer of that product. We tend to look at the business very much as the markets we serve.

About 75 percent of what we do is in the plastics arena, or $2 billion of our total sales.

Spell: I wasn't coming from the plastics industry and learning acquisition and merger skills. Our group was actually former investment bankers who decided to get into the plastics business.

In 1993 we acquired a Nebraska company that extruded plastic pipe and tubing. Subsequent to that we acquired several plants in the western United States, we built a second plant on our Nebraska campus, we built a new facility in Utah, and recently we acquired the Lamson & Sessions PVC pipe business, as well as a PVC resin plant. So we not only consolidated our industry — we also vertically integrated.

This year we should do, ballpark, about $225 million in sales, but actually that's misleading, because if we could sell the resin that we produce to outside customers, we could probably get another $75 million or $80 million in sales.

McKinniss: In 1973, I started my business in California. I built it and sold it, in 1986, so that I could retire. That lasted about nine months. I had a covenant not to compete on the West Coast. So I bought a company in Chicago that I built onto.

Meanwhile, the company I had sold my original business to got into all kinds of trouble. So in the fall of 1991 I merged the new company back with it.

At that point we were about $16 million to $18 million in sales. Since then I've done some acquisitions and I've been consolidating an industry that probably still has 200 rotomolders in North America doing only $500 million or $600 million worth of business annually. There's still a lot of small rotomolders, a lot of mom-and-pop operations, but there's a lot of consolidation going on.

This year our sales should be in the $50 million range. Our last acquisition was less than a year ago, which was a $10 million acquisition.

It's an industry that's grown dramatically in my lifetime. In North America, it came from nothing to about $1.1 billion or $1.2 billion annually — including Rubbermaid's Little Tikes group and Step2 Co. and companies that are primarily just in the toy industry.

Buechler: Spartech has been public since the late 1960s, and we've predominately been in the plastics market since the mid-1980s. We initially were a very leveraged business. We changed in the early 1990s to be a little bit more equity-oriented, as opposed to financing all through debt.

We've done 10 acquisitions over the period from 1993 to today.

Durham: We tried to create a company that is a leader in its market, and a business that has several smaller pieces that are all leaders in their markets.

Those smaller businesses have the advantage of the customer service, but they also have behind them a much larger company that can leverage purchasing and leverage the technology that resin suppliers can provide. It also allows us to have world-class manufacturing sites, to make the investment in quality, safety, cleanliness and so on.

It allows us to have the capability to invest in product development and innovation for the customer in a way that most of our competitors, at least in smaller markets, don't have the ability to do. We're No. 1 or No. 2 in most of the markets we compete in. We have perhaps the widest array of film extrusion technology in the industry.

We have anywhere from very narrow, highly specialized medical film extrusion equipment, to 210-inch-wide stretch-film lines, and everything in between.

Plastics News: What factors led your firms to become industry consolidators?

Spell: We had to get bigger to lower our raw material price. Our business is really more of a commodity than packaging or automotive parts. If you're a low-cost producer, you'll be a dominant producer.

Crawford: In the automotive industry, companies really have gone from being individual part suppliers to module suppliers. Obviously plastics really lends itself to that sort of strategy.

Second, our customers were demanding that their suppliers become global. For us to convince an OEM to use our product in their car, we needed to be able to provide them with service anywhere in the world.

We also were in an industry that suffered from excess capacity. And we were in an industry that really needed a significant investment in research and development.

There also were a lot of large companies making structural plastic parts, but they were doing it in divisions that were really a sideline to the parent firm. The divisions that we acquired were sort of an afterthought to those companies.

Wambold: We had customers who were looking for solutions rather than product. They didn't want, necessarily, to buy oriented polystyrene. They wanted to buy the best possible product they could to serve a particular food in.

No one thought about how to do that in a large way, and had deep enough pockets to go acquire the various businesses that produced those products and invest in them.

There was a lot of consolidation of our customers themselves. The supermarkets had been consolidating now for 10 years — fewer and fewer with more and more stores. The distributors that serve supermarkets have been consolidating now for 10 years — fewer and fewer, and with a more national scope.

They wanted us to become more national. If you could serve them on the West Coast, the East Coast and in the center of the country, they were much more likely to do business with you.

It's not just supermarkets, I just use that as an example. For instance, food processors are doing the same thing. It really has to do with supply-chain economics in the food industry — reducing the overall cost and the inefficiency that existed there.

Harbison: As our customers have been re-engineering or right-sizing or whatever you want to call it, they're looking for their suppliers to do more.

Many of the companies that we worked with four or five years ago had 15-person purchasing departments. Those departments now have gone down to a couple of people.

As a $10 million or $20 million blow molder, you simply don't have the financial resources and the capability to be able to provide the kinds of services that these companies are looking for today.

When we look at acquisitions, one of the critical factors we look at is the technical service strength the company brings to the table.

Here's an example: A year ago we acquired Pocono P.E.T. Inc. Before that, we didn't have PET processing capability anywhere in the company, and none of our customers, no matter how great they thought we were, would let us use them as a guinea pig.

Now we're using the technical resources of the Pocono people, which are superior in the indus_ try, with customers in other parts of the country. And we use their people to spec equipment, molds and do plant layouts in our other facilities around the country.

So we're cross-fertilizing between the plants — as opposed to going in and sucking the brains out of all these people and putting their knowledge into our massive corporate headquarters structure.

We manage on a decentralized basis. That's how we differentiate ourselves from our competitors. Most of our competitors, once they cross the $50 million mark, they tend to centralize customer service and all those things that, as a small company, the customers can access directly at the plant level.

We've grown by acquiring good companies that are profitable, which we learned after our first three deals. It took us three years to do our first three deals, and then seven acquisitions in the last year.

Plastics News: Has anyone been successful buying sick companies, or looking for bargains in the bankruptcy bin?

Buechler: We traditionally buy businesses that are making money. We don't go out and buy companies that are in bankruptcy or ones that are very, very sick. Then you'll spend three years trying to get them better.

Spell: If they're losing lots of money, they have outdated equipment, they don't have a good customer base, they don't have a good franchise — you know, that's something we don't want to buy. It's cheaper for me to buy equipment and expand my plant and so on.

I guess there's one caveat — if it's an area of the country I want to get into. But having said that, we usually buy businesses that are in pretty good shape.

Crawford: When we first started, we didn't have any money. So we followed what I call our three-legged, one-eyed dog strategy.

We bought the three-legged, one-eyed dog that nobody wanted, because that's all we could afford. And we were pretty successful. We didn't get them all to be greyhounds, but at least we got them all so they could walk.

Initially the companies that we bought, we couldn't screw them up. One company lost $22 million on sales of $55 million. We took over some disasters, and it worked very well for us.

But as you get bigger, I think it becomes more and more difficult to do turnarounds.

What you find when you're ding turnarounds, you pick the low-hanging fruit in about 90 days. You get 80 percent of the improvement right away. The last 20 percent takes a couple of years. But it takes a tremendous management focus. It takes your top people eating, sleeping and breathing it. You literally set up a cot and sleep there.

As you get larger, there are very few turnaround opportunities that warrant the diversion of management attention. It would have to be, for us, a $1 billion company.

Wambold: It really does get down to what your strategy is, and what stage of development the industry that you compete in is in.

If you're in an industry that has a lot of mom-and-pops in it, it may be that your best alternative is to buy distressed companies. That may be your best possible way of creating value.

We got out of the box fairly early, so we had the opportunity to go out and buy companies that were in great shape and that had great management that we needed badly.

We went out and went after the Tier 1 companies, and bought those at what we think were reaź sonable prices.

I think some of the players who are out there doing consolidation in some of the niches that we're in today are not able to do that. The top-tier companies are gone. So they're forced to do different kinds of acquisitions to achieve the same kind of strategy.

Durham: When you've acquired 13 businesses, chances are you're going to see all kinds.

We've had some businesses that were losing a lot of money, some that were making a lot of money, and everything in between. What we try to focus on is the customer and what the customers' needs are, and identify a certain market where we really want to play.

Then we look at that landscape and see who the best players are in that industry.

In a couple of instances we've gotten into a market with a acquisition where we felt like we paid a very attractive price. Once you do that, you can look around and say, OK now, strategically, how do I fit another business onto this, and maybe pay a higher price for that add-on business.

The combined investment in that market is still very attractive, and yet with the combination of whatever technology the two businesses had, getting the best people from those combined acquisitions and the best practices and best customer base from the combined acquisitions, that allows you to dominate that market.

Plastics News: Is it easier having private ownership, or being publicly held?

Spell: Eagle Pacific is public. But our group also has unrelated private businesses, and in those, we can manage for cash flow, which creates value in the long run that is greater than if you manage for net income, earnings per share, and trying to keep quarter-by-quarter growth, like you do with a public company.

I think our Eagle Pacific business, since it's commodity-based, would probably lend itself better if it were private, because of the volatility of the end market.

Wambold: As a public company, you give up patience.

Crawford: The CEO and the chief financial officer spend half their time communicating with the shareholders


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THE BIG GET BIGGER. HERE'S HOW THEY DO IT

Published: March 8, 1999 6:00 am ET

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