The Business of Life Chapter 36 -it’s not just the business risks

Roger was taken seriously ill over the Christmas holiday 1998 and admitted to hospital with crippling back & chest pain.  Following MRI scans and blood tests he was diagnosed with an MRSA infection in his thoracic spine.  The affected vertebrae had all but collapsed, were partially fused, trapping nerves and were the cause of the excruciating pain he was suffering.  No one knew the source of the infection or how it came to lodge in his spine but it seemed life threatening at worst and incapacitating at best.  Whilst Roger was being pumped full of a cocktail of the most powerful antibiotics I pondered our situation. When it's not just the business you have to fear

 The illness could not have come at a worst time.  Our dispute with the vendors of MSG had reached the stage where a court action seemed inevitable and with the only certainty that we would be spending vast sums more to fuel the action.  I had been overseeing the detailed investigative work inside the company and liaising with our legal team.  I could ensure that our claims continued to be pursued with vigour but there was a peak of activity occurring simultaneously on a number of fronts.

A few months earlier one of our minor customers had been placed into administration.  The loss to MSG was small but the business itself was interesting.  The company concerned was Trisk, a world leader in infra red paint curing equipment for the automotive after market.  Situated only a few miles from us in Sunderland, it had enjoyed explosive growth with the founder recently receiving the accolade of North East Businessman of the Year award.  Unfortunately, a combination of poor strategy and uncontrolled spending had run the business into the ground resulting in the management being replaced and the bank appointing an administrator as soon as they had recovered their overdraft.

 The other aspect was that Trisk was also a 3i investment.  Although they had no hope of recovering their original investment they assured me that they would be supportive of an acquisition by us.  Prior to Christmas we had met with the administrators and the new management at the Trisk headquarters.  The new team had all been promoted from within and, whilst lacking experience, seemed supportive of our efforts to acquire the company.  However, there were a number of other parties interested including the largest competitor, Hedson of Sweden.  We were fully engaged in negotiations when Roger was taken ill.

Our efforts to locate at least one suitable acquisition candidate in our own engineering sector had come to nothing.  Having scoured our industry, had meetings with owners and analysed many sets of accounts, we came to the decision that there was not a competitor worth buying.  With the exception of a single piece of equipment (that we subsequently acquired for very little) none even had assets worth acquiring.  It was also quite clear that our competition fought with only one weapon – price.  They competed with each other for components that had always been made by the spinning process simply driving down price in the process.  The result was that margins in all of the competition were slender to non existent.

Following our strategic review we had identified that any new major business to be targeted would have to be conversion from alternative metal forming processes.  It was apparent to us that we could offer significant technical advantages for industrial applications where the risk of failure in life had to be eliminated.  This was a risk in particular (and demanding) applications where components had been made using alternative metal forming processes.  Companies were prepared to pay heavily for a process that eliminated these risks.  As the result of our new strategy, Roger had targeted the medical division of one of the largest industrial companies in the world.  Within hours of his contact they had put an engineer on a plane from the USA to meet with us.  Now, they had followed this up with drawings for a set of major components for one of their products.  The only person with the engineering skills to lead the investigation into how we could produce the components was Roger.

When I went into the hospital the following day to discuss how we might make alternative plans, I found I had been beaten to it.  Drawings were strewn across Roger’s bed and a small team were assembled around him.  “If I don’t do it, no other bugger can.” growled Roger in his inimitable manner.  He proceeded to lead the team that developed our ultimately successful solution from his hospital bed in the weeks that followed.  Samples were produced, shipped to the US and soon approved.  Unfortunately, despite our superior solution (and the winning of an internet auction) we fell foul of internal politics and it was to be several years before we became a regular supplier.

The infection that had laid Roger low was finally pronounced clear but it was to leave him with subsequent and recurrent problems that continue to this day.  Somehow he would shrug the problems off and battle on displaying a level of fortitude and perseverance I have never witnessed before or since.   It soon became apparent that to pursue these strategic opportunities required investment in new equipment that was capable of producing the power and tolerances required for the demanding, new work.  Over the next few years we acquired two of the largest CNC spinning lathes in Europe (capable of spinning components up to 5 metres in diameter).  These were followed by smaller state of the art spinning machines, water jet cutting, high speed plasma and a robot.

Our bid to acquire Trisk was successful, beating off our Swedish competitor.  Getting to know our new business and repositioning strategy proved to be a time consuming process.  However, we quickly had the business back into profit and started looking for fresh opportunities.

In another serendipitous turn of events we suffered a further minor bad debt when a second of our many MSG customers went into administration.  The company, Bison IBC Systems in Bradford, produced UN standard intermediate bulk containers for the transportation and storage of hazardous chemicals.  It was a leader in its field and had a strong reputation for quality.  However, once again we found a company that had been mismanaged, although this time it was through the activities of its parent company.  Following protracted negotiations we bought the assets of the business later in 1999.  A similar pattern occurred as with Trisk and profits started to flow shortly after our acquisition.

 By the end of that financial year both new acquisitions had made strong profits and, combined with our MSG business, we produced an extremely strong result for our holding company, Precision Engineering International (PEI) which we held jointly with 3i.  We now owned a portfolio of 3 industrial companies, each a leader in its sector.

Pleased with our track record, 3i positively encouraged further acquisition activities.  As a result I received a copy of their entire engineering and manufacturing portfolio (over 500 companies) together with an open invitation to consider any of these for acquisition.  Detailed investigation made clear a couple of things to me.  The first was that it was extremely satisfying to discover that we were one of their top performing investments in these sectors.  The other aspect was learning that they were quite amenable to turning over an investment with a fresh set of partners they considered could produce a higher return.  However, despite spending a great deal of time in further research and analysis there was no obvious target for us.  Shortly afterwards, another problem was sprung on us.

When I set up the funding to acquire MSG I had sat through a ‘beauty parade’ of banks (something that might reasonably be called an oxymoron).  The bank that offered the lowest lending rates and the most attractive deal was Allied Irish.  It seemed that they wanted to become involved in supporting VC backed deals and were anxious to become involved with 3i, hence their better than average offer.  All had gone well for several years although it was clear from various meetings that they knew little about manufacturing and less about engineering.  Nevertheless it was a shock when they turned up one day that year and said they were calling in their millions and we would have to refinance.  When pushed for a reason they claimed that they really didn’t understand our sector and were going to concentrate on property, a sector where they had real expertise.  Well, we all now know how that one worked out for them!

We refinanced easily with HSBC and that relationship worked well for a number of years with further lending to support our growing capital investment programme at MSG.  Until that is, they decided to replace their extremely knowledgeable regional director for someone who knew about as much about business as Allied Irish (perhaps less).

In 2000 another significant event took place.  Our claim against the vendors of MSG and our defence against their counterclaim had been consuming vast amounts of my time and we had already run up massive legal fees.  With all legal avenues exhausted, I had prepared for a full hearing with a brief to a very experienced barrister in London.  We were convinced we could win our case and this meeting reinforced that view.  The process had become more and more fraught as a result of constant rejection by the vendors of each and every attempt we made to resolve the matter and obstruction of our investigations.  It didn’t help that Clifford had a reputation as a blustering bully whose usual line of defence was attack.

Nevertheless, in one last attempt to avoid the additional time and expense of a trial we made a proposal to the vendors to join with us in the Alternative Dispute Resolution (ADR) process.  To our great surprise we learned that they had agreed to this process.  The stakes were very high.  We had already sunk a large six figure sum into legal and investigative fees in the previous three years but there always has to be an element of risk and uncertainty in legal matters.  Even the ADR process didn’t come cheap with barristers in attendance on both sides.

 Some weeks later I sat across the table from Clifford with our respective teams ranged around us.  It was the first time we had met since we bought the business three years previously and in that time I heard he had suffered a stroke.  Would illness have mellowed him or would he be as obdurate as ever?  Could we reach a settlement and put an end to the vast drain on time and expense?  Or was this just a futile exercise?

Image courtesy of gastroenterologyupdate.com.au

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