On the day we acquired the Metal Spinners group of companies (MSG)I drove the 100 miles to Newcastle to take control of our new acquisition after just two hours sleep. Following months of tortuous negotiations that I swear would have sent a saint insane, we had completed the transaction at 4.00am that morning in our lawyers’ offices in Leeds. Roger, Mark and I now owned (along with 3i, our equity partners) a specialist engineering business that had been formed in 1953. Along with our nearest competitor, we were jointly the largest such firm in the UK.
Our business strategy, which had won us the backing of 3i & Allied Irish Bank, included not only growing the MSG business organically but buying up a number of our competitors, rationalising production and ultimately selling on the business. However, that morning when we addressed the workforce in two mass meetings at our largest factories in Newcastle, we spoke only of our commitment to the business and of continuing investment. Whilst Mark set about the process of ensuring that we had firm control of the company’s finances, Roger and I set off with Clifford (the previous owner) to meet some of the major customers.
The meetings went well and Clifford was companionable and co-operative enough. The following week I travelled with him again to meet more customers as Roger immersed himself in the production processes. This time little inconsistencies began to emerge in Clifford’s accounts of a number of aspects of the business and it wasn’t long before Roger’s assessment on meeting him for the first time came back to me, “I wouldn’t trust him as far as I could throw him.” Given Roger’s size advantage I was prepared to allow Clifford some latitude but doubts nagged at me when he became increasingly evasive over what should have been straightforward matters. This evasive behaviour plus a word in Mark’s ear from the management accountant as he departed for a new life in Australia sent what had been merely niggling doubts into full blown alarm.
The more we dug into the company’s affairs the more our doubts rose until we had a dossier of concerns that we laid before our lawyers. Their advice was that we had significant claims against the vendors plus a damaging potential problem with HMRC. Warning letters from our lawyers were sent out that were initially ignored only eventually to result in a counter claim from the vendors. Additionally, as the stakes rose and the acrimony mounted, towards the end of that first year Clifford demanded repayment of the loan notes he had issued as part of the sale and purchase agreement. These loan notes (which gave Clifford the tax advantage of spreading part of the consideration over two years) had provided a large chunk of our working capital and were repayable on demand to Clifford.
Word was at the same time filtering back through the local business community that Clifford was claiming we had no idea how to run the company, would be forced into administration and he would buy the business back for a song. Hearsay, yes. But the demand for repayment of his loan notes could have been fatally damaging. However, our business was performing extremely well and we had built something of a cash mountain by year end. We repaid the first loan note, pushed on with the claims and over the next two years incurred huge legal bills in progressing our investigations and the claims.
The business was certainly performing well and Roger, Mark and I had settled into our respective roles. Roger had his hands around his role of MD and his wealth of experience not only as an engineer but someone with immense knowledge of the steel and engineering sector worldwide was proving ever more valuable. With complete agreement over strategy, I had immersed myself in two key tasks. The first was ensuring we progressed our legal claims in the most effective manner. The other was researching companies in our sector seeking out potential acquisition targets. Other problems were growing though.
“We need a word, “Roger said one day, closing my always open office door, “We’ve got a real problem with Mark.” He then proceeded to spell out a litany of concerns he had over Mark’s ability and performance as financial director accompanied by hard-hitting evidence. I was shocked. I had seen Mark work tirelessly with me over the previous two years through one rejected bid after another. I had been impressed with his understanding of corporate finance and his grasp of the wider aspects of business strategy. I had seen Mark go through a particularly difficult period in the month prior to our acquisition when it looked increasingly like the transaction would be successfully completed. His dilemma had been over timing of his resignation from his existing role as FD in a small Plc. I had needed Mark full time from the very first day if we were successful and he would have to resign at least a month ahead of our scheduled competition. In the event he had resigned but with a young family it had been a difficult decision to give up financial security. I said I would speak with Mark.
The process that took place over the next few weeks was far from easy. I liked Mark, enjoyed his company, had been impressed by his financial judgement and knew his family well. I felt committed to him for his support over the previous few years but the evidence that he was failing was overwhelming. It was not a matter of experience, he certainly had that. The problem appeared to be that he lacked many of the competencies required for the role. I prepared for our meeting by reviewing the requirements for the role of finance director, covering every aspect of the role. I shared our concerns with Mark and provided him with a copy of the list I had drawn up. I suggested he took a week off to consider how he felt he matched the requirements of the role. He agreed to do this.
A week later we met and I was saddened to hear from Mark that he accepted that he was deficient in most of the key competencies required for his role. Nevertheless he felt he could improve. What he was basically admitting was that he did not have the aptitude for the key aspects of his role. Roger and I discussed the situation at length. We were just a three man board. Having recently acquired a large and demanding business, with a potentially crucial legal claim unresolved and with the tasks of reviewing and improving every aspect of the business, we could not afford to be carrying anyone. With a vast amount of debt, external shareholders and financial backers, it was essential that the financial systems and processes and the man responsible were bombproof. Quite apart from our considerable personal investments, we had to consider the wellbeing of over 150 employees, our customers and suppliers.
Parting company with Mark was another low point of my career. But I believe that the process and timing of our approach enabled him to forge a career more suited to his undoubted skills and competencies before the situation degenerated into one infinitely more damaging to all concerned. Certainly the relationship with our financial backers was going to be critical over the next few years and the role of FD would come under the spotlight on many occasions. Luckily for all concerned, as a result of experience, our shareholders’ agreement made explicit provision for dealing with the transfer of equity in such circumstances. Mark went on to forge a new career as a financial advisor, a role he was well equipped for.
Once more we were thrust into the task of finding a suitably skilled and experienced executive to join our team. In the event the hunt was not a lengthy one and after a thorough process Malcolm joined us as FD and became a fellow shareholder. Having worked with Roger in a previous business for many years, he was a known and able man who made a strong contribution to the business (although I do have to say he seemed to operate occasionally on a unique and personal time and priority system). We were a team that would work well together.
Over the next year or so the process of updating both the fabric of the company, its systems, procedures and equipment gradually sorted out the able employees from the also-rans. We were pleased to be able to support and enhance the roles of those who were skilled, loyal and committed but were not sorry to wave goodbye to a few who decided they couldn’t or wouldn’t change.
When we had acquired the company we had inherited well over 1,000 customers on our sales ledger. Following a complete strategic review, including analysis of each and every one, we found the best margins were flowing from those customers for whom we produced the most demanding and technically difficult components. These customers also had one other characteristic in common – they all produced a final product that absolutely must not fail during life.
This review enabled us to form a strategy of concentrating on identifying, reaching and influencing those potential customers in certain key industries with the most demanding needs. This strategy led us into major investments in new plant, equipment and engineering techniques. But it also gave us the security that when we converted such a critical and demanding customer to our process, there simply wasn’t another company that could replace us. We were to suffer the agonies of our largest customer (a global giant) constantly trying to replace us as a way to drive prices down, ultimately finding that no-one else in the world could do what we did.
As we were moving towards the end of our second year we had drawn a blank in trying to find a worthwhile competitor to acquire. Exhaustive research and meetings with a number of the most promising firms had failed to reveal anything worth acquiring. The picture was emerging of a sector of the engineering world that was continually fighting over the same narrow amount of business for components that were traditionally made using the process of spinning. Furthermore, the only weapon in the armoury of these firms seemed to be price. As a consequence almost none of them were making any worthwhile profits and they hadn’t been able to invest in new equipment or techniques. In short, they were caught in a vicious downward spiral.
Our own newly confirmed strategy seemed to make more sense than ever. Why fight the competitors in our own sector for commodity components where prices were terrible when there was business we could win from other processes? Yes, it would be far harder but there had to be business out there we could take from other engineering processes where we could win on technical advantage. The opportunities were global, the challenges were significant and Roger was itching to get stuck in.
Meanwhile, events seemed to be conspiring against me once more. Not only was Bridgestream looking decidedly sickly but another of my investments was beginning to show signs of terminal ill health. And then an even worst piece of news struck just after that second Christmas that had appalling potential consequences. Malcolm telephoned to let me know that Roger had been taken seriously ill. Just how many problems could come at the same time?
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