Tag Archives: Alternative dispute resolution

The business of life Chapter 37 – the joy of closure

Assembled in a meeting room in a hotel close to Newcastle airport early one morning, the two sides eyed each other warily.  We had not met for three years but had fought with all the powers of the law on our side and what had seemed like pure obduracy & guile on our opponents’ part.  It appeared that Clifford had convinced himself that our legal claims would melt away as we failed in the business his father had founded all those years before.The business of life - chapter 37

The plenary session began with both sides facing each other either side of a long table with the law society facilitators at either end.  Both sides had legal teams present comprising lawyers and barristers, all enjoying huge hourly fees whatever the outcome.  The process of spelling out our claim in great detail and at length whilst staring Clifford in the eye was a strange experience indeed.  It was exceeded only by having to listen to what we felt constituted the fairy tale of their defence and counter claim.  The plenary session over we retired to our respective rooms and the shuttle diplomacy began.  The chairman visited each party in turn to ascertain at first hand the reaction each group had to the others’ position.

It was clear that no quick or easy solution was likely to emerge, in fact it seemed that Clifford and Mike were as resistant to a settlement as ever.  Day turned into evening with no progress at all and the session broke up with each group making its own arrangements for dinner.  The next day began and continued all morning with no progress.  I was becoming increasingly irritated by the corporate finance partner from our law firm who could only match the other side’s bluster and seemed intent on ensuring that we ended up in court.  In contrast, Stephanie his manager who had worked closely with me over the previous three years impressed me greatly with her calm efforts to find a solution.

The day wore on in like fashion and Roger, Malcolm and I were becoming resigned to having to endure the costs and uncertainty of resolution before a judge.  I had been casually intrigued by the behaviour of our barrister who for the last hour or so had been ignoring the rest of us and quietly doodling on his pad (or so I assumed).  “OK,” he suddenly exclaimed, “this is how I see things.”  He then proceeded to share his doodles with us, which were actually a matrix of all of the claims and counter claims at stake.  Ranged against each claim was a percentage calculation of the chances of each party winning or losing with his best estimate of the awards and costs each would incur should they win or lose.

The bottom line was the view that we had an almost 100% chance of winning all of our claims.  His view was that Clifford had, at best, only a 50% chance of winning their counter claim.  However, the killer result was that the costs and damages Clifford would suffer as a result of our wins would exceed any benefit from his counter claim succeeding by a factor of about ten.  We called in the chairman who quietly listened, asked a few questions and departed to put this picture before Clifford and Mike.   An hour later he returned and we learned that they had capitulated almost completely.  A couple more hours later we all signed the necessary documents that drew matters to a close (apart from some remaining issues that festered on with HMRC).

As I drove back to Yorkshire that night I reflected on what had happened over the last three years.  Many years previously Clifford and Mike had put in train a course of action that was relatively insignificant at the time but one that had snowballed into major proportions.  I felt it was sheer arrogance and mindless bravado that had brought Clifford into conflict with us, a process that set about unravelling their plan & compounding matters through their refusal to negotiate.  It was clear that Clifford and Mike’s legal team had failed to advise them of the costs they could incur by their actions.  We had won a long, drawn out and bloody battle that had never been of our choosing and had won handsomely.  Strangely, it gave me little satisfaction other than great relief that the whole sad story was over.  I had closure.

Freed of the efforts and frustrations of a long and drawn out legal fight, we threw ourselves back into the challenges of improving our complex new group of three companies.  MSG was our strategic acquisition, the core of our business with, we believed, great potential for highly profitable growth and an ultimate sale.  By the standards of the UK engineering sector it was already a highly successful business (not least due to its non-involvement in the mainstream automotive sector, one we steadfastly ignored).  It had a potential to become even more profitable through an ability to offer unique solutions to demanding blue-chip customers.  We knew that it would take hard work and patience owing to the extremely long leads times required to replace an existing process.  In the case of one of the major customers we won, it took fully ten years.

Trisk and Bison were more tactical (and certainly opportunistic) acquisitions.  Both produced exceptional profits in the first year of our ownership.  If we had then put both businesses up for sale life would have become a lot simpler (a lot sooner).  However, buoyed by the wondrous sound of cash hitting the bottom of the piggy bank and improving PEI’s balance sheet, we pressed on certain that we had hit the magic formula.  From then on matters got infinitely more complex as the cash production machine slowed.

There are long, frustrating stories behind our ownership of both these businesses but I’ll restrict myself to the following brief accounts.

A common feature of both businesses was the quality of management and many of the staff we inherited (courtesy of TUPE).  In both cases, instead of their embracing the change and opportunity brought by new ownership, we had to spend too much time fighting a tendency to revert to the orthodoxies that drove them into administration in the first place.  It was almost as if they believed their failed businesses had been pursuing the correct strategy and policies all along and some freak external event had knocked them temporarily off course.  These tendencies were bad enough but the net effect was to divert our attention from MSG where, with hindsight, we should have concentrated our time and energies.

With Bison, it only took a parting with the MD (son of the CEO of failed parent PLC) and four short years to sell the business in 2003.  We heaved a sigh of relief and moved on.

The situation with Trisk was much more complex.  The company still had technical leadership in infra red paint curing and had also developed ultra violet technology for more demanding applications.  The business was certainly a world leader in its sector and exported to every continent across the globe.  Once we had taken over we saw that Trisk had a number of critical strategic issues.  A major market for Trisk had been the USA where we had a network of commission agents.  Our products were capable of commanding far higher price levels but the agents had learned to sit on their hands ahead of the peak winter demand until our locally based manager panicked and reduced prices.  This was a pattern that revealed itself to be a major problem in many parts of the world.  Attempting to establish a stable and rational pricing strategy proved to be particularly tough due to internal company politics and the weak MD we had inherited with the business.

The other major problem took several years to emerge as the Trisk management either weren’t aware of the shifting dynamics of their marketplace or they ensured that they wouldn’t reveal what they knew (knowing it would require them to change strategy completely).  Trisk had built its initial success on designing and selling IR paint curing systems almost exclusively used for automotive repair work.  These systems were based around an array of IR lamps mounted on relatively simple mobile stands that could be moved around car repair workshops.  Trisk had also adapted the concepts into larger arrays built into custom spray booths.  A major market shift began to make itself felt in the first couple of years following our acquisition.

Legislation was driving the introduction of health and safety and other environmental regulations and these were killing off small repair shops, consolidating the market towards larger and more efficient units.  As this trend continued (fuelled by a succession of mild winters) sales of Trisk’s traditional mobile units declined.  The problem, that took some time to emerge, was that we were not gaining the share of in-booth systems that we should have been achieving.  Booth manufacturers were being involved at the design stage of the new super car repair shops permitting them to specify whose paint curing system was installed.  By the time Trisk personnel got to know about a new repair centre it was already up and running with a competitor’s curing system installed with the booths.

It was clear that Trisk management and sales staff had simply been unaware of this key shift in market dynamics.  Or worse, they had chosen to keep doing what they always did (in their comfort zone) in the hope that it might bring about a return to the glory days.  Around the time that this strategic market shift was becoming apparent, our MD, Tom, came to us with a request to buy the company out from us.  Tired of the short-sighted and intransigent management at Trisk and a need to re-focus our attention back upon MSG, we agreed.  What followed was a disaster that we should have foreseen.  Tom took many months getting funding and putting his bid together during which time he clearly neglected the company.  The bid he put to us ultimately was derisory, was duly rejected and he departed shortly afterwards.

Roger and I became more closely involved in running the business and the strategic issues began to surface.  Trisk’s real expertise lay in the technology of curing paint quickly and effectively and it was a world leader in this field.  The actual delivery systems were secondary but it was vital that Trisk became involved in ensuring their systems were specified at the design stage of the spray booths.  We recruited a marketing manager to research the market, promote and co-ordinate the use of Trisk technology into booths.

We also looked to see where else the technology could be most effectively employed.  It didn’t take long to discover that the servicing and repair of commercial aircraft was a potentially hugely profitable sector.  The leading edges of wings and tailfins had to be resprayed on a scheduled basis but the paint curing systems used were slow and expensive.  Trisk’s solution could eliminate days of aircraft downtime saving thousands of pounds for the operators.  With these two strategies in place, we employed an aerospace expert and a new managing director.

Sadly, our new MD transpired (despite an apparently strong CV and significant technical qualifications) to be completely ineffective and I had the task once more of seeing an MD off the premises.  It became clear that the sales and marketing team were not being successful in either ensuring specification of Trisk technology into new booth installations nor were they taking the action we had agreed to improve pricing.  Despite diverting major time on the part of our local MSG US manager towards assisting Trisk, the distribution problems there remained.  The fledgling aerospace business was still struggling to break through and gain aerospace approvals.  Our aerospace manager resigned taking up a more mainstream role in the sector.  Despite investing huge amounts of our time the team never seemed to have their heart in stepping out of their comfort zone and taking the necessary action that would turn the business around.

Looking back, Roger and I had believed in the business and had pushed hard to effect the changes that we believed would turn its fortunes around.  Our experience once more had been of ineffective management that we had inherited (and subsequently employed).  Buying both Bison and Trisk had stretched our management capabilities to the limit.  I still believe that we could have made a success of Trisk had we been able to concentrate solely on that business.  Both businesses had initially contributed strongly but we should have sold both within a year.

Although 3i had never overtly pressured us to sell PEI we did experience attempts at ‘persuasion’ occasionally and around this time a fresh ‘persuasion offensive’ was made.  Roger, Malcolm and I discussed the situation and decided that we would put the entire PEI business up for sale.  MSG had been performing well, our debt had been significantly reduced and we would be glad to see the end of Trisk.

Could we find a buyer for the whole business?  Would we receive offers that would reflect the value we had built in MSG?

 Image courtesy of careers.guardian.co.uk

 

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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