Acquisitions on the Horizon
Dated August 1998
Horizon Partners, Ltd., is a Milwaukee-based private equity buyout group that focuses its efforts on acquiring middle-market companies of $50 million and below. Horizon's strategy involves targeting a company that is considered a leader in its market niche, and which typically is part of a fragmented market of $1 billion or less in size. The strategy, says Horizon principal Paul Stewart, is to grow the company internally and build it up while scouting out logical acquisition targets within its own industry.
A classic example of that strategy is Xymox Technologies, Inc., a former division of W.H. Brady Co., which Horizon Partners bought out in 1993. Xymox is considered a leader in the $500 million market for membrane switches. When Horizon acquired Xymox, it already had a strong customer base along with capable management and engineering facilities.
Horizon stepped in and built a new facility for Xymox within the first year of acquiring it, along with hiring Pete Sognefest, a veteran electronics industry executive, as CEO. Sognefest has the industry contacts and the ability to see the big picture, Stewart says. Horizon built the Xymox platform by pumping all profits back into the business and positioning it for growth. Since Xymox was spun off from W.H. Brady, it has gone from $ 10 million in revenue to $21 million at the end of fiscal 1998 - all of it through internal growth.
Three months ago, Xymox acquired Paneltec, Inc. from a Santa Clara, Calif., entrepreneur whom Sognefest knew from his previous business experience.
Paneltec makes membrane switches for the appliance and telecommunications industries, and has facilities in California and Phoenix along with a small manufacturing facility in Vietnam.
Plans are to expand the Vietnam facility staff from 40 to 200 or more employees, while preserving the value of the recognized Paneltec brand name, Sognefest says.
"The Paneltec acquisition was about acquiring market share," Sognefest says. "This gives you leverage on technology and purchasing power. Paneltec has already received discounts of 15-20% on three of the major ingredients of membrane switches because they are part of our purchasing umbrella. Paneltec can quote things out of our maquiladora in Tiajuana, while we can quote things for customers out of the Vietnam facility.
"While Xymox has ISO 9001 certification and counts Motorola and John Deere as some of its biggest customers, Paneltec is able to move faster on the service side of the business. That is important in an industry where customized add-ons are critical.
"They have a lower overhead, and they can hit a lower price point than we can and still do an excellent job," says Sognefest, who likens the Xymox-Paneltec combination to the difference between a Lincoln and a Mercury.
"Paneltec understands the difference in strategy," Sognefest says. "With our rapport with the Fortune 100, we can bring in business and move things into high-volume production into the factory in Vietnam while raising it to ISO 9001 status."
Xymox plans another $10 million acquisition sometime in the 1999 fiscal year, Sognefest says.
Stewart and Sognefest act as a team. Stewart is involved in an ongoing process of meeting competitors. Discussions are ongoing with about six companies.
"We have all the right ingredients at Xymox," Stewart says. "The key is, you really need a strong person at the top who can relate to a fairly wide audience so that people respect what you are trying to do within the industry and are willing to sell to you," Stewart says. "You need someone who can convey their strategy and develop confidence in the companies they are going to acquire so they can work together and make it work."
Sognefest says it's about having a healthy respect for the entrepreneur and what he has accomplished. Once the acquisition is completed, Sognefest and Xymox try to preserve that entrepreneurial spirit while putting management systems in place to make it a better-run operation. Without the continued enthusiasm of the entrepreneur, who preferably stays on as president of the division following the acquisition, it becomes difficult to get the most value out of the acquired company,
Sognefest says.
"Our strategy is to preserve what has been created," Sognefest says. "Paul [Stewart] and I work together well. We need to have these entrepreneurs interested in talking to us. Paul works the front end very effectively, screening candidates and setting up opportunities for acquisitions that he knows meet our strategy. And remember that these people need to want to report to me."
While it's still early in the process, the strategy is on track. Xymox has strengthened its position as the industry leader. Two years ago ending June 30, 1996, revenues were $12.8 million. Last year, the figure increased to $15.6 million, while 1998 revenues are expected to be $21 million. Next year, after another acquisition, that figure is expected to be in the high 30s, Sognefest says.
"We are going to consolidate and roll up this industry," Sognefest says, adding that projections are that Xymox will grow by 20 to 30 % per year while making at least one acquisition per year. "So in 10 years we will have done 10 or 12 of these things," he predicts.
Unlike other mergers which attempted to consolidate manufacturing, sales and engineering, Xymox is not interested in getting rid of people simply for the sake of cutting overhead, Sognefest says.
"That is a strategy that other people in this industry have tried and failed," Sognefest says. "Our business is all about service. This industry is extremely technical, so there are many processes that our competitors have that we don't, and vice versa. Because of the stage of development this industry is at, it becomes an exercise in maintaining the [acquired company's] performance level and helping them enhance it."
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