Casting his own shadow

It was all there in the business plan presented to the federal bankruptcy court – visions of back-to-back years of 50 percent revenue growth and 35 percent margins. The numbers would be squeezed from a dowdy bankrupt company with an aging work force and 80-year-old equipment barely held together by continuously improvised mechanical Band-Aids applied by a Croatian immigrant who had lovingly overseen plant operations for 35 years. And it was a model of brevity, if not hyperbole, all these shimmering financial images poured into a five-page plan for the turnaround of Vital Products Inc.

As a testament to a son’s aching ambition to live up to the standards of his prominent surname, one might have interpreted it as a glittering epic poem.

But as a plausible road map for a bankrupt company that had been on the decline for decades, it was less satisfying. A skeptic might have boiled the plan down even further: We propose to take a company founded in 1909 by one of those ornery tinkerers who built Cleveland’s economy – we’ll take this company which first made its name by manufacturing the oil guns stashed aboard Henry Ford’s Model T, and which now makes cheap metal consumer caulking guns that are easy targets for foreign competitors – and remake it into a modern enterprise with ambitions to “revolutionize” a $100-million industry.

And it would all be accomplished by a group of investors put together by 38-year-old Tom Roulston III, a relative novice as a dealmaker, but the oldest son of a certifiable legend, Tom Roulston II. Heck, maybe the old man, revered for his shrewdness and patient tough-mindedness in all things financial, will even take a piece of the deal, the son once thought aloud.

In retrospect, the due diligence was a little sketchy. It proceeded from an important first impression, the cataloguing of the younger Tom Roulston’s basement sundries. “I did an inventory of my house: I found four caulking guns,” Roulston said, echoing the tactics of iconic money manager Peter Lynch, who famously discerned clues to good investments by studying the most innocuous indicators of consumer popularity.

For the first round of this rescue package, he assembled 14 investors – including several in their 30s – who would pump about $500,000 into the company. Eventually, a second round of money would fund a reinventing of the product, to produce it from molded plastic instead of stamped metal and concentrate on higher-priced guns designed for tradesmen rather than on cheap, disposable guns that stack up in do-it-yourselfers’ basements – and which were vulnerable to the flood of cheap Asian imports.

For Tom III, the upside looked generous, the potential pitfalls relatively few. “He’s doing it with other people’s money. If it flies, he makes a couple million dollars. If it doesn’t, he just lost other people’s money,” said one potential investor who passed on the deal.

“We want to revolutionize this industry, which is an old, tired business,” Roulston grandly explained in March 1998, while sitting amid the faded Gilded Age splendor of Cleveland’s University Club – owned at the time by that caster of long shadows, his father, still an old-school drillmaster in the investment business.

Try as one might, it was hard to miss the parallels between father and son. Tom II had brashly opened his own investment shop in downtown Cleveland in 1963, on the occasion of his 30th birthday. His namesake opened his own investment company 34 years later under starkly different circumstances, bitterly leaving the family business three years ago, having been passed over by his older brother, Scott, who ascended to the presidency of Roulston & Co. in 1991.

The patriarch was as successful as he was forbidding. “He’s a tough-minded, honest son of a bitch,” says Al Weatherhead, founding donor of the business school that bears his name. He recalls occasionally duck hunting with the elder Roulston a quarter century ago, though not getting to know him well. Former COSE Executive Director John Polk, who calls Tom Roulston II a “self-made genius,” likens him to people such as Progressive Corp.’s Peter Lewis – socially prominent, hypersuccessful business owners who never really got their full measure of recognition from Cleveland’s business establishment. “He really is kind of a Larry Robinson type: an insider/outsider. Kind of on everybody’s list, but never quite seen as a captain of industry.”

For years, Roulston ran one of the tightest organizations in Cleveland, a boutique investment firm whose specialty from the start was focusing top-flight research on companies in the Midwest and selling that intelligence to such blue chip clients as Fidelity Investments.

The founder’s driving energy was nearly mythical. He made dozens of trips to London, where he built a following with institutions that invested with him. Even on day trips to New York aboard the company plane (which was sold off a decade ago), aides often wouldn’t have time to go to the rest room, so packed was the schedule.

Back in Cleveland, the pace was just as grueling. “They had early morning meetings and you got docked for being so many minutes late,” recalls a Cleveland attorney who knew the founder well. “And everybody had to speak and they’d get 30 or 40 seconds. He was a bully, but it worked.”

To some, this manic energy had its roots in childhood wounds. Roulston grew up in Brooklyn, N.Y., the son of a wealthy grocer who for a time owned as many as 500 stores. But when he was 14, his father died suddenly and the family’s fortune was all but wiped out. “I think that angered him,” says one retired Cleveland CEO who dealt with Roulston.

Among the patriarch’s lasting legacies is the turnaround of Cleveland’s Midtown Corridor from a streetwalker-infested eyesore to a modestly booming business district. When the area’s history is written, Tom Roulston will be recalled, along with Premier Industrial’s Mort Mandel, as one of the two most important figures in its resuscitation. In 1979, he moved Roulston & Co. to East 40th Street, surprising the investment community. “They said they were going to be the forerunner in moving out from 9th Street. Everybody was on 9th Street then,” recalls Al Adams, managing partner of Deloitte & Touche’s middle market practice.

A year later, Roulston purchased the University Club, one of two remaining 19th century gems of old Euclid Avenue. He invested in its rehab and aggressively sold memberships. “He just grabbed everybody he knew and [figuratively] put a gun to their heads,” says friend and fellow Midtown business owner Dan Sussen. “It was easier to join than to give him the reasons you’re not going to.” His son, Tom, then in college – and the children of other company employees – pitched in, selling 700 memberships in one summer. The Club quickly became the spiritual, if not geographic hub, of Midtown, a place where five meetings might be going on at once.

Roulston recently sold the club, but as if to signal the next stage in Midtown’s development, Roulston & Co. unveiled plans for a new $7.5-million headquarters, to be named Midtown Corporate Center. It is in line for a $3 million low interest loan from the Empowerment Zone, which would be the largest such loan to date by the federally funded, locally administered urban renewal program.

But Roulston’s proudest achievement, say those who know him, was how his investment firm survived when so many others had either gone out of business or been swallowed up by larger entities. It almost didn’t happen, though. Knowledgeable sources say that just a year or two ago, the sale of Roulston & Co. to Fifth Third Bank was all but finalized until the family stepped back from the altar at the last minute. The founder “didn’t want to work for a bank,” says one person who knows the situation. (Scott Roulston neither confirms nor denies the near sale, saying, “I get approached all the time. It’s very flattering that banks and other institutions are interested.”)

Despite his ramrod internal operating style, Roulston is said to have had a particularly d
eft touch with clients. Calfee, Halter & Griswold Senior Attorney Chuck Emrick recalls once referring a client to Roulston for investment management. “He calls the guy three days before the end of the year, from [Vail] or wherever, and goes over his portfolio for three hours. The guy was really impressed.”

By most accounts, Scott Roulston has let the corporate hair down considerably. No longer do Roulston & Co. employees have to address each other as Mr. or keep their suit jackets on in their own offices.

After a difficult retrenchment from investment research that saw the dismissal of about a dozen research analysts in ’96 and the closing of the trading room, the troubled company refocused its efforts on investment management and corporate finance, where margins are higher. But the company continued in its traditional segment, finding solid companies in the eight-state Midwest region. While that was tough in the Rust Belt’s most trying decade, the ’80s, by the early ’90s, the region’s manufacturing turnaround had proven the strategy prescient. Roulston & Co. launched the Roulston Midwest Growth Fund and, by ’95, just as the larger stock market was taking off for an unprecedented four-year run, it was the second-best-performing regional fund in the country, according to one survey.

As for his own investment approach, Scott seems to have inherited his father’s cautious conservatism. As he told a San Diego newspaper in 1994, “We may miss out on the next Apple Computer or the next Microsoft or the next Japanese small-cap opportunity. It’s not going to be flashy. We’re not big risk takers. That’s not our style – we’re value investors.”

But he readily concedes that so long as his father the chairman keeps coming into the office – no, as long as he’s alive – he’s still really in charge, despite the fact he’s surrendered daily control and the title of president. Until then, Scott notes with a self-effacing grin, he’ll merely be the S.O.B. – son of the boss.

Talking with a writer in various locations around Cleveland for the better part of a year, young Tom Roulston seemed a starkly different sort. He was supremely at ease in every environment, be it social or business. Wherever he went, he invariably knew half the people, confidently nodding or shaking hands. While politically conservative, his manner was less buttoned-down than his father’s (though the elder Roulston once showed up at his son’s annual bash dressed as Yassir Arafat).

His mind moves quickly, scouting possible deals, even if they are a little offbeat. Roulston owned a piece of the Lumberjacks hockey team, and as he had a pre-game cocktail in a small sports bar near the Gund Arena one evening, he considered aloud buying the place, spiffing it up and making it a financial success.

But in unguarded moments, with cell phone close at hand and his darting eyes missing little, that upbeat nature is tinged with darker brooding about being the odd man out. His father’s reputation was secure, his brother was heir apparent of the family company, and his sister, Heather Roulston Ettinger, was making a name for herself as an advocate of women investors and baby boomer philanthropy (while holding down a key management spot at Roulston as a working mom). Where did that leave Tom Roulston III?

Tom would vent a little about his luck, musing aloud about perhaps one day writing a book about his family. Through a fluke of timing, his brother, Scott, was born while the family briefly lived in Alaska. “That’s why he got into Dartmouth,” from which his sister also graduated, Tom maintains. “I got the same grades [in high school] and did better in sports. But I can’t compete with that,” – “that” being an apparent Ivy League fixation on exotic birthplaces. Instead, he ended up at St. Lawrence College in Upstate New York.

Roulston’s smoldering filial resentment has an even deeper source, though. As he made the rounds of Cleveland’s tightknit investment community, it didn’t take long for Tom to surmise that his brother had bad-mouthed him at gatherings of the Young Presidents Organization – a place where dirty laundry is supposed to be hermetically sealed against seepage to outsiders. Tom guessed that stories told by his younger brother had put him in a bad light and partially soiled his reputation as they got around. (Scott, sworn to secrecy by YPO, declines comment). It seemed to provide the last bit of high-octane incentive, if he needed any, to make his mark outside the family business.

He put out his own shingle in 1997, intending to fill a gap. He loved good stock pickers, pure research grunts who could find solid companies in the dark. As he saw it, his role – operating from a sleek office in the jet-black Renaissance Building on Euclid Avenue, where he commanded a prime view of Jacobs Field – would be marketing. He would steer well-heeled investors to these investment gurus; he would rep for the best of them. He would also, and this was important, be alert for good private-placement deals for himself and his clients.

At first, he considered calling his three-employee company Roulston Investments. Eventually, apparently after family members signaled their displeasure, he settled on Thomas Roulston III Investment Partners. But the entry in the Cleveland telephone directory was less distinct. The line for Roulston Investment Partners ran just above that for Roulston & Co.; a line below that was the residential listing for Thomas Roulston III. Visually, at least, his start-up had his family’s more venerable firm surrounded.

If he was counting on the turnaround of Vital to provide personal vindication, though, he had cause to be concerned. As ’98 progressed, developments at the company were increasingly mocking his self-assured business bravado.

Within months of his group’s purchase of the company, the daily operating realities were starkly at odds with the glowing language of the business plan. The investors had essentially bought the shell of a company, whose name they changed from Vital Products to Vital Applications. “When we first took over, the company was basically nonfunctional,” says Vital’s president John Sherwood, 30-something with a background in sales and marketing and the only member of Roulston’s investment group who had a role in operations. “It had trouble filling orders.”

The musty plant in a nondescript Maple Heights industrial park, populated with presses dating from the 1920s, first had to be cleaned of mountainous piles of garbage lying in heaps everywhere. The equipment was similarly challenged: When the new owners took over, just 30 of the 300 ceramic heating elements in the paint-drying oven were in working order. “So not only did they have to paint everything five times, but they had to run it through the oven several times … and then it had to sit for a couple days to dry off,” he said.

The preceding winter, the heat hadn’t been on in the plant many days. And still, most employees continued to come to work. Their leader was Stipi Vranic, a 59-year-old Croatian immigrant with mildly broken English, a shock of silvery hair and an unschooled genius for all things mechanical.

The only salaried employee on the shop floor, for years he had jerry-rigged his way around the fact that the company had no money for new equipment. “He’s really the guy who held the company together,” says Sherwood. “When machines didn’t work, he’d kind of rig things.” He was also the institutional memory, said Roulston. “You’ll say, ‘We’re missing this part to a gun and where the heck do we get these things?’ Vranic would quietly disappear and all of a sudden would come back and say, ‘I found this in the back – this is the part we used to use and these are the people that used to make it for us.'”

Vranic himself found his contributions unremarkable. Despite not getting paid for five or six weeks while the company was in bankruptcy, he kept coming in, continuing to rally the troops in his laconic fashion. He had an artist’s love for his tools and dismissed the previous owner’s plans to computerize operations as so much foolis
hness. “My welder’s 60, 70 years old. They no make machines like that no more,” he said. “Computer’s good, but not everything.”

He was charmed by Tom Roulston’s personal touch. Asked about the new lead owner, he smiled brightly. “Oh, yeah – he give me hockey tickets. I told them I’ll work 10 more years. I’ll teach them [how to run the company].”

For the first time, his efforts were being supplemented by a new layer of expertise. The new plant manager, Tom Koons – a can-do veteran of TRW who had been caught up in downsizing after the defense contractor’s helicopter engine business plunged at the twilight of the Cold War – was methodically rearranging the materials flow.

By late winter of ’98, all these developments had left Sherwood upbeat. The company was now doing about $50,000 a month in sales, or more than double the rate it had when the new owners had taken control. Even though the new investments in people had pushed the break-even point significantly higher, he was expecting Vital to eke out a modest profit for calendar ’98.

But the company was laboring to hold on to key accounts, especially giant Wal-Mart, which had once been the second biggest customer, after Sherwin-Williams.

Where Vital had once supplied all 24 of the giant retailer’s distribution centers, it now did business with just five. Sherwood made at least four trips to Arkansas to try to lure that business back, but his wasn’t a position of strength. “We went down and asked them for help, quite frankly,” he says. The former owner, Bill Laufer, calls Wal-Mart executives “decent people who try to support American businesses.” But after his chronic equipment problems caused a major interruption in shipments to the retailer in ’96 (which pushed the company into bankruptcy), he recalls, “they tried to do what they could, but they’ve got their own competitive pressures.”

On the factory floor, meanwhile, Koons had his doubts that the Wal-Mart account was even worth holding onto. “It creates volume, which creates opportunity. But they sap the life outta you, cause they’re low-end and you can’t make any money on it,” he said.

By the spring of ’98, the partners – or at least some of them – were beginning to understand how bad the long-term situation was. Vital was stuck in a labor-intensive commodity business, with no end in sight.

Roulston had always understood that the company’s product would have to be completely re-engineered. “As long as we make a metal gun, if we stay at the $1.99 price point, the Chinese are going to eat our lunch. So we’ve got to figure out how to get away from that price point and that means we have to change the gun.”

The only way to make Vital a growth company with the kind of margins investors expected was to concentrate on the professional market, in which premier caulking guns, some pneumatically powered, went for hundreds of dollars. That would require a second injection of capital. But the first-round investors were apparently losing hope they could hold on long enough to allow that to happen.

“There were two big surprises,” said one investor, 30-ish pricing consultant Dave Bauders. Even if volume were increased significantly, Vital still couldn’t make money; and the apparently simple operation slurped cash. “Our conclusion was it required too much capital to reach that turning point to justify it,” he said in mid-’98. “Fundamentally, my decision was that this company did not have the internal capability to be a leader in product innovation, and that while that was theoretically possible, it was unlikely. … My view of it was like buying an option and I wasn’t ready to buy any more of those options.”

Neither, apparently, was anyone else. While the partnership talked to “over 100 people” about injecting additional capital in the second round, according to Roulston, there were no takers.

By August, the die was cast: Vital’s doors would be shut that month, the company liquidated.

Some long-time vendors who had already taken a hit on the ’96 bankruptcy – secured creditors got only eight cents on the dollar from the Roulston ownership group – were stunned. “They were a very congenial group and they worked very hard to turn it around,” said Don Anzells, whose Euclid Steel supplied Vital with steel rods and a little bit of fresh credit. (After putting the previous owner on C.O.D., Euclid Steel put the Roulston-owned company back on account).

“It looked like they knew what they were doing, because operationally they had improved. … Apparently, they just took on too much debt from before and apparently ran out of time and money, which was a shock to us.”

Tom Roulston III’s first big deal had failed, and in less than a year. Asked in December if he had seen Roulston after the deal soured, Tom Koons didn’t try to mask his bitterness: “Naw – he’s probably out huntin’ duck.”

He may not have gone hunting, but Roulston did go into a subtle form of hiding about that time. Once a fixture on the local investment deal circuit – a man who threw lavish parties for baby boomers each year at his home, at which he would whisk to dinner aboard rented limos those who stuck around long enough – he was less in evidence around town. No longer would he regularly quiz people over lunch at a monthly venture capital gathering, probing for possible deals while studiously ignoring his brother, Scott, just across the room.

Tom labored to put the best face on the Vital deal, which in the end failed partly because he was suffering through a messy divorce which badly diverted his attention. “My money management firm is taking off full-bore,” he said in the fall, and he intended to put his full attention into that rather than more complicated private-placement deals. “I don’t have time for the due diligence and negotiating the deal. So I’m just referring those kinds of things to others.”

By September, weeds were sprouting from between the cracks in the cement of Vital’s parking lot and a large sign on the front lawn referred interested parties to a real estate agent. Little was visible through the window in the locked front door but some dangling utility wires and a ratty, turquoise seat once positioned for the benefit of visitors. John Sherwood had helped find everyone a new position.

But he was doing something else, too. He was helping administer this latest Vital bankruptcy proceeding – a Chapter 7 filing – and the court-appointed trustee, Saul Eisen, was giving him wide latitude to try to wring some value out of the assets for creditors. “He pretty much let me administer it myself. So I went out and looked for a buyer,” Sherwood recalled. He knew of Wayne Jones, a near-recluse who nevertheless was becoming a minor legend in Cleveland’s manufacturing community, and thought he might be interested in buying the company. In fact, Jones, or his representatives, had looked at the company before.

Jones, who declined to be interviewed, has been an investor in manufacturing companies in this region for a quarter century. In the mid-’70s, he left the accounting firm of Touche Ross to help run Cuyahoga Management, a company which bought and operated small companies. Soon after, he began Brittany Corp., a vessel for buying solid manufacturing companies with no succession plan (he has since sold it to investor Charles Bolton). In each of the companies he acquired, Jones installed a framed plaque. It read, This company is forever.

“Of course, think of his strategy: This was what the seller wants to hear,” says Forrest Hayes, former head of the Cleveland office of Arthur Andersen, who now runs Brittany and has known Jones for many years.

At this stage of his career, Jones didn’t need to do much tire-kicking at Vital. “He just asks you a couple of questions, sizes you up real quick,” says Tom Koons. “Then I negotiated the particulars with Brian,” his son. “They’re all straight shooters, feet on the ground,” adds Koons, who recalls a startling moment shortly after the October sale to Jones, which confirmed for him what kind of people the new owners were.

Even though the Vital operations were
due to move to the Dayton area in a few months to join its existing operation there, Jones came in on weekends to paint the employee bathroom himself. “Wayne was in here in his grubbies. … One [employee] said, who’s the old guy? I told him, ‘That’s the owner, and he’s a millionaire a couple times over.'”

Jones bought the company through his Springfield, Ohio-based EMBEE Corp., a century-old maker of paint scrapers and other items for the painting industry to which he would now graft the operations of the former Vital. Through a handful of platform companies, the Chagrin Falls investor now quietly owns 17 manufacturing companies, say those who know him best. His son, Brian, has similarly been well-schooled in reticence with the media (he does, however, admit to spending lots of time driving around Ohio, looking at solid companies with aging owners and no real succession plan).

Why the modesty? Says Brian, politely declining SBN‘s request to interview his father: “We want to be like Northwestern Mutual – the quiet company.”

In the end, the epilogue wrote itself. A reclusive, plodding hare of manufacturing had succeeded where younger, brasher types with a less-modest vision could not.

A seasoned operator’s stealth and patience had won out over a budding financier’s bravado, a cautious eye for bargains bested a boomer’s search for personal redemption.

The Cleveland area would lose yet another tiny shred of its manufacturing heritage to another city. But a piece of that history might live on in a product, or an industry segment, or perhaps a way of doing things on the plant floor. This company wouldn’t be forever.

As for the Roulston clan, it had begun to heal. Last fall, for the first time since the younger Tom left the family company, the Roulston men got together for a trip. Tom II, his two sons and his son-in-law, spent a week in Europe together. “We’ll probably never be as close as we once were,” says the younger Tom. But neither would they be feuding.