It was the summer of 1979 and a climactic moment in Tom Sullivan’s rite of entrepreneurial passage. His auditors had just delivered the year-end computations. Typically loquacious, Tom was struck speechless. At age 42, he had just pushed his company to the $100 million landmark.
Eight years earlier, when his father had died suddenly of a heart attack, annual sales at Republic Powdered Metals stood at $11 million. Taking the reins of the business his father had launched in 1947 to make an aluminum roof coating, Tom feared he would wreck Frank Sullivan’s company. But he was determined to drive sales and growth for his father’s sake. So he surrounded himself with professionals who knew more than he did—a board of directors who had served as CEOs of successful publicly owned companies and a crackerjack corporate staff of MBAs and lawyers. Then he reorganized the business as a holding company, RPM Inc., and aggressively pursued acquisitions in the paint and coatings industry. Never in his quest, though, did Tom ever dream he’d reach the $100 million destination.
At the celebration in the hunting lodge on RPM’s 127-acre headquarters property in Brunswick, Tom reveled in a celebratory stream of champagne and backslapping. But his euphoria dissolved like a fizzling antacid tablet when, a few days later, three members of his board of directors paid an unexpected visit to RPM’s Georgian-style headquarters. Behind closed doors, they told the young magnate: “Congratulations on your first $100 million. Now, we’re going to tell you what you’re doing wrong.”
Since that day, a revised acquisition formula and a polished operations strategy has spurred RPM to even greater achievement. To the delight of 85,000 shareholders, the company last year reported record-high earnings of $87.8 million (84 cents a share) on record-high sales of $1.6 billion.
Its streak of setting such records is expected to hit 52 years when the fiscal period ends this May 31—by far the longest such run in the history of all publicly traded companies.
How did Tom Sullivan do it? What changes did those directors suggest that made RPM the world leader in specialty coatings?
In essence, half of RPM’s annual growth comes from aggressive acquisition, for which the company has a long-standing reputation. The other half is achieved through internal growth.
But if you ask Tom Sullivan how RPM has grown so quickly and profitably, year after year, while managing more than 40 legal operating entities structured under 20 independent operating companies, he simply offers the kind of hackneyed advice you might have gotten from your first boss.
“The philosophy … is something my father always taught: ‘Go out and get good people, create the atmosphere to keep them and let them do their jobs.’ So we buy businesses that don’t need fixing and we let them do their thing.”
It may be the oldest business cliché in the book, but as you undoubtedly also learned from your first boss, the hard part is implementation.
That’s the strength of RPM: a commitment to following the founder’s simple philosophy. Here’s the corporate formula.
Know yourself and what you want to be
When RPM board members George Karch (former chairman and CEO of Cleveland Trust Co.), Niles Hammink (retired chairman and CEO of Scott & Fetzer Co.) and Lester Gigax (former president at Rubbermaid Co.) cornered Tom Sullivan that summer of 1979, they told him to create a profile of the holdings that had made RPM successful to date, and then advised him to discard the rest.
Sullivan ultimately decided to keep and acquire only companies in noncyclical, specialty coating or chemical niches—businesses with gross margins at or above 40 percent and potential operating margins of at least 15 percent. Potential was a key consideration. The amount of effort to get an underperformer to that level was a determining factor in the decision to sell it.
As for future acquisitions, RPM’s apparent Midas touch (the company has overseen 81 purchases and 20 divestitures since 1966) came from pursuing companies of the same profile: recognized leaders in a large market and dominant players in a small market—and in all cases, with the gracious margins that indicate a company is operating as a value-added niche player.
Build trust first, then negotiate
Another essential component of any acquisition target is a superior management team that would remain intact.
Frank Sullivan, RPM’s lanky, sandy-haired vice president and CFO who is known for his acquisition acumen and sanguine style (and not just because he’s Tom’s son) says that’s why his father “courts” a company first.
Tom “sells” RPM’s entrepreneurial edge—the notion that the right companies can grow better with RPM than on their own. “In that process, you’re going to tell people about who you are and they’re going to know whether there’s a good fit,” Frank says. “… Then we get to the financial information and negotiations.”
“It’s like courting anything in life. If you’re going to do it, you have to sell yourself first,” the elder Sullivan says. He’ll jaw on for hours, weeks, months or years if that’s what it takes to woo a company he likes. He started laying the groundwork in the ’60s to buy Tremco Inc.—a sealant and coatings company that he finally acquired in 1987 from its corporate parent, BFGoodrich.
“At least once a year, I’d call [former BFGoodrich CEO] John Ong and say, ‘Someday you’re going to sell that company, and we want to be in line when that happens,’” Sullivan recalls.
Pay a fair price
Ever since the first acquisition, in 1966, of St. Louis-based Reardon Co. (maker of Bondex products), RPM has been known for offering a reasonable price. “You have to pay a full, fair price if you’re dependent upon these people staying to run the business,” Frank says. “Because [if you underpay] they may not figure it out today, but when they do, they’re all going to be gone.”
How do you determine what’s fair? “In terms of acquisitions, we typically look at multiples of earnings or multiples of cash flow,” Frank says. “For example, we paid eight times proforma adjusted earnings before interest and taxes for Rust-Oleum,” Frank says.
He adds that it’s important to convince the seller that, while you aren’t trying to steal the company, you also aren’t going to pay too much—one of the big reasons that so many acquisitions fail.
Overpaying forces cutbacks in the search for return on investment that ultimately hurt the product or performance.
“We’ve avoided that,” Frank says. “We would buy their businesses for a fair price and let them run independently if they would adhere to our planning program, and [we] provide a lot of cash to help them grow their business.”
In the end, Tom adds, “You don’t know whether you’ve underpaid or overpaid until it’s yours and you’ve seen the results.”
But the one-two punch of building rapport and offering good money has worked so far.
When New Jersey-based Stonhard Inc.—a producer of pourable polymer flooring—was sold to RPM in 1993 for $105 million in RPM stock, the owners rejected a $115 million cash offer from another suitor.
“RPM has a reputation in the coatings industry as a good acquirer. We knew we would be a good fit with their other businesses and that strong synergies would result from RPM’s acquisition of us,” says Jeffrey Stork, Stonhard’s president.
Avoid restructuring
Only twice has RPM bought a company with the knowledge that some kind of restructuring would be necessary.
In both cases—Carboline Co., a worldwide leader in corrosion control, acquire
d from Sun Oil in 1985, and Tremco—the sellers were multinational corporations that didn’t foster the kind of empowered management that RPM wants among its division leaders. Tremco also produced some commodity products that don’t fit the RPM model of value-added and strong margins.
“Being part of RPM means being able to run your own business as you see fit, while being accountable for results,” says Jeffrey L. Korach, Tremco’s president. “Since RPM acquired Tremco, we’ve been able to grow the revenue significantly and double operating income. We were able to achieve these results because of the climate RPM provides for its operating companies.”
RPM’s corporate staff is a central resource in areas such as financial reporting, insurance and benefits, legal, environmental and information systems. But instead of taking over other important functions, the company simply promotes synergies among operating companies—such as sharing manufacturing capacity, marketing expertise, volume purchasing power and product research.
RPM’s Purchasing Action Council, a sort of in-house cooperative, is credited with saving the operating companies about $15 million in each of the last two years.
A few years ago, RPM turned down the opportunity to buy a large chemical company with a wealth of high-margin coatings products simply because the restructuring—it also owned a hodge-podge of commodities—would have been large and complex.
Plan from the bottom up
Everybody knows how operating plans are usually created. As Frank Sullivan puts it: “What we don’t have is some top-down, this year the powers that be have decided that everybody’s got to grow 15 percent process.”
RPM uses a blueprint plan, designed by Executive Vice President of Operations Jay Morris, that really does seem to produce bottom-up (read: achievable) plans.
The various charts, graphs and narratives contained in the blueprint are designed to track different measures of growth, such as market expansion, product development and even the “bolt-on acquisitions” that RPM encourages at the division level.
The format also measures operating and capital efficiency.
“Every February, we get annual operating plans from each of our 20 operating units that show what challenges and opportunities they face—plans that are driven by the realities they see in the marketplace and not by some corporate edict,” Frank says. “So while we do press our companies to grow, the plans we get are generated from the bottom up.”
RPM’s top management reviews and reconciles the plans with the people who actually write them, suggesting adjustments to minimize surprises and pinpoint opportunities. Once a plan is approved, it becomes the operating company’s individual annual strategy, on which it must report monthly to RPM.
Each annual operating plan includes a cost-cutting scenario, which Frank refers to as “Plan B,” in case the year goes badly.
“It’s a simple concept, but it’s effective because you’re asking them to think of steps to take before they get in trouble—where they can save money and not hurt their business,” Frank says.
Provide incentive to meet the plan
Technically speaking, the division heads who write the operating plans aren’t paid for adhering to those plans; compensation is based on earnings.
So there’s no reason for sandbagging during the planning process. But there’s good reason to pursue the plan: It’s the best route to the highest profit.
Beginning this June, bonus plans have been made even more aggressive, and now measure efficiency, too; two-thirds of a division head’s compensation will be based on Incremental Adjusted Net Earnings—in essence, earnings minus the cost of capital.
“It’s unlimited, so the better they do, the more they get,” Frank emphasizes.
“The RPM system is geared to reward those who perform, so we have an inherent motivation to do that based on our year-end bonus and stock-option pools,” says Bob Senior, president of Jersey-based Zinsser Group and Wm. Zinsser & Co. Inc. “But the pride of success is the thing that drives most of us, and it all comes from having goals and targets, committing to them in the business plan and living up to that business plan.”
If a company is meeting its plan but needs additional capital for higher growth, RPM will open its wallet to help achieve that goal. But again, under the new bonus system, it’s the return on such an investment that gets rewarded.
“Performance … directly determines their bonuses and participation in our stock option program, so there’s a real incentive for them to meet their plans. That’s critical in the entire planning process,” Frank says.
Know when to get involved
Perhaps the finest line in business is knowing when to step in on an empowered and valued employee—or in RPM’s case, an entire company.
First off, according to Frank, with a corporate staff of only 40 people, there is little temptation at RPM headquarters to micromanage operations.
“There aren’t enough people in our corporate office to screw up our good operations,” Frank laughs.
But there are just enough people to monitor monthly financial statements and identify trends.
“A number of months begin to give you a trend of performance. We monitor that performance so that, if over a couple of months a company continues to perform off plan, we can better understand why it’s off plan, or decide if it’s time to put them on the Plan B cost-cutting program,” Frank says.
Tom assures that he’ll respond without restraint when a company is wrestling with such problems as a change in an industry or market, or a downturn in the economy.
Sometimes that means developing new products, as RPM’s Day-Glo holding did to offset the cyclical nature of its fluorescent colorants, a fashion-industry staple that is constantly going in and out of style.
The main problem for Day-Glo (and all its competitors) is the fact that fluorescent colors fade under exposure to sunlight. While the entire industry is trying to figure out how to stop that process, Day-Glo’s marketing and R&D departments ingeniously found a way to turn that inherent flaw into a product.
The company developed a new fluorescent colorant with an accelerated fade—a biodegradable, environmentally benign tracer that can be mixed with water dropped from aircraft to douse forest fires. The tracer leaves a trail of bright orange to show what targeted areas have been saturated. The color fades within days under exposure to sun. Negotiations are also underway with agricultural companies to develop a similar product to use in fertilizer for an even spread.
If there’s a change in a company’s market, RPM will also jump right in, like when Carboline’s domestic markets began to dwindle. RPM responded by taking a greater focus overseas, working with Carboline to acquire licensees in South Africa, Argentina and Europe.
Know when to divest
“The businesses we have divested have been those that have changed in their markets over time from niche businesses to a commodity. We don’t want to be in the commodity business,” Frank explains.
Operations with gross margins below 40 percent, or companies that no longer compete effectively, are sold off. For example, Gates Engineering was acquired in 1973 and for a time became RPM’s most profitable company, based on a chemical compound used in commercial rubber roofing.
Gates beanstalked from $10 million to $20 million in less than two years, but when Akron’s tire companies responded with their own products, the price of EPDM toppled in less than two years from about 75 cents a square foot to less than 20 cents.
In 1987, RPM sold the company—not because
Gates had made any mistakes, but because its market had changed so drastically.
“With every acquisition, you’re bound to take some risk. It’s just a part of the game,” Tom says. “Sometimes you hit a home run, sometimes you bunt a single and occasionally, you fly out.”
