Toy story Featured

7:00pm EDT December 31, 2006

For Curt Stoelting, growing RC2 Corp. is anything but kid’s stuff.

In an industry in which overall growth is essentially flat, growing toy maker RC2 has been acquiring companies that can add to topline performance and provide a platform for organic growth.

And RC2’s growth has been impressive. Its 2001 net sales were $204 million; by 2005, that had grown to $504 million, much of it attributable to the acquisition of companies such as Learning Curve and The First Years, and brands such as Bob the Builder, Johnny Lightning and Orange County Choppers. Net income grew over the same period, from $15 million to $53 million.

Stoelting, CEO and director, has not only led RC2 to strong revenue growth, he has added plenty of knowledge to the company’s acquisition and integration toolbox. That experience has made subsequent transactions faster, the integration smoother and the companies into better performers.

Stoelting and RC2 have determined that the keys to making successful acquisitions and integrations are thorough evaluation of target companies, detailed integration plans and a commitment to complete the integration as quickly as possible, thereby gaining its benefits faster and reducing the stress imposed on both organizations.

Evaluate targets carefully
Stoelting has found that a successful integration starts with a thorough evaluation of the potential acquisition target, measuring factors such as brand strength, future growth potential and how well the company fits RC2’s strategic purposes. “We’ve developed a very detailed set of criteria that we use, and we actually end up with a score, so it’s weighted and we score these companies and then we rank them,” says Stoelting. “When we get to know more, we continuously adjust our ranking through the due diligence process to make sure it’s still rating at a high level. There are financial measures, but there are other measures, as well. “Branded products, that’s a key part of the score. The strength of the brand would impact how many points they would get in that area. We would go out and do actual consumer research to see how the brand strength is at the consumer level. We benchmark that, and that would help determine how highly we rate the company.”

The evaluation process doesn’t end there. Stoelting and his team go back and compare their initial evaluations to actual results to determine how accurate they were.

“The great thing about that is you can go back after the fact and do your post-mortems and determine how good your assessments, how good your judgments really were,” Stoelting says. “It’s really helpful when we do this. We go back six months and one year, and we share it with our board of directors. We say, ‘This is how we rated them at the time we were acquiring them, and six months into it, here’s how we rate it now. Here’s where we were wrong, and here’s why we did that.’

“It’s very good to do that, especially when you’re wrong.”

Form a detailed plan
Stoelting assembles a team to make the acquisition and the integration go as smoothly as they can. That requires involving key managers from both companies. “We get a fair amount of our management team involved,” Stoelting says. “I’m not saying every member of our management team is involved, but many people within our management team are involved in components of that plan. So it’s not like I write the plan. Likewise, we involve the key managers in the company we’re acquiring.”

The integration plan gives culture-building a head start by drawing on the talents and the knowledge of both teams. The team of the acquired organization can share the subtleties of its business with RC2’s team, providing valuable insights that can be incorporated into the integration plan. “A lot of times, because we have more experience at these kinds of things than they do, it provides a great opportunity to kind of take them through it,” Stoelting says. “It’s another way to communicate to them why we’re doing what we’re doing. But a lot of times, they’re going to be the ones who know some of the customer concerns and the nuances of the business that you’re going to want to be able to take into account in your detailed integration plan. “It’s a great process, because it really gets both sets of management working together and becomes kind of a shared responsibility. So you’re already building a new culture and getting the new team working together.”

Stoelting and his team take the time to learn the strengths and weaknesses of the acquired company’s management.

“The best way to evaluate them is to spend a lot of time with them, understand what their background is, what their strengths are,” Stoelting says. “When we’re doing acquisitions, we try to spend as much time as we can with the management of the company we’re acquiring to really get an idea across all of the management team of who the other’s strong players are.

“We informally have all of them rate each other and compare notes and see how they rate themselves; what their strengths and weaknesses are from a perception point of view is a good starting point. Then, you can start making your own assessments based on that.”

Remain customer-centric
Stoelting says that while the integration plan needs to be detailed, it also must be flexible, particularly when it comes to customer needs. “One of the key things to be careful of from my experience is you have to remain very customer-centric through the implementation because sometimes there may be customer needs that you didn’t take fully into account,” Stoelting says. “You’re always better off when you hit these situations pausing, listen to what the customer’s telling you and then making adjustments, and we’ve had that happen.”

In one case, RC2’s plan called for moving the acquired company’s distribution to another location.

“We were going to make changes in a logistics situation where we were going to move the distribution from one point to another,” Stoelting says. “For some reason, that was going to be a problem for a key customer. We were able to make adjustments for that, we were able to accomplish the goal, but we did it in a way that was consistent with serving the customer and didn’t create a long-term problem.

“What we’ve learned over the years is to have as detailed as possible an acquisition plan, with timetables and commitments to those timetables, and have that done before you close the transaction so that you can start to implement that integration plan right away,” Stoelting says. “You need a lot of communication along the way, but then, even though you have a defined plan with timetables, there are times when you have to be flexible and make adjustments, and that’s OK. You just have to recognize that, and that’s kind of the art of managing through those situations, because no matter how detailed the due diligence, no matter how detailed your implementation plan might be, there will always be things that come along that you didn’t anticipate.

“You have to be in a position to make good judgments and be flexible and modify your plans but committed to achieving the overall objectives and timeframes on which your initial integration plan was based.”

Move quickly
Stoelting has learned that moving slowly does not necessarily make for a comfortable and smooth transition. Conversely, not moving quickly can create more problems than it might avoid.

Speed of execution is critical for several other important reasons, as Stoelting points out.

“First of all, time is money, so the quicker you can get the integration done, the quicker you can realize the integration cost savings, but more importantly, you can get on with the growth platform,” Stoelting says. “The second reason is just the quicker you can accomplish the integration, the quicker you can get through a stressful period. The longer it takes you, the more stress you have, kind of a cumulative stress factor, which I think causes people and companies to underperform.”

That lesson was driven home by RC2’s first acquisition in 1999, of the Ertl Co., a transaction it attempted to achieve in a more measured way.

“We know this because the first integration we did took us longer, and we did hit a point where that cumulative stress factor was beginning to damage the current business and was beginning to damage the long-term opportunities for the combined business.,” he says. “So we had to make some adjustments, and we learned that even though you like to do everything in measured steps, sometimes in an integration, you’re better off going as fast as you possibly can and get it done.”

Stoelting says the problem was that RC2 was trying to do the integration in a sequential fashion, completing one step at a time rather than taking a risk on too much at one time and fumbling in the process. That approach had a negative effect on the entire organization, he says. “What ended up happening was we would do one thing, and people thought the integration was over,” Stoelting says. “Then we’d start the next phase. By the time we got to the third phase, we realized we were just creating a lot more fatigue and a lot more stress among the people and within the organization — and we didn’t communicate as well as we should have. Because we hadn’t communicated it that way, that added to the stress, so it was both the communication and the sequencing that created the problem. “That’s where we learned the hard way that you’re better off moving as fast as you can and doing things simultaneously, but also make sure you communicate what the plan is and continuously update people on where you are in the process and remind them what’s next. It’s all part of an overall plan and not individual, unrelated activities.”

The experience, while a difficult one, wasn’t for naught. The lessons gleaned from it have proved valuable when adapted to subsequent acquisitions.

Says Stoelting: “It just took us longer than we would have liked, but luckily, it all worked out and then when we did get to our 2003-2004 acquisitions and integrations, we were much more prepared and able to apply some of those learnings.”