Strategic alignment Featured

8:00pm EDT August 26, 2007

Rick Blum and his siblings were looking for a way to create a smooth succession plan and boost the capability of their family-owned business, Kirk & Blum Manufacturing Co. They were looking for new ways to invest in and expand the company, and they came up with the answer in a kind of upside-down arrangement that found a small company taking over the ownership of a larger one.

CECO Environmental Corp., a publicly traded company, acquired Kirk & Blum in 1999 and left Kirk & Blum’s management group in place to run the company.

“When CECO acquired us, they were the buyer, but the next morning, I was their boss,” Blum says, now president and chief operating officer of CECO, an environmental systems provider. “The old president was reporting to me, the people in Pittsburgh were reporting to me, the people in Rhode Island, in a business we no longer own, were reporting to me. So it was an odd situation because normally the acquiring company comes in and says, ‘Here’s what we’re going to do, here’s how we’re going to do things,’ but in this case, the acquiring company had to step back and say, ‘This guy we acquired is now in charge of us.’”

The acquisition has accomplished what Blum and his family intended. CECO has acquired or launched several new businesses since acquiring Kirk & Blum. This year it issued a secondary public offering that eliminated its debt. Last year’s net sales were $135 million, up from $78 million in 2002, and the company expects to surpass the $200 million revenue mark in 2007.

Blum faced the prospect of running a public company that was highly leveraged, but his experience to that point had been only with the private and debt-free Kirk & Blum. He says his biggest challenges were to keep Kirk & Blum together through an acquisition and to align the interests of the companies’ cultures.

“It’s all people issues,” Blum says. “You just have to get all the people on the same page. When a company’s acquired, there’s a lot of fear and trepidation on the part of the people there.”

Preparing to be acquired

Blum had prepared Kirk & Blum for a sale long before CECO made the acquisition. Concerned that the company would lose valuable personnel, many of whom had long tenure, he took pains to explain why the company was looking for a buyer and why it was the best route to take for its future growth.

“There are people here that I work with every day,” Blum says. “The guy who runs our business unit in Cincinnati I’ve known since he came here in 1966. We sat all of these people down well before the deal and said, ‘We’re going to do this, and we’re going to find a home.’ First, the decision was made to sell the company, then the decision was made to whom we were going to sell. So when we made the decision to sell it, we talked to all the managers, explained to them what we were going to do, asked them to keep it in confidence, obviously.”

Blum’s strategy of preparation worked, with virtually no one departing the company.

“I was very, very concerned that we not lose anybody, and we didn’t — not one,” Blum says. “We lost one since, but that was for entirely different reasons, but every other manager is still here. Every one of our divisions, every one of our operations has a guy running it, and all of them are still in place.”

Once the deal was struck with CECO, Blum followed up his preparation of the work force with a personal visit to all of Kirk & Blum’s business units to explain how the new arrangement would work and to answer their questions and address their concerns.

“Once we announced it, I went around to every facility,” Blum says. “That day, I started out on this little driving tour, doing two a day. We got everybody in the shop together and said, ‘Let’s sit down. You’ve got questions, I’ve got answers.’ I gave them a little stump speech and asked them to fire away with their questions, if for no other reason than to stop the rumor mill. Somebody hears the company just got sold, and there’s a day’s productivity down the drain.”

Blum emphasized how the change in ownership, as a practical matter, would bring minimal change in how the company would be run while offering substantially more opportunity for growth.

“I think instead of them having to look and work for a new guy, I tried to make it seem like nothing had really changed and, at the end of the day, nothing really had in their world,” Blum says. “It made a little difference in mine, but not in theirs. They’re still reporting to me, and we laid out for them this vision for a broader company with broader capabilities and said, ‘Look, if we can do this, we can create more opportunity for you, the people that work for you, for people in your shops. If we do this and we make this work, we’re going to bring in all this business that Busch International [a CECO division] is now subcontracting elsewhere. It’s going to give you opportunities, it’s going to give your guys out on the shop floor more opportunity, more work, more stability. So it creates a better deal for everybody.’ So that was how we were able to sell it.”

Blum used the same tactic of open communication last year when CECO acquired H.M. White. He made sure that H.M.’s key employees got an opportunity to hear directly from the senior management of both companies what the deal would mean.

“We sat down, one on one, with every office employee, with every shop supervisor, with the union steward for maybe a half-hour with each person,” Blum says. “It took us over a day, and we said, ‘Look, what are your concerns?’”

When CECO acquired Effox this year, he repeated the same approach used at H.M. White.

“I learned from that, and we did the same thing at Effox, not with every employee, but with every senior employee, one on one, and with every employee at a big mass meeting, where we stood there and answered questions for an hour and a half,” Blum says.

An incentive plan

Blum’s vision was to build a company that was fully integrated and could provide complete solutions for clients. One key to growth and profitability would be the willingness of the CECO divisions to subcontract business to Kirk & Blum.

Blum knew that the integration of the two companies and achieving the synergies that they could muster by combining Kirk & Blum’s fabrication and installation capabilities with CECO’s engineering strengths would not be a simple matter. The companies had been competitors in the past, often vying for the same contracts. Subcontracting patterns at CECO’s divisions had been in place for many years, with long-standing relationships with vendors steering business to Kirk & Blum’s competitors, in some cases.

Blum points out the case of Busch International, as an example. “These guys are the premier providers of rolling mill ventilator systems in the world,” Blum says. “They are the absolute best; anybody who is anybody in the steel industry knows who they are. Now, we’d compete with them, and we’d get a job every once in awhile, but they were pretty hard to beat. They were selling based on features, not on price. For me to go in and tell them how to do what they do would be crazy.”

So to avoid upsetting the apple cart, Blum took an incremental approach, not dictating from Day One to the CECO companies and Busch International, yet encouraging them to use the Kirk & Blum companies when appropriate.

“So, we eased into it,” Blum says. “We’d say, ‘All right, this job is ready to go. Kirk & Blum doesn’t have the knowledge that your current supplier does, so let’s put this one there. But let’s make it a goal of slowly weaning this business away from the current supplier and putting it in the company with which you’re now affiliated.’”

While the ultimate goal is to keep all work within the CECO companies to maximize profits, Blum realized that simply ordering the CECO units to subcontract work to Kirk & Blum wouldn’t be enough. So he implemented a system of incentives that made it worth their while to put work in the hands of their sister company.

“And that takes a little time. There’s some consternation on some people’s parts, but the key is to incentivize them, so if it works, they get rewarded,” Blum says. “So they’ve got a financial incentive to make this happen. Basically, we reward people based on their performance. If they subcontract something to Kirk & Blum and Kirk & Blum makes money on it, we count that toward their score. If they made $100 in their company on a project but Kirk & Blum made $10 building it for them, then their score is $110 and now everybody’s interest is pointing in the same direction. Every division of our business has its own financial statement, so the main objective, obviously, is to reach whatever financial goals we have set for that division. Getting them to do it and cooperate with each other so that on occasion you can make one and one equal three is the key. We have done that by simply incentivizing everybody in a parallel manner, if you will. If it’s good for the company, for one division of the company to subcontract to another division, then it has to be good for them financially, too. We’ve developed systems that do that. It has to be good for the people to work at those places.”

So regardless of what the patterns had been in the past, people will see where their interests lie and will respond accordingly.

“As long as you incentivize the people that you say have to change, that if it does work they’ll get rewarded, then they’ll figure out which ones are going to work,” Blum says. “It’s in their financial interests to say, ‘This one we ought to keep here, but this one we can put over there, and it’ll create a bigger pie for everybody. These are high-class people and very intelligent people, and once you get that in front of them, they’ll say, ‘This makes sense; let’s do it.’”

Providing those financial incentives has served to get everyone’s interests aligned in the same direction.

“That has helped us go secure some projects that none of the companies would have been able to do on their own. We’re doing a job in China right now — Busch and Kirk & Blum, two former competitors, as a matter of fact. They’re two separate jobs, but they’re with the same company. So we submitted a joint proposal from Busch and Kirk & Blum for these two projects. Busch would have never done the project that Kirk & Blum wound up doing. Kirk & Blum might have competed with Busch on the one that they were doing but certainly not in China.”

What if Kirk & Blum hadn’t been acquired by CECO and the two companies hadn’t been successfully integrated?

“We’d still be a private company, we would be getting older, we’d have succession issues,” Blum says. “We wouldn’t be in the oxidizer business, we wouldn’t be doing jobs in China, we wouldn’t have a plant in India, we wouldn’t have any of those things because I don’t think we would have been as bold investing our net worth and that of our sisters. I don’t think any of the people inside Kirk & Blum or the other companies, for that matter, would be as well-off today if this company hadn’t been put together.”

HOW TO REACH: CECO Environmental Corp.,