Acquiring mind Featured

10:04am EDT July 22, 2002

Since 1984, Terence Profughi has bought or founded an average of two companies a year. He's been doing that since 1984. But it's the deal gone bad that taught him the most important point about planning: Nothing's foolproof.

The year was 1990, and Profughi, CEO of Cleveland-based HI TecMetal Group was putting the finishing touches on what would have been his ninth acquisition.

Seated in the boardroom of the Public Square law firm that represents him, Profughi waited with the would-be sellers of Champion Commercial Industries for news that would either make or break the deal.

The arrangements had been about as straightforward as corporate finance can be: Champion had three divisions; Profughi only wanted two, but was willing to buy the third based on the agreed-upon price.

Then the roadblock appeared. "The company goofed while we were in the process of buying them," Profughi explains. "They sent a letter to all their customers and said, 'We're going out of business.'"

Profughi retracted the letter 10 days after learning of its existence, penning his own to assure customers that Champion was being acquired and not going out of business. But Champion's largest customers had already begun searching for new suppliers.

"The day of the deal, we sent seven salesmen to the seven major accounts on our corporate airplanes," recalls Profughi. "The salesmen told the companies, 'We're closing the deals right now. We want the purchase orders. Are you going to give the business back?'"

Meanwhile, Profughi and the sellers waited.

Finally, when rejections from the three largest customers were relayed back to the boardroom, Profughi had heard enough. "We said to the Champion people, 'We're not going to buy a company with no customers.' And we walked on the deal."

Profughi learned a fundamental lesson that day: It doesn't take much to spoil the best of planning. That's why the soft-spoken man, who has built a local reputation as a master of acquisitions, doesn't leave very much to chance.

He's boiled down the acquisition process into a succinct manual that details everything from targeting potential acquisitions to integrating a new company into HTG, which is a metal joining and heat treating company.

"I've developed a due diligence process," he says. "We use that to go in and answer 74 pages of questions about a company."

The answers are compiled into a document that becomes a diagnostic checklist for analyzing a company's infrastructure-everything from accounting processes and customer profiles to employee benefits and even janitorial services.

Profughi says, "Anything you would need to know if you were an owner about how to manage the company."

Profughi has acquired or founded 34 different companies in the last 14 years. In that time, HTG has grown from 38 employees and annual revenue of $1.6 million to 650 employees and close to $50 million in revenue. In the process, Profughi's role as CEO has changed. Daily operations and integration of new acquisitions are jobs left to President Carmen Paponetti. Profughi's full-time pursuit is identifying and qualifying companies to buy.

Always on the lookout

The acquisition binge began when HTG-then called TecMetal Inc.-developed a new technology for vacuum heat-treating metals. Profughi couldn't find a tool-and-die maker to build the first piece of equipment without a guarantee that future orders would follow.

But with no direct experience in the process, Profughi couldn't make such promises. "We failed miserably trying to get into that market on our own," he recalls. "So we decided the only way to get into the market was to buy our way in."

Profughi looked for a local steel treatment plant to buy, thus providing a guaranteed stream of orders for the new process.

He found Walker Steel Treating and, less than a month after closing on its purchase, he bought Walker Steel's largest competitor, quickly establishing HTG as a market leader and Profughi as an aspiring acquisition artist.

Each of Profughi's purchases is designed to complement HTG's existing businesses. "We don't buy a company unless it fits our core competencies-brazing and welding," Profughi says. "We're not financial buyers, we're strategic buyers."

Every acquisition makes intuitive sense to even an outsider, including the May 1998 purchase of a trucking company.

"We were supporting all of our businesses with their transportation needs," he explains. "But we could never get a control of the real cost of doing that. We looked at that and said it was crazy."

After a financial analysis of the shipping costs between divisions in four states-plus an accounting for the amount of shipping provided to customers-Profughi bought Chardon-based G&W Cartage Inc.

Profughi's aggressive if-you-need-it-then-buy-it philosophy has developed gradually since the mid-1950s, when his parents bought Technical Metal Processing Co.

He first worked in the business in 1968. He was 14. It was a classic mom-and-pop operation that provided a modest family income.

After high school, Profughi attended college during the day and worked as a foreman at night. He was later promoted to salesman and worked his way up to the post of president.

Over the years, Profughi noticed how the brazing and metal heat-treating business was growing more competitive. Not only was the local demand for such work declining, changing technology was driving up capital expenses even as it drove down prices. He concluded the only way for the company to survive was to become a regional player.

He also learned that just because a company isn't for sale today, doesn't mean it won't ever be available. "We always keep a list of hots and colds," he says.

Eliminating surprises

Before his first acquisition-of Walker Steel Treating-Profughi poured over the details of its operations with the owner, one Charlie Abbott. The prognosis: In addition to the purchase price, Walker would need $1.5 million in capital improvements to remain competitive.

"At the time, we were only a $5 million company," Profughi says. "We had debt because we'd just acquired [our own] company.... So we were taking a risk by buying this other company and putting $1.5 million in it... The numbers kept coming back negative. Big negative numbers, like we were going to lose three or four hundred thousand dollars a year."

Profughi asked if Abbott knew of any other companies for sale.

"Charlie said Met-Tech," recalls Profughi. "And I said, 'Aren't they you're biggest competitor?' Charlie said yes. So we contacted Met-Tech the next day.

"We closed the Walker deal in September and the Met-Tech deal in October," says Profughi.

Profughi cut overhead by closing Met-Tech's plant and moving its workforce and operations to Walker Steel.

"We put them together into a bigger unit and put the million-and-a-half into it. That increased the market share and diluted the money into two companies.

It also helped fill in an operational model that Profughi and Paponetti had been working on since buying HTG. Like a much larger company, their business is organized through SBUs-strategic business units. Each of these serves a different HTG niche; there's brazing, thermal treatment, welding, machining and coating.

The SBUs are supported by centralized service groups-including quality and engineering, maintenance services, marketing and finance.

"We've become an expert at fixing troubled companies," he says confidently. "That's really one of the things we do-provide infrastructure and financial requirements to the companies we acquire. I try to blend them into our strategic plan, and they automatically become part of the larger picture."

Cash-and-carry finance

Profughi prefers to finance HTG's acquisitions from either cash flow or through stock-for-stock swaps. "We don't use brokers. We don't use consultants. We don't use investment bankers. We don't use outside accounting firms," he says.

But as the company -and the size of its acquisitions-has grown, Profughi has faced the reality of the need to assume new debt.

He doesn't have a rule-of-thumb guideline on what percent of revenue will be dedicated to acquisitions. But every year, the budgeting process includes a line item for acquisitions, based on projected cash flow.

When it does pay cash for a new company, HTG seeks 25 to 50 percent equity. Profughi then borrows the remaining 50 to 75 percent to finish the deal.

While Profughi accepts the need for borrowing, it runs counter to what he was taught while coming up through the business, when the philosophy was to avoid debt for any reason.

"We're not big risk takers in terms of wanting to leverage a lot. We won't leverage more than we can handle just to get a deal done. We stick with our borrowing capacity under traditional commercial lending," he notes.

Among Profughi's no-nos are mezzanine financing, asset-based financing and factoring receivables. But he also avoids setting too many policies about the issue. "You don't know what profit opportunities are out there until you look at them," he says. "You can't set too many limits or you'll miss out."

Haste makes money

Between his adherence to the most conservative financing ratios and his crisp due-diligence process, Profughi manages to close deals much faster than the norm.

A "normal" HTG acquisition takes a month. "The most grueling one we did-from the time we said we were going to do the deal to when the deal got done-took 31 days," he says. The shortest? Eighteen days.

It's a pace that surprises outsiders.

"If you have a strategic buyer buying someone else in the same industry, you can typically do a deal within 45 to 60 days," offers Jim Hill, a mergers and acquisitions attorney with Benesch Friedlander Coplan and Aronoff. Hill hasn't worked with Profughi, but he knows the man's work. "Buying into businesses is his sweet spot. He does his due diligence," Hill offers.

In fact, by the time you read this, there's a good chance Profughi has completed yet another deal.

Bringing them in

Buying companies may be easier for HTG than it was 14 years ago, because the formula has never changed. Integrating those acquisitions is another story.

"Integration is either going to be smooth or a whole lot of trouble," admits Profughi.

Once the deal's done, HTG's team invades. "We break down the services-human resources, sales support, marketing, communications and computers, safety programs, transportation services, maintenance, environmental compliance, accounting, quality control," says Profughi. "They go in and go through the new company. They review my due diligence document and extract information from it."

The human resources chief may analyze the health care plan to see if it's better than the one HTG already has in place. Says Profughi, "The one thing we never want to do is take away any benefits. We want to improve their situation, not degrade it."

Others determine any staffing, management or corporate structure needs. In one recent purchase, the new company's managers were immediately given additional responsibility to run an underperforming HTG division as well as their own.

"Everyone always gets worried that they're going to lose their job," says Joe Iovine, who has been on hand for a dozen HTG acquisitions and is manager of the brazing and metal treating strategic business unit in Minnesota. "But Terry goes out of his way to make sure that everyone stays."

Profughi claims that in all his acquisitions, nobody has been laid off. "In an acquisition, those employees will become our employees," he says. "They have to understand our culture. We're going to give to them a choice when we buy the business-do you want to come with HTG or don't you? They almost always do."

It takes just three months for a purchase to be fully absorbed. New employees are put through orientation, where their individual training needs are assessed. After that, they are sent to HI Tec University-a university-style training program that introduces new employees to HTG and retrains veteran employees on new processes the company develops.

Profughi goes beyond other roll-up firms in that he's committed to investing whatever money is needed to make new personnel effective. After taking the risk to buy a company, he says, HTG will do everything necessary to assure a return as fast as possible. That's why all the strengths and weaknesses are assessed in advance. By the time a deal closes, the money has been allocated to fix whatever problems Profughi has identified.

"When they say they're going to bring new technology in, they do it. And they do it quickly," Iovine say. "They've got this process down so pat that it's just like going to work another day (for them)."

If trouble is going to arise, it's usually with people. "The fantasy is that everybody's going to come on board and you're all going to be one happy family," says Profughi. "That's the fantasy. The reality is that change really causes the most amount of problems. The minute you start changing things, people start getting concerned."

Nevertheless, the goal is for everyone to benefit from the deal. "In a lot of respects, when people sell their business they're looking for enhancements in their life," he says. "Improvements. Satisfaction."

These, of course, are lessons learned from experience. "From 1984 to 1995 we just charged into these acquisitions. It was the HI TecMetal way or the highway. Then we learned that you have to go slower in terms of making changes. While we really didn't lose people, we lost a commitment of the owners to stay with us. Their rules were upset."

Always setting a new pace

"When you buy a $150 million business with five plants in four states and two different unions, it's a much more complicated transition," says Benesch Friedlander's Hill. "When you're buying a smaller company, between $5 and $10 million, you do not have those complexities."

Now, Profughi's focus on ever-larger companies promises to make things more difficult.

"The numbers get harder to increase," he says. "We need to pick up our pace with the size of the acquisitions. They need to be larger than they have been-between $1.5 million and $10 million. If we're going to influence our growth in the next 12 months, we're going to have to buy a $20 million company, which is what we're looking for right now."

Profughi's confident he can do that. But, he says, it will require some changes in philosophy-and, most likely, new pages in the acquisition book.

By the way, not long after Profughi walked on the Champion deal, Champion-staggered by the losses of its major accounts-liquidated. Less than a year after that, Profughi bought the assets of the two divisions he wanted in the first place; and he paid far less than he would have in 1990. "They made a mistake," says Profughi. "Big time."