Tough choices Featured

10:14am EDT August 30, 2006
Back when he was chairman, president and CEO of ALLETE Inc., David Gartzke knew it was his job to create value for shareholders.

The company was profitable, but after spending a year talking with shareholders, Gartzke knew that ALLETE’s business model was simply too complicated for investors to really see the value. About half of the business was focused on energy assets such as electric utilities and coal, while the other half was focused on automobile auctions.

“The tough decision was made to separate all the businesses,” he says. “One of (a public company’s) bottom lines is shareholder value in a public marketplace. That value was not being recognized. The sum of its parts was significantly less than what the parts would be standing alone.”

Gartzke then decided to leave ALLETE to take the helm of ADESA Inc., the automobile-related business that was spun off from the parent company.

The tough decisions didn’t stop there. While ADESA had a lot of growth potential, Gartzke had to unlock it.

“Nowadays, the challenge and the opportunity is growth of this company, to continue to create value and get it recognized in the marketplace as a freestanding company,” says Gartzke, chairman and CEO.

Gartzke has grown ADESA from 2002 revenue of $823 million to more than $969 million last year.

The key to growth is being able to make the difficult decisions. For Gartzke, this meant getting the right mix of people, improving the company’s communications and putting together an aggressive acquisition strategy.

Choosing people
Gartzke needed to put together the right management team to help him unlock ADESA’s full potential.

To be successful as a standalone public company, he knew he needed an additional skill set. The people already there were familiar with running the automobile auction operation, but what they didn’t have were the skills to deal with the financial and legal regulations related to being publicly traded. To fill the gap, he had to move some people out of roles they were no longer equipped to handle.

“The most important thing is people,” Gartzke says. “Management and motivating people are probably more important in terms of providing a successful future than even acquisitions. With that, we looked at the management team that we had (with ALLETE). I had to rethink the kind of people that this organization needed to be successful.

“I had to formulate a team that had a mix of individuals that were part of the management of this company before, with no public company experience, with people from the outside that had public company experience.”

Gartzke brought in a new chief financial officer, chief administrative officer and chief information officer and new accounting and legal teams. While experience, leadership and skills can be objectively analyzed, Gartzke learned that those qualities don’t automatically make those people into a smooth operating unit.

“You pull that team together and then expect them to be able to communicate with one another, be able to anticipate one another’s needs,” he says. “(That) was expecting too much.”

When that didn’t happen, Gartzke realized the lack of teamwork wasn’t intentional; it was simply a familiarity issue. Gartzke had a solution, but it meant spending valuable time and money on something other than running the company.

“What we should have done, once I formed the team, was spend a lot of time on cultural alignment with the top management team as opposed to putting the team together and then start focusing on, ‘OK, let’s manage the business; let’s make sure we hit our margins, hit our numbers, sell the vehicles,’” Gartzke says. “That stuff’s important, no question about it. But I made the mistake of assuming that people would learn to trust one another, learn to work with one another, and they don’t.

“It wasn’t that they didn’t like each other or didn’t trust each other, they just didn’t know each other.”

So, Gartzke forced the issue.

“You have to take one group at a time, off-site — this is a huge financial commitment, but you have to do it — to spend the time to get to know one another,” he says. “And you have to do it in a formal structured way. You don’t go to a golf course for three-and-a-half days. You spend very valuable time at a hotel talking about the company, talking about the company’s values, talking about the company’s strengths and weaknesses so you are internalizing all the things we know we need to do so that everybody gets a chance to discuss it.

“The best part of it is the interaction you have with the management team discussing those things.”

It starts with the top managers, but the truly difficult and expensive challenge is to weave it through the entire company.

Gartzke conducted the first retreat with 20 of the top managers, including several senior field people. But it didn’t stop there.

“The field people have to do it again with their management people,” he says. “The legal team needs to come together so they’re all talking about the same thing.”

And to be truly effective, these retreats must have different departments interacting.

“You have to combine management of the operations with sales and marketing people, with the corporate staff, so that everybody truly believes that we’re all on the same page,” Gartzke says. “If companies don’t do that, maybe they’ll be successful in the short term, but they certainly won’t in the long term.”

Gartzke says it’s a very time-consuming process, and it is not a one-time project.

“It’s my responsibility to make it a way of life,” he says. “We don’t stop doing this. I expect we will get together as a group periodically to reinforce this stuff. It’s a part of our annual reviews.”

Committing money to communication
Managers may make the decisions, but it is the company’s 11,000 workers who carry out the company’s vision. With that in mind, Gartzke decided to spend a good deal of time on communication issues and has invested a lot of money to make sure everyone has the technology tools they need to do their jobs.

It’s also about making sure they don’t forget the importance of human-to-human contact.

“The investment that this company and others have to make in technology is an eye-opening experience,” Gartzke says. “My principle responsibility, as the CEO of this company going forward, certainly includes strategy and acquisitions, but probably more important than that is communications. (That includes) communications with employees in the field as to why we’re doing these things, why it’s in their best interests.”

Gartzke also has to make sure that his sales team is communicating with the company’s customers to keep them informed about what ADESA has to offer.

ADESA’s customers are licensed franchises and independent wholesale auto dealers. When someone trades in a car, the dealer makes an offer on the trade-in, which typically comes after consulting with a wholesale broker. Those dealers often don’t understand the increased value an auction may bring them. Getting them to understand what ADESA can offer is the key.

“If we can educate these people to the economic opportunity that they’re losing by not pushing those cars to a back lot and instead remarketing them through an auction, that is our challenge, but it is also our opportunity,” Gartzke says. “We need information to do that. We need talented people who can communicate with these types of customers, with the information in such a way that these people would be willing to pilot with us to sell their vehicles.”

The only way the customer can be educated is by having a work force that truly understands the value ADESA provides. There are the traditional communication solutions such e-mails, newsletters and soon, an Internet portal for employees where they can keep up-to-date with the company’s latest news. The challenge is communicating without technology.

“It’s also a lot of windshield time, and it’s a lot of face-to-face time,” Gartzke says. “The general managers get together two to three times a year, and I’m always with those people when they do this for a couple of days. There is a lot of communication there firsthand with me.

“Communications is a real asset for us. I have staff meetings with my management people; the operators are having staff meetings an hour later every week. On Fridays, the operating people in the field all get together telephonically to talk about the same things. Newsletters are nice and e-mails are nice, but voice-to-voice communication is much, much better, and face-to-face is best.”

Choosing acquisitions
Some of ADESA’s growth is organic. There are more cars coming into the market every year, which means there are more autos sold through used or salvaged vehicle auctions.

But ADESA’s primary vehicle for growth is acquisitions. Whether it’s basic due diligence, integrating a culture or just finding the right opportunities, Gartzke is constantly struggling with whether a particular company is the right acquisition for ADESA.

“The one thing I would mention to other CEOs that are aggressively or actively in acquisitions, if the business cultures are different, that is a significant part of the integration challenge and risk,” says Gartzke.

The key to easing the transition is the upfront work.

“We’ve acquired companies that are maybe vertical acquisitions to our core businesses in a technology way, like Autovin in Atlanta [a technology company that provides automotive-related support services], and like when we first got into the salvage business,” Gartzke says. “It’s a similar business model, but our customers are insurance companies and dismantlers, so it is a different culture. Being astutely aware of those cultural differences up front and addressing those in the integration process is very important.”

No matter what type of business it is, you can never forget the basics — checking the company’s value and cash flow. Gartzke also considers the talent of the management at the company being acquired, and perhaps most important, makes sure not to overpay for the company, no matter how appealing it seems.

“We all make that mistake once in awhile,” Gartzke says. “We fall in love with something, and you can’t back off. You get too close to it just before you close. You find some things in due diligence that surprise you, but you still want to do the transaction.”

Gartzke likes to get the employees of the newly acquired entity on the same page as existing employees as quickly as possible.

“We don’t make a lot of changes in their lives,” he says. “What we do is perhaps provide a different technology platform that they have to work with. We might change a general manager if there is a need to do so because the seller was the general manager. We want to make sure that everybody buys in to (the ADESA philosophy).”

When companies are acquired, they take on the ADESA name.

“We always attempt to retain the management,” says Gartzke. “We did our due diligence. We attempt to assess the quality of their management, the quality of the relationships with their customers. To the extent possible, we hope to retain everybody in those places.

“In some cases, it doesn’t work quite that well, but that’s something we attempt to do. What we don’t do is bring in our people and replace management as a policy or as a rule.”

The market ADESA operates in is wide open, and there is plenty of room for growth.

“There are a lot of vehicles out there changing hands that we think could be better served if they used our service,” Gartzke says. “There are about 258 million vehicles out there, and about 46 million used cars changing hands every year. About 10 million go through auctions. It’s a great industry.”

HOW TO REACH: ADESA Inc., (800) 923-3725 or www.adesainc.com