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Niche investing Featured

9:29am EDT February 26, 2004
The No. 1 thing Obsidian Enterprises' management looks for when acquiring another company is whether it monopolizes a particular market niche.

Obsidian doesn't invest in start-ups because of the risk. Instead, it targets small and mid-sized companies with a potential for growth, looking for historically dependable companies and markets.

"We can buy them at a reasonable valuation and maximize our returns," says Obsidian Chairman and CEO Timothy Durham.

One of Obsidian's subsidiaries, U.S. Rubber Reclaiming Inc. in Vicksburg, Miss., is the major source of butyl rubber reclaim in the Western Hemisphere, and is a single-source reclaimed butyl rubber supplier to most of the country's tire industry. Other subsidiaries include a truck body manufacturer, steel-framed enclosed cargo and specialty trailers manufacturers, and a luxury coach leasing company.

In addition to its subsidiaries, Obsidian's principals have substantially invested in a wide range of businesses, which it calls affiliates. Affiliates include the Aesthetic Surgery Center in Indianapolis, Bella Vita Direct catering service in Indianapolis, and Los Angeles, Calif.-based National Lampoon, known for its movies including Animal House and National Lampoon's Vacation.

Like a busy parent of many children, Durham finds that staying in tune with the industry and needs of each subsidiary can be a challenge.

"Keeping your attention on all of them is difficult," he says.

Staff members meet regularly to discuss the subsidiaries' progress and challenges, and to research industry trends. And when one company does something innovative, they look at implementing the change in others.

For example, Obsidian's cargo trailer company, United Trailers Inc. based in Bristol, Ind., has a unique compensation system that has increased the company's profitability, and Durham says there are plans to implement that system in the other subsidiaries, as well.

Smart Business poke with Durham about Obsidian's investment strategy and its operational challenges.

What aspect of your investment strategy makes it successful?

If the risk is too high, like in start-ups, we are not interested in investing. I have personally invested in some start-ups, but the company doesn't.

And as the company grows, we merge them into Obsidian. We look at historically profitable companies in dependable niches.

The companies we invest in are monopolistic versus commodity based. It's not a unique strategy, but it is successful.

Why target small to mid-sized companies?

I think the opportunity for value exists to a greater degree in small companies. Our investment returns are six to seven times greater than large companies'. The opportunity for that value is not as prevalent in large companies.

It takes the same time to concentrate on larger companies, and companies far larger are competing for them. Once that happens, pricing gets tight, and it is more expensive to acquire them.

Are you targeting specific geographical areas?

We look at companies throughout the country; we'll go anywhere. We have looked at companies in Europe and Canada.

What we are looking for is historical, dependable profit; companies operating in a niche.

For example, our rubber company is the only company in the country that reclaims butyl rubber. Tire companies use that rubber in tire manufacturing. It's a dependable niche.

Companies approach us to see if we are interested in purchasing or investing in them, and we're constantly looking. We are also approached by brokers, accountants and lawyers. Leads come from all over the place.

Are there particular industries you are most interested in investing in?

There is no one industry that we are looking for more than anything else. We tend to stay away from high-tech companies because they can become obsolete quickly. We also stay away from the service and restaurant industries and start-ups.

Which of your subsidiaries is the most successful and why?

Right now, it's hard to measure success. All of the subsidiaries have been more successful than the others at various times over the years.

Our cargo trailer company does very well, and it has a unique way of compensating its employees. The more trailers the company sells, the more money they make. The pay percentage never goes up. This company sees higher and higher productivity out of the employees.

It is a unique system we plan to implement into our other companies, as well. This company tends to be the most profitable; traditionally, they have been the most profitable.

Are there plans to divest the company of any of its subsidiaries?

We don't plan to divest. We plan to acquire.

What are your biggest operational challenges?

The biggest challenge lies in understanding the aspects affecting the companies at different times. And understanding what changes would complement each one.

When we are looking for new acquisitions, the challenge is to find ones that would make the most sense and growing them. We have a pretty good staff, and we divide the responsibilities of research internally. We meet as a group twice a month and discuss the progress and challenges at each of the companies. That keeps me in tune with the company and the industry, and everyone else as well.

What areas/processes are you working to improve?

The improvements needed for each company are different, and we work with each one to identify them. We work with management to identify areas for improvement and develop plans for those improvements.

What are your biggest personal challenges in managing the company?

For me, the challenge is finding a balance with my professional and personal life.

With so many enterprises developing, it's a challenge to take time off without shorting the companies. How to reach: Obsidian Enterprises, (317) 237-4122 or www.obsidianenterprises.com