At Ceradyne Inc., chairman, president and CEO Joel Moskowitz has seen firsthand the need to constantly grow and evolve his business, which he co-founded in 1967 and has built into a company that generated $402 million in 2010 sales. Ceradyne started as a defense contractor, using advanced technical ceramics in military applications, including nuclear weapons.
“We were a classified facility, and doing a lot of work with nuclear weapons,” Moskowitz says. “That really gave the company its start, but it quickly became evident that were relying very heavily on defense work. But at the time, we were too small to do much about it.”
As the company matured, Moskowitz and his leadership team saw the need to look outside the military and defense sphere for new customers and began to seek strategic partnerships and acquisitions that would allow Ceradyne to leverage its expertise in technical ceramics in new markets.
After several failed strategic alliances in the 1970s, Moskowitz forged a partnership with Ford Motor Co. in the mid-1980s that allowed Ceradyne to broach the automotive market. This was followed by a partnership with a division of 3M that had the company producing a line of ceramic orthodontic brackets. After that, several acquisitions followed, allowing Ceradyne to stretch its products’ reach into the satellite communications and glass and metal fabrication industries.
“We also acquired a company that developed the fused silica ceramic crucible for solar cells, which is going to be 30 percent of Ceradyne this year,” Moskowitz says.
To find acquisitions that can add value to your business, you need to know what your business does well and how you can take that competency and apply it in new ways. It’s an approach that takes the development of and adherence to a well-defined strategic plan, but the creativity and flexibility to be willing to try something new — and the discipline to know a good move from a bad move.
Attack new markets
To seek out and effectively integrate new companies into Ceradyne, Moskowitz and his leadership defined an area of focus for the company’s technological muscle.
“We’ve always had a very clear idea that we make generally large structural ceramics,” Moskowitz says. “That’s different from the high-volume electronic ceramics that are used in ceramic capacitors, microwaves and semiconductor packaging.”
With those boundaries set, Moskowitz has empowered his key decision makers to scan different industries looking for potential targets of opportunity.
“We have a clear, pragmatic culture that starts with me,” he says. “I founded the company in 1967, and a lot of the process starts from that point going forward. Now that we’re a diversified global advanced materials company, every person in a key position is keeping their eyes open. In addition, we have myself and our president of North American operations working with our vice president of business development, and the goal is for us to get to a point where we’re acting in consensus on a given project.”
If consensus on a acquisition cannot be reached, if there are too many questions from key players that aren’t adequately answered, Ceradyne will often scrap the idea and rapidly discard the opportunity, coming to the decision within weeks. If Moskowitz and his team are encouraged by their initial research, it will often take up to six months before Ceradyne is ready to invest money and make the acquisition happen.
“First, you have to be interested in doing the deal,” Moskowitz says. “You have to like it, simply put. Second, the company we’re acquiring has to really want to be a part of the company. We still have a very collegial, entrepreneurial culture, so we never do a hostile deal. There has to be a rationale for the sale, and the people who are going to stay with the company, we have to feel like they like us. After that, you start to get into the things that every acquiring company does — five-year projections, due diligence, speaking to key customers and opening an ongoing dialogue with key employees.”
Moskowitz says it is almost always prudent to approach any acquisition with caution. Stay conservative regarding the type of business you’re willing to buy and the amount of money you’re willing to spend. There will always be another opportunity to make a strategic addition to your company. But digging out from a poorly vetted or poorly financed acquisition could take years. In a worst-case scenario, it could endanger your company.
“Never bet the farm,” he says. “It has to be within reason of your resources. That is the first thing we always try to remember. The second is that, generally speaking, we want it to be within the framework of our core competencies in the areas of advanced technical ceramics and high temperature materials. Third, at least in our case, we want it to add value almost from the beginning. We’re not looking to complete somebody else’s research. We’re not looking for a turnaround. We’re looking to pay a fair price, generally in cash, and have the entity that we acquire add value from the beginning.”
But finding an acquisition that will add value to your company doesn’t mean that you’re not going to have work to do to once the purchase is completed. Acquisitions are almost always a scratch-and-dent sale, and even if you find a company that is a great fit, you will still need to spend some time under the hood. How much time you’re willing to spend is a good indicator of how much risk you’re willing to take.
“If you’re really reaching and going into debt, you’re leaving no room for problems,” Moskowitz says. “And acquisitions are problems. There is a reason somebody is selling it. People don’t sell companies that are going to turn around with phenomenal results in the next 48 hours. So you have do a lot of due diligence, don’t reach beyond your means or theirs, and keep in mind that the people involved in the acquisition are important.”
Lead the people
You might make an acquisition to bring a new area of expertise to your company, a new product or for other strategic reasons. But you can’t lose sight of the people involved. When you’re acquiring any company, you’re almost certainly going to have to handle the people who had been operating the company. You’ll have to decide how to best employ them, or if you can’t move forward with them, how to part ways.
As the acquisition process is progressing, Moskowitz and his leadership team have a simple method for getting on the same page with Ceradyne’s potential new employees: They talk to them. The information gleaned from casual lunches and dinners can be, on some level, more valuable than what you learn through your formal due diligence process.
“First off, you just ask them what they think about your company,” Moskowitz says. “We did an acquisition not so long ago, and at one of the early dinners in the whole process, one of the key people in the company we were acquiring said to us, ‘You know, this investment banker is the one actually doing the deal, but we’d like to express that we would like to be a part of Ceradyne.’ Although these people didn’t have the final say because most of the key management was not a part of the company’s ownership, their desire was made clear.”
If there is dissension on the team of the acquiring company, the more you interact with them, the sooner it should become evident. Acquisitions aren’t popularity contests, but if high-ranking members of the acquiring company have genuine reasons for hesitation, you need to quickly identify and address the issue, or your purchase could be in danger before it ever gets off the ground.
“We’re always talking to the people who are selling, because we want to really see if they like us,” Moskowitz says. “We want them to like us, we want to like them, we want to have a very collegial relationship. Deals often sour because of individuals. They didn’t want to make a deal or they didn’t want to be a part of it. There are a lot of personalities involved when you get into making acquisitions.”
Know when to run
In acquisitions, size does matter. Size equates to risk. The larger the company you’re looking to bring aboard usually means the more money paid out for the purchase, the more people involved and the more complexity involved in piecing the two companies together.
Ultimately, you need to set a level of risk tolerance that is right for your business and not stray over that line, no matter how tempting the purchase may be. You need to know what you can spend and what your company is capable of handling in terms of growth and new areas of practice.
At Ceradyne, Moskowitz doesn’t draw a definite line in the sand, but the red flags start going up once an acquisition surpasses the $100 million mark.
“We’re very cautious past that point,” he says. “We’ve only done one acquisition over $100 million. And it does take a level of discipline to walk away. I always point out to my team the number of deals we’ve walked away from, because it’s as important as the number of deals we’ve actually made.
“Often times, a company we’re looking to acquire has investment bankers, and their job is to get the highest price, and sometimes they can act in a manner where we make up our mind that we’re just not going to do it. If they create an auction type of atmosphere, we’ll say, ‘This is the number we’re going to pay, and if you can get more money, then do it.’ And that becomes the walk-away point.”
Years of watching the aftermath of bidding-war acquisitions has solidified Moskowitz’s belief that it’s the wrong way to do business.
“In the times we’ve been outbid or are not going to the next round of the bidding, in a percentage of those times, things have not worked out for the company that ultimately made the acquisition,” he says. “There might be other reasons it didn’t work out — we just had one of the worst recessions — but for some reason, it didn’t work out.”
And if an acquisition doesn’t work out, you might have your moment of frustration. But then, you have to get back to work figuring out what happened, and your course of action moving forward.
“If an acquisition isn’t working out, you cry,” Moskowitz says with a laugh. “But after you finish crying, you start to think about where you want to go from here. You do your best to mitigate thee problem. For us, that usually means we take a look at reducing resources or maybe reducing people, and try to understand why things are so different than they were a month or two before you said you were going to do the deal. It’s usually a money issue, but it could be an issue with culture. We haven’t found that, because we work so hard before a deal to try and ensure that we’re all on the same page or at least close enough.”
How to reach: Ceradyne Inc., (800) 839-2189 or www.ceradyne.com
The Moskowitz file
Born: New York City
Education: B.S. in ceramic engineering, Alfred University, Alfred N.Y.; MBA, University of Southern California
History: Moskowitz co-founded Ceradyne (NASDAQ: CRDN) in 1967 in order to develop, manufacture and market a new product line of advanced technology, structural ceramics for defense, industrial and consumer applications. The company has grown from a founding investment of $5,000 to become an international, publicly held corporation with research and manufacturing facilities in the United States, Germany, Canada, China and India.
What is the best business lesson you’ve learned?
To create a culture that recognizes the contributions of individuals and to be very clear in recognizing that contribution not only with words or praise but with compensation and other recognition. Without the key people, there is no company.
What traits or skills are essential for a business leader?
The business leader often has to look inside the company, as well as outside to its customers and shareholders. Inside, there must be a concept of collegiality and building consensus with a reasonable focus on objectives and performance. To the outside world, the business leader must be professional and calm, and as a public company, always truthful and transparent.