The Economy

Against The Grain

Dec. 21, 2004

Some investors capitalize on manufacturing.

While many investors continue to ignore "traditional" U.S. manufacturers having only small- or medium-market capitalization, others see remarkable opportunities for productive and profitable growth among the metal benders, fastener makers, auto-parts producers, specialty-chemical companies, basic food processors, and kitchen cabinetmakers. Within a month, for example, a buyout firm headed by former Reagan Administration budget director and Michigan congressman David A. Stockman expects to record its first closing. Heartland Industrial Partners is gambling that private equity can be profitably used to selectively acquire manufacturing firms in the Midwest and grow their scale and earnings. Heartland is focusing on small- and medium-cap companies in such industrial sectors as auto components, chemicals, and metal forming and bending. It plans to string them together, invest internally in new plants, products, and information technology, and over five years build firms that it can then take public and that will command reasonable valuation multiples. For about a month, Corpfin.com, an Atlanta-based Internet company, has been registering small-cap manufacturers, other public companies, and potential investors. Its goal: to make completing a private placement quick, competitive, international, and secure by providing tools that significantly reduce the time, effort, and cost of private equity transactions. In practice this means that the CFO or CEO of a $100 million medical-products company seeking to raise $10 million in capital could obtain a closely matched list of interested investors "within the snap of a finger," asserts Gregory Miller, Corpfin's COO. Then it's up to the CFO to speak with investors (either online or off), negotiate terms, and come up with a term sheet that makes the most sense. "And for that . . . it's only a 4% fee-as opposed to the traditional 7% to 11%," says Miller. Meanwhile, 10-year-old Pfingsten Partners LLC, Deerfield, Ill., continues to invest in low- to medium-tech manufacturers -- the food processors, metals companies, specialty-chemicals producers, and auto-parts firms of the Midwest and Middle Atlantic regions. Pfingsten, a private equity fund that counts more than a dozen former senior corporate executives as limited partners, furnishes capital and management expertise to companies in fragmented industries. And, in return, it requires controlling interest. Typically "one of the first things we do is address all forms of information technology: phone systems, PC LANs, the mainframe, data warehousing," explains Richard W. Manning, a Pfingsten partner and managing director. Next, Pfingsten gets involved in rationalizing the layout. "If you've had eight additions to your building [over 20 to 30 years], probably you don't have the most efficient building anymore," observes Manning. "You have to make a relatively significant investment to . . . get rid of the old facility, get a new facility, and just redo the entire manufacturing or distribution process." And Pfingsten works to improve the management process. "We come in and pull the team together and introduce the concept that if you're in sales, you have to understand the impact on manufacturing -- and if you're in manufacturing, you have to understand how your decisions impact sales, finance, etc.," says Manning. The strategy of improving IT, the deployment of fixed assets, and management style is being applied to Norcraft Cos. Inc., a Minneapolis-based kitchen and bathroom cabinetmaker that Pfingsten acquired in June 1998. Having renamed the company Norcraft Cos. LLC, Pfingsten's stated objective was to double or triple its sales within five years. In 1997 sales were more than $84 million. They're now above $100 million, relates Thomas S. Bagley, a Pfingsten partner and senior managing director. What's more, the estimated $6.5 billion industry "is on a pretty good growth curve right now, and there also exists the possibility for us to grow fairly rapidly through add-on acquisitions," he says.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.