That buy-in feeling

John Spruell’s involvement in the $125m (£77m) management buyout of Deloro Stellite at the beginning of this month was not planned. Until May, Spruell had been overseeing the expansion of GKN’s Powder Metallurgy Division, a business manufacturing powder metallurgy parts mainly for the automotive industry. Appointed managing director of the business in 1993, he increased […]

John Spruell’s involvement in the $125m (£77m) management buyout of Deloro Stellite at the beginning of this month was not planned. Until May, Spruell had been overseeing the expansion of GKN’s Powder Metallurgy Division, a business manufacturing powder metallurgy parts mainly for the automotive industry.

Appointed managing director of the business in 1993, he increased its turnover from £43m to £59m over two years and tripled its profits. In 1996, the operation was turned into a self-standing division and Spruell was made chief executive, reporting directly to a main board director. He also secured approval to expand the division into a global operation with a turnover of about £300m.

But GKN’s £352m takeover of the US’s Sinter Metals changed his situation. Joe Carreras, Sinter Metal’s chief executive, took over as head of the enlarged powder metals operation with a distinctly different management approach.

‘There certainly wasn’t room for two chief executives,’ says Spruell. So he put out feelers with contacts and found a headhunter looking for an executive chairman to head the well-advanced management buyout of Deloro Stellite, a manufacturer of specialist hard-wearing components. Thermadyne Holdings Corporation was looking to divest the company with factories in four countries and a workforce of more than 700 people.

The venture capitalists and banks putting up the finance for the deal wanted an experienced figure to take the helm, and Spruell’s background both in the industry he worked in and the autonomy he enjoyed in running operations convinced them that he was the right man.

‘I think part of my role is to bring a more analytical role to the derivation of strategy,’ he says.

While he may have taken a short cut into the Deloro Stellite buyout, Spruell had in a sense paid his dues between 1992 and 1993.

After a career that had seen him join Metal Box as a graduate trainee in 1968 and work his way up to group managing director of Carnaud Metalbox’s Speciality Packaging division by 1991, he spent 15 months (after another displacement following a corporate takeover) with a financier contact looking for a small-to-medium company to buy into as chief executive.

While he and his partner identified four companies as possible candidates, by 1993 three were not on offer at the right price and by the time negotiations were well advanced on a management buy-in of the fourth, Spruell felt he needed to be earning money again. ‘Eventually I ran out of time or perhaps a bit of nerve,’ he concedes.

The financier went ahead and the buy-in was a success. Although he did not see the deal through, Spruell says the experience was valuable.

It proved to the venture capitalists and banks backing the Deloro Stellite transaction that he was serious about being involved in a buyout. The earlier experience also meant he was familiar with the legal and financing requirements. ‘Without doing any of the hard work this time, I landed in the middle of a very exciting company,’ says Spruell.

To provide an exit for the venture capitalists in three years with the returns they expect will be a challenge, but one Spruell is confident of meeting. Increasing world-wide sales of products, based on sophisticated alloys from metals such as cobalt, will require a sustained marketing effort to persuade customers to spend more in the short term for components that will eventually save them money through reduced maintenance and downtime.

Spruell acknowledges that the sales and marketing department will require a larger share of the overall budget than in some companies. But he is keen to limit the time that executives spend travelling to the minimum, possibly though increased use of videoconferencing. ‘We don’t want people spending a lot of unproductive time on aeroplanes.’

So why was Deloro Stellite a good candidate for a buyout or buy-in?

‘Really you’ve got to find a company where you can add value, and you’ve got to be able to add the value fairly rapidly. Then there’s your feeling for the unquantifiable things the quality of their operations, the quality of their people.’

The operation also probably needs to be of a character that will not attract ‘determined trade buyers’, who can always outbid the MBO team because they are not under the constraint to achieve adequate returns for investors in a short time.

Spruell also stresses the importance of having the right people involved in buyouts, as the degree of self-reliance in all matters from treasury management to staff pensions ‘only suits some people’.