When A.O. Smith Corp. sold its electric motor business to Beloit-based Regal Beloit Corp. in 2011 for $890 million, the Milwaukee-based company got an influx of cash.
Ajita Rajendra, who became chairman and chief executive officer of A.O. Smith in 2014, has been deploying the funds on strategic acquisitions while repositioning A.O. Smith as a portfolio of global water technology businesses.
Rajendra will be the keynote speaker at the annual BizTimes Media M&A Forum on Friday, April 21, at the Milwaukee Marriott Downtown hotel. The event helps business buyers and sellers learn what they need to know as they consider their options and move through the process.
In his keynote address, Rajendra will share with attendees the journey of the 143-year-old company and its evolution into the leading U.S. water heater manufacturer.
He also will discuss the value of not just organic growth, but also strategic acquisitions to creating value in a company. It can guide what a company does, but more often what it chooses not to do, Rajendra said.
“If you don’t have a well-defined strategy, then you could be doing M&A but you’re not really sure it’s creating value or the right kind of value or positioning your company and making sure it’s heading where you want it to go,” he said.
Following the electric motor business sale, later in 2011, A.O. Smith acquired Lebanon, Tennessee-based boiler manufacturer Lochinvar LLC for $418 million. It was the largest acquisition in the history of A.O. Smith.
And then for a couple of years, the company analyzed a number of potential acquisitions, but made the decision to walk away from some targets due to issues that came up in due diligence and a desire to meet the criteria it had set out.
Mergers and acquisitions are all about value creation, Rajendra said.
“You want to really look at who your potential buyer is and make sure that buyer understands clearly the unique value that is created between the two companies,” Rajendra said. “If there isn’t value created, then any value created in the transaction goes to the seller, not the buyer. And you really want win-win.”
A.O. Smith has certainly created its own value. The company reported a record net income of $326.5 million and a record revenue of $2.69 billion for 2016. Earnings increased from $1.58 to $1.85 per diluted share.
“We wanted to redefine ourselves as a water technology company,” Rajendra said. “We divested ourselves of the non-water-related businesses and focused on making decisions in the water-related areas in markets that are growing. We feel that clean water is going to be in demand all over the world. We have a water infrastructure that is aging.”
As part of that strategy, A.O. Smith in 2016 acquired Texas-based water treatment system developer Aquasana Inc. for $87 million. The company was a good fit because of its skills in selling direct-to-consumer using web-based selling techniques and those are skillsets that Rajendra feels will be useful to A.O. Smith in the future.
“Everyone’s buying through all channels, but the key is the decision-maker is going to become more and more the individual consumer. A lot of it is coming through digital means,” Rajendra said. “Regardless of how you’re selling, you really have to be well-versed in the digital marketplace.”
In addition to Rajendra’s remarks, the M&A Forum also will feature two panel discussions.
The first panel will discuss the uncertainties of selling and life after a sale. The panelists will include Tom Campion, managing director of Chicago-based Merit Capital Partners; Scott Happ, CEO of Plano, Texas-based Optimal Blue; Fritz Frazier, founder and former CEO and owner of West Allis-based Winter Services Inc.; and Jim McCormack, chairman of Brookfield-based Diversified Insurance Solutions. The discussion will be moderated by Andrea Wolf, vice president of commercial banking for Brown Deer-based Bank Mutual Corp.
Frazier’s goal was to exit the day-to-day of running Winter Services by the time he turned 50. But he hardly told anyone he was in the process of actively marketing and selling the company until the deal was finished about 18 months later, which brought on tremendous pressure.
“I was very concerned with not getting it out on the street and not impacting my business because I know individuals who tried to sell their business and it falls apart,” Frazier said. “It was difficult to keep that in the inner circle. I’ve been in business over 30 years and I can say it was probably one of the most stressful times of my life.”
Frazier bought Winter Services from William Hanney in 2006 and sold it to Pennsylvania private equity group FNB Capital Partners in August 2015, so he has been both a buyer and a seller. In the time he owned it, Frazier grew the snow removal company from $1.8 million to $20 million and expanded it from Milwaukee to a seven-state footprint.
Exiting the business was like creating a vacuum of time and energy and a sense of urgency for Frazier, he said.
“So while you’re secure and it was a major accomplishment in my life personally and professionally, to reflect on the impact I had on people and families and subcontractors and vendors and that my little snowplow business provided for people and allowed other businesses to grow because of my success, it’s pretty emotional,” he said.
Jim McCormack co-founded Brookfield-based insurance brokerage Diversified Insurance Solutions 35 years ago and was the majority owner until he sold to its employees through an Employee Stock Ownership Plan Jan. 1. He will discuss his dedication to rewarding his employees and making sure they were taken care of when he exited.
“There was no question it was the best thing for the organization and my associates,” McCormack said. “There’s no regrets. Personally, there’s really no regrets either. It’s just a matter of minor adjustments in lifestyle.”
The second panel will cover options for business sellers through a case study of a business owner considering an exit. The panelists will include Steve Heinen, managing director of Omaha, Nebraska-based First Capital Partners; Larry Burnett, shareholder and corporate law practice co-chair for Milwaukee-based Reinhart Boerner Van Deuren s.c. and Dave Rolston, president and CEO of Milwaukee-based Hatco Corp. The discussion will be moderated by Ann Hanna, managing director of Milwaukee-based Schenck M&A Solutions.
First Capital Partners focuses on providing growth capital to small businesses, and often completes partial sales. Recapitalization is an option business owners should consider, Heinen said, because they could get “two bites of the apple” and the new investor expertise provides opportunity for growth.
“You get immediate professionalization across a number of fronts. Legal, financial, strategic, board level, operations…hiring and firing,” he said.