A deal that would have sold Pittsburgh Applied Research Corp. to a group of its managers had just collapsed. The lawyer who had tried to put it together, it turned out, was a friend of Dave Eichenlaub, CFO of Gemini Holdings Inc., a firm formed last year to acquire stable companies in a variety of business segments. The lawyer mentioned the failed attempt to his friend, and Eichenlaub, sensing there may be an opportunity for his company to acquire PARC, brought it to the attention of Tom Certo, Gemini Holdings’ CEO and the leader of this young, aggressive cadre of entrepreneurs. In the end, Certo and company consummated the acquisition in about 60 days, from first mention to closing. It all began simply by maintaining contact with a business associate.
Undoubtedly, Certo, 34, and his four similarly youthful partners in Gemini Holdings, waste little time when an opportunity presents itself. They move quickly, each applying his particular area of expertise to scrutinize the target, identify its strengths, weaknesses and potential, and integrate the new company into Gemini Holdings.
Despite their youth and assertiveness, however, they seem to hold little regard for the latest theories being promulgated by the prestige business schools or management gurus currently in vogue. Their conversations aren’t peppered with highfalutin jargon or the faddish buzz words and slogans that seem to plant themselves so easily in some business owners’ vocabularies.
A good deal for both parties isn’t a “win-win.” It’s simply a good deal. They’re not looking for basket cases in need of heroic rescues. Instead, they seek out good companies that need a little help to reach their peak. And they rely on the fundamentals of business.
Relying on the basics
You’ve heard it a million times. When things are faltering, go back to the basics. Practice the fundamentals. During a panic or, at the least, a downturn, most businesses will embrace the basics. There’s some comfort in going back to the familiar, to the tried and true, like putting on a pair of comfortable shoes. And it makes good sense. What’s more important, for instance, than balancing the checkbook, looking for ways to cut costs, and asking your customers what they think?
But how many companies do it when things are going well?
Gemini Holdings, with operating companies doing in excess of $20 million in annual sales, appears to know the value of the simple stuff: sound operations and financial management, investment in technology or equipment when necessary, and good human relations skills. They’re the bedrock principles, Certo and his colleagues assert, that will keep any kind of enterprise on a steady course. And so far, Gemini Holdings has successfully applied the approach to a start-up, a turnaround and more than one mature company.
“When forming Gemini Holdings, the approach we took, unlike many management or holding companies, was that we weren’t going to specialize in any particular industry,” says Certo.
Instead, Gemini’s tack is not to micromanage each enterprise, but rather to apply a set of fundamental management and business skills in overseeing strong management teams with the specific knowledge of their respective industries.
In effect, the five principals use a team approach and function as a very active board of directors for each of the operating companies, staying focused on strategic needs and leaving the day-to-day functions up to the managers.
They’ve then taken that approach on the road, applying it across the board to their growing-and diverse-portfolio of companies. First, there are Carman Supply & Equipment Co. and Havnaer Supply & Equipment Co., with $15 million in combined sales. Both are distributors of laundry chemicals, supplies, equipment and parts to commercial concerns.
USA OnRamp Network Integration Corp., formed after the sale earlier this year of USA OnRamp, an Internet service provider, is a network consulting and integration company with revenue of more than $2 million. Leasing Capital Corp., formed in 1997, is a third-party equipment leasing company that has annualized revenue of $3.6 million. PARC, a $5 million concern, provides independent testing services, primarily to the petroleum industry.
Certo places Gemini Holdings’ business philosophy somewhere between the typical financial stakeholder-those looking to regularly churn their holdings and take short-term profits-and strategic owners, who are seeking acquisitions that will enhance the growth and profitability of their other interests. The time frame for holding onto the companies that Gemini Holdings acquires is something on the order of three to 10 years, says Certo.
“The key is, if they’re turning their portfolio over…then what they’re doing can work very well,” says Bill Rupp, assistant professor of management and director of business accreditation at Robert Morris College.
But success at acquiring and divesting businesses hinges on knowing when to get in and out of them at the right times, Rupp says. He notes that research indicates companies that practice “conglomerate diversification,” or acquiring businesses unrelated to each other, often find that the operating companies become less manageable. “As they continue to add to the portfolio…they will spread themselves beyond their ability to control them,” he cautions.
Certo started out as an entrepreneur when he became a partner in International Culinary Academy and Computer Tech, two downtown technical and training schools. The business was in a state of paralysis-and in the red-because its owners were at odds and couldn’t agree on how to proceed. Decisions were deferred, and by the time Certo and a partner took over in 1991, the business dipped into the red.
By 1997, when Certo decided he wanted out of the education business and sold the company to a national chain of proprietary schools, revenue was $7 million, up from $1.7 million when he took over, and was turning a healthy profit.
Certo launched the successful USA OnRamp, an Internet access company, as a spin off from Computer Tech. He then decided that Gemini Holdings, however, wasn’t going to pursue additional start-up opportunities. Instead, he was going to seek out existing companies with good growth potential, generally within a 100-mile radius of Pittsburgh.
Certo surmised from his experience with the proprietary schools that a lot of companies out there were essentially sound but for a variety of reasons, ranging from feuding partners to complacent owners or poor financial management, hadn’t been able to reach their potential. That theory led to the formation of Gemini Holdings and the concept of acquiring businesses and acting as a strategic team in guiding them rather than adopting a day-to-day management structure.
“We’re kind of industry generalists, and we rely on the management of the companies,” Eichenlaub explains.
The team approach
In the early stages of a takeover, the principals generally meet for a long brainstorming session, where they make a master list of things to be accomplished. Then each works independently at the new company, with Dave Gilpatrick, chief operating officer, taking a lead role as kind of an advance man, introducing Gemini Holdings to the managers and working closely with them to resolve issues like personnel and facilities needs and refining the sales function.
“With most companies we come across,” Gilpatrick acknowledges, “sales and marketing need a kick.”
Support, don’t supplant
Gemini Holdings’ approach of leaving the day-to-day management of its operating companies to teams of managers means that those teams need to be capable of working independently. So far, since its acquisitions have been of essentially sound companies, Gemini Holdings, for the most part, has not yet had to totally revamp the management teams.
“The most valuable asset we are purchasing is the people who are there,” Gilpatrick says.
And the principals expect the managers to provide honest input into how the businesses shou
ld be run.
“We foster some disagreement,” says Gilpatrick. “We don’t want a lot of ‘yes men’ or ‘yes women’ in our organization.” In fact, Certo and Gilpatrick say, even most of the major decisions are made by the operating companies’ managers, albeit with the input of the principals.
They further solidify the commitment of the management team by giving them an equity interest. The top managers at PARC, for instance, who had been seeking an ownership stake when they tried to acquire the company, secured an equity interest in Gemini Holdings.
Companies taken over by Gemini Holdings generally don’t have to expect a housecleaning. While the principals make a careful analysis to determine how the management of its companies will be staffed, shake-up is not the general rule. In fact, Gilpatrick points out, only two people were not offered positions in their last two acquisitions.
Very close to the closing date, the principals hold a meeting with all of the company’s employees to introduce themselves, announce the management team and explain changes that will take place in benefits and pension plans, for instance. The roles and responsibilities of all parties are covered.
Early in the takeover, the principals spend about a day a week on site with the management team. “We’re all kind of going in our own directions,” says Gilpatrick, but they meet as a group weekly to review their progress. After the acquisition has been completed, Certo moves away from any day-to-day involvement to focus on identifying and evaluating other acquisition targets.
All of the principals eventually withdraw from the day-to-day to focus on the larger strategic issues. Keeping out of the details of running the business, they say, gives them a perspective that otherwise might be lost.
“It allows us to take a fresh look at the business,” says Gilpatrick.
The technology investment
While the companies Gemini Holdings has acquired have been in reasonably good condition, the Gemini principals all realize that investments will be necessary to get the companies running at full tilt.That’s where principal Joe Joy comes in.
Joy, executive vice president of information systems, leads the way in assessing what the acquired company’s technology needs are. The acquisition of Virginia-based Havnaer Supply & Equipment Co., for instance, was made to help expand the geographic coverage Gemini Holdings held with its earlier purchase of Carman Supply & Equipment Co., which is in the same business. To coordinate their operations and tie the two companies together, Joy directed the installation a wide-area network. At PARC, new network cabling and software were the first improvements to be made.
Creative financing
Eichenlaub says Gemini Holdings has structured all of its deals to date using its equity, bank loans and with the seller holding a subordinated note. Getting the seller to hold paper means, at least for a time, he or she has a stake in the company’s success, says Eichenlaub, and the larger the seller’s share, the less equity and bank financing required.
But one of the main financial keys, says Eichenlaub, is to not overpay for a company and saddle it with excessive debt. The tendency in a strong economy is for companies to be over-priced. On the other hand, the ease of securing credit in such conditions makes it easier to overpay for an acquisition. For a company on the acquisition track, a combination of too much debt and an economic slowdown can pose a problem.
“If you pay too much for a company and you have a lot of debt and you hit a recession, that’s a recipe for disaster,” says Eichenlaub.
And having the company but not being able to invest in it because you’ve overpaid for it won’t work, either. “Once we are able to make an acquisition, we need to grow the business,” says Eichenlaub.
So careful valuation must be made of each target. While the intent is to increase revenue, to ensure that the company will be able to support the deal, Certo explains, projections are made with the assumption that there will be no increase in sales.
An ear to the ground.
Just as the PARC acquisition came out of a personal contact and not through a business broker or some other formal channel, all of Gemini Holdings’ takeovers have come out of referrals. Each of the principals belongs to at least one organization that allows them to get Gemini Holdings’ story on the street and attract potential deals.
Certo spends the lion’s share of his time meeting with potential sellers and others who might be interested in the Gemini Holdings story. Gilpatrick rubs elbows at the Downtown Rotary Club, and Eichenlaub, Joy and Joseph Weis, executive vice president and general counsel, stay visible through organizations associated with their respective professions.
The referrals usually come to them only if there is a reasonably good fit. “We’re not turnaround people, and don’t profess to be,” says Certo. The companies have to be at least near break-even or slightly in the black, in a good industry with growth potential. And getting in early usually means moving in before a broker has had an opportunity to shop the firm around and, in most cases, inflate its asking price and the expectations of the current owner.
“They say they’re not doing turnarounds, but I guarantee you the first thing they’re doing is getting a hold of the checkbook,” says Rupp. Next, he says, they should be making a comprehensive evaluation of management and products, picking out the winners for further development.
Since its formation in 1997, Gemini Holdings has enjoyed the luxury of doing business during a period of relatively easy credit and a growing economy. What happens when the business cycle alters its course and the economy takes the inevitable downturn? Rupp says there should be opportunities in any economic environment, and smart companies are sharp enough to recognize which ones can thrive in current conditions.
“They will never run out of opportunities,” Rupp says. The key, he maintains, is to know where a company’s strengths are and where it fits into the external conditions.
Certo says he believes that an economic slowdown, while it may pose a challenge to his firm’s operating companies, will provide opportunities that a good economy does not offer.
“I think it will actually increase deal flow and give us more realistic pricing on deals,” he says.
So for Gemini Holdings, the good times could very well roll for a long time to come.
