David Hein walks through the archaic factory on Superior Avenue on Cleveland’s near east side in his suit and tie, waving to every employee and greeting him or her by name. The employees take a moment away from the rolling presses or foil stamping machines to smile and wave back.
Hein, chairman and CEO of The Chilcote Co., a 98-year-old manufacturer of photo mounts, folios and albums, understands the importance of the employees and the specialized knowledge each of them brings to work. The machinery is a mixture of old and new — some pieces appear to have been in use when the building was constructed at the turn of the century, while others have so many lights and buttons on them they could be part of a NASA space launch. The building itself is also a mix, a cobbled together collection of brick and block structures that is reminiscent of many American manufacturing facilities.
Hein points out a scar on the floor in the middle of the warehouse.
“This is where the exterior wall was the last time you were here seven years ago,” he says to this reporter.
The building now extends far beyond that line, with racks of boxes stretching high in the air on narrow rows of shelves. As the company grew — from 190 employees and $23 million in sales in 1997 to 475 employees in four states and in excess of $50 million in sales today — the building grew with it. The business was almost exclusively photography-related seven years ago, but diversification has changed that.
“In 1997, 95 percent of our revenue was photo-related,” says Hein. “Today, it’s probably 60 to 70 percent.”
The diversification came from a string of acquisitions the company has made to help secure its supplies, keep its dominant position in the marketplace and acquire the specialized machines and the people that run them. Hein knows that consolidation is happening in every industry, and to ignore it would be folly.
The Chilcote Co. has not been idle. Between 1986 and 2001, Chilcote made five acquisitions — Forest City Bookbindery, D. Davis Kenny Co., Winthrop-Atkins Co., Wooden Nickel Albums and Lakeview Products — and Hein says they are looking for other opportunities.
Managing growth is challenging, but Hein has found that by focusing on the people issues first, acquisitions go a lot more smoothly.
HR building blocks
People make the business, and people policies determine the viability of a potential acquisition.
“We’ll observe the owners and employees to see if there is a chemistry,” says Hein of potential acquisitions. “If they are really flamboyant people that fly in the face of our conservative style, there would be a clash. We’ll meet them at tradeshows or on the golf course. In a short time, we’ll know whether we can get along. We try to get over the cultural hump at least on the executive level.”
This is important, because one of the keys to Chilcote’s success with acquisitions is to keep the leadership in place after the transaction is complete. It keeps the business running smoothly and helps alleviate employee apprehension.
“We try to minimize the intrusion for our acquisitions to make the process as seamless as possible,” says Hein. “We don’t want the people that work at the company we acquire to think that their job is going to be at risk. We’ve been able to do that by making sure the person we bought the company from is still in charge.”
When a company is purchased, the person in charge makes the announcement and explains the sale and that he or she will still be running the company. Then Chilcote executives talk about The Chilcote Co. and its culture and financial stability. After that, it’s a matter of aligning certain aspects of the business.
“The first thing we go after are the HR issues to make sure they are in close proximity,” says Hein. “We could never buy a company that was giving two-month vacations. We go in and make sure the handbooks are similar and that the vacations and holidays are the same.
“We don’t want to be working in Cleveland on Washington’s birthday if they are not working in Middleboro, Mass., but that’s what they do up there. So what we did was establish a program of a floating holiday. We didn’t want to take the benefit away from them, so we had to add more here in Cleveland. It’s good for the employees, but bad for the company, but at least now we have people working on the same page.”
Overtime, safety and other policies are lined up as best as possible. If a company has a policy that isn’t in line with what Chilcote does, it is negotiated.
“We’ve never been in a position where we’ve had to take anything away,” says Hein. “Maybe if a company had a super generous bonus program, if we felt it was not cost-effective to have that, then we would sit down and say, in order to maintain this benefit, we are going to have to increase profitability by 6 percent. How are you going to do that?
“Better buying because of the acquisition might get you 3 percent right there. By putting the hospital benefits together, maybe you get a 1 percent reduction. If you have to go out and get a 5 percent sales increase, how will you do it? That’s a mathematical equation and a financial reality.
“If we could not come up with a formula that could make that work, then we probably couldn’t do a deal.”
Joining a common health care package is one of the few changes required for the new acquisition.
“We try to change as little as possible,” says Hein. “But if we can spend $500,000 on health care rather than $600,000 on health care, I think everyone can understand that. We always look to the internal aspects first.”
The most difficult part of acquiring another company is dealing with regional cultural differences.
“We have a Northeast culture, a rural Kentucky culture, a Southern culture and we have a Midwest ethic here,” says Hein. “It can be frustrating. You have to have a different kind of feel for folks. We’ve learned that communication is very important. I give high marks to our people who have been involved in the integration process. Most companies do business pretty darn well, in any case, better than we could if we tried to do it ourselves. We give them a set of rules to follow. We still have differences of opinion, but if they do it better than we do it here, they can do it that way.
“There are still some feelings that we are competitors. It’s a hard thing to overcome. They always saw us as the enemy. Now that we are in the same family, how do we become friends?”
Differences in operations can cause internal struggles as cultures clash.
“But if something is working well, why change it?” says Hein. “In Massachusetts, they feel they have to be at every trade show, buy everybody dinner and have the latest in brochures and products, and that’s very expensive. We had to have an understanding. The previous owner was more liberal financially. We are more ultraconservative. They are not insurmountable differences, you just have to sit down and talk about what steps you have to take to deal with this expense account.
“There have been some casualties along the way. Some people leave. And more often than not, the people that left are probably the ones that should leave anyway.”
The Chilcote Co. is owned partially by its employees through an Employee Stock Ownership Plan, with the balance of the company still owned by the Chilcote family. While the employees eventually see the value of being an ESOP, it doesn’t make the initial acquisition any easier.
“It has to be hammered home on a continuous basis,” says Hein. “That’s why we go down there with two or three people and then follow up with levels of communication, not only about the ESOP, but also the soft aspects of employee ownership. It takes a while to get there.”
Hein says the company has been very liberal in applying ESOP rules to new acquisitions, giving employees credit in the ESOP for time spent employed with the acquired company.
“The ESOP is the undertow of what we are trying to do. If we can get everyone to think like owners, the whole will be so much better,” he says. “Closing windows, turning off lights and writing on the backs of paper — we are all doing things that a lot of people think are dumb, but that culture, once taught and ingrained, has a huge impact.”
The company has paid dividends for more than 35 years, and they have increased or remained the same for eight of the last 10 years. Communication at every level reinforces the value of the ESOP and ultimately helps Chilcote keep its employees.
“The older employees become prophets for employee ownership,” says Hein. “They tell the younger employees to not go across the street for a dime more an hour because in a month’s time, that company is going to have a layoff. They know their jobs are secure here. It’s money in the bank. We understand the company. We share that information so they know where we stand. We share the good information and the bad information.
“Tell me what’s going to happen here. That’s the kind of place I like to work.”
Continuous communication with the acquired companies is vital to the success of the organization as a whole.
“We communicate as much as possible,” says Hein. “We invite them here and we go there. We try to get in front of people as much as possible in other locations. We could do it over a conference call, but it is so less personal that way. It’s like the sales process: If no one ever bothered to come and see me, I’d feel somewhat slighted.
“We use memos and e-mail to stay in contact while trying to let them act as independently as much as we possibly can. You are not going to get 100 percent right. Of those things to get right, if you get 70 percent, I think you’ve done a good job.”
Communication is the thread that binds the acquisition process together and eventually ties the new company to the parent company, but the integration has no defined end.
“It requires complete diligence,” says Hein. “The integration process never does end. Sometimes what people say and what they think are different.”
You have to be aware that the leaders of the acquired companies may be looking for more input and guidance than they are asking for. It’s important to recognize and address this issue, Hein says, particularly because Chilcote values the human part of the equation.
“As we broaden our scope of acquisitions, we are going to add to our pool of knowledge,” says Hein. “Three people in a conversation is going to be better than one person thinking or talking to themselves. When we had our meeting in Massachusetts about research and development, I didn’t want the marketing people to just think about what the market needs and how to respond to it. I wanted the engineering people to not just think about what is the next greatest thing we can do faster and better, but why not put all the ideas together? We should all walk a tradeshow and spend six to eight hours together and then sit down over dinner and really share ideas.
“Is there a company that already has the equipment we need? Rather than us going out and creating a new wheel, let’s take advantage of what’s there. What I’m trying to do is bring more of us together to share knowledge rather than standing in our own intellectual capacity. There is too much knowledge and capacity in this country, and we need to take advantage of that.”
Acquiring minds
There are many reasons for making acquisitions: Diversifying revenue, gaining redundancy in capabilities and increasing marketshare are a few. But The Chilcote Co. is in a specialized niche that requires technical machines with skilled operators. It’s exactly this type of expertise and machinery that drives the company’s acquisition strategy.
“I look for manufacturing niches and professionalism,” says Hein. “I prefer to be a big fish in a small pond rather than a commodity player. All industries are consolidating, and you have to have something to hang your hat on. I’d rather be in something very unique with high entry barriers. You can’t go down and just buy that piece of equipment we have from Germany for less than $500,000. We also will take a standard piece of equipment and apply it to the market in new ways.”
Some of the companies Chilcote acquired were in danger of failing or falling into the hands of a competitor.
“Protecting our revenue stream was critical,” says Hein. “Who knows whether these companies could come back or become a threat to us.”
For example, the acquisition of Forest City Bookbindery was based purely on the need to secure Chilcote’s supply line. With a key supplier selling out, Chilcote bought Forest City, which could fill the gap.
“We were going to be out of a product because we didn’t have control of the manufacturing process,” says Hein. “That acquisition was based on need — an immediate and significant need — and there was an opportunity right here in the city of Cleveland. It allowed us to get a product to the marketplace much more quickly. We have control of the quality process because it is right under our nose.”
A similar situation drove the purchase of Wooden Nickel Albums of Benton, Ky. The company, the third largest distributor of Chilcote’s products, decided to sell to a group that wasn’t as interested in promoting Chilcote’s products as the previous owners. Hein exercised a provision in the distribution agreement that allowed Chilcote to veto the sale and bought the company himself.
“We told them we would buy their business,” says Hein. “We would get into the distribution business, putting us in competition with our own customers, which is a difficult philosophical position to be in.”
But it was better than losing a major distributor and suffering the related sales hit.
“It is probably an area of growth for us in the future,” says Hein. “We’re going to find places for us all over the map. It will be moving to the people who buy our products.”
With Lakeview Products, the acquisition offered a chance to pick up additional equipment and experienced operators.
“They had equipment that we did not,” says Hein. “We were doing something similar but on different pieces of equipment. They did something a little more sophisticated, so we ended up buying their company. It gave us a bigger presence in the commercial market. It was an opportunity to get some good people and equipment and add to our pool of talent.”
Rather than creating an operation from scratch, it sometimes makes more sense to buy an existing operation. The Chilcote Co. had just started to get involved in a particular manufacturing process in the late ’80s when the opportunity to purchase D. Davis Kenny Co., which already had mastered the process, came up.
“It would have taken us three to four years to get up to speed because of the learning curve and to get known in the marketplace,” Hein says of the process Chilcote acquired with the San Antonio-based firm. “They had already gone through that in the marketplace. There was no point in duplicating the effort.”
In each acquisition Hein has made, the new company had a piece of equipment that was not redundant with what Chilcote already had.
“In each case, it offered a different level of service or capability than we had here in Cleveland,” says Hein.
The company not only added manufacturing capacity, but expertise, as well.
“It was another set of eyes in the marketplace looking at capabilities and availability. Our guy down there was so knowledgeable about folded edge products, he knew exactly where a specific piece of equipment was. In a matter of weeks, we had a purchase order issued for it. Now that machine is working 20 hours a day, six days a week, and I’m not sure we’ll be able to keep up. They possessed knowledge that we did not. It was cheaper to buy it than to learn it.”
Redundancy was another reason factor that drove the decision. The company did some of the same things Chilcote did in Cleveland.
“We were under one roof, and if there was a disaster here, we would be out of the market and be exposed to losing it permanently to someone else,” says Hein. “I’d seen that happen to some of our competitors, and I felt we needed that redundancy, that insurance policy.”
Davis Kenny also had half of its revenue in commercial bookbinding and making products such as menus for major restaurant chains. This offered a related diversification of Chilcote’s product lines.
The company gained more diversification with entry into the retail photo greeting card market when it acquired Winthrop-Atkins in Middleboro, Mass., but it was the people who helped drive the final decision.
“It wasn’t necessarily what they could do, but their marketing aggressiveness and sales aggressiveness that attracted my attention,” Hein says.
The company also made presentation folders, something Hein was looking into manufacturing.
“We leapfrogged by 24 months getting into the market,” says Hein. “Whether you pay for it through research and development or through acquisitions, you still pay for it. We went with acquisitions. They have the customers, they know where they live, they have their habits and their telephone numbers. There is a built-in marketing strategy. Our salespeople were selling a lot already. To take on another load and learn another industry would have been a very cumbersome process.”
Acquisitions have worked well for The Chilcote Co. It has diversified its product line while staying within its core manufacturing process, created redundant operations in other cities to protect itself against disaster and increased revenue. But the most important acquisition of all is the people.
“We are a company that is not real deep in senior management,” says Hein. “When I look at these companies to acquire, it’s not to eat them up and fire a lot of people, but to acquire their expertise, their market share, to acquire their executive talent or even the people working on the machines or the people with engineering capabilities or the machine operators. These are the people we need to build the business from the bottom up.
“We don’t slash and burn when we buy companies. We are out there to assimilate them into our culture or for us to assimilate into their culture if it is better. So far, that’s worked reasonably well for us.”
How to reach: The Chilcote Co., (216) 781-6000
