While the Garden State’s manufacturing sector may be shrinking, some companies are getting second chances. In spite of the challenges currently facing the industry, entrepreneurs and investors are buying up struggling manufacturers and turning around the companies with the aim of making a significant return on investment.
“These are very tricky times for any manufacturing company,” says W.C. Bultman, president and CEO of W.C. Bultman & Co., a New Providence-based management and advisory services firm focusing on the manufacturing sector. Much of the manufacturing base in the country has gone overseas because of cheaper labor costs, he says. Meanwhile, the economic downturn has lowered demand for products, he adds. “That’s going to put a lot of pressure on manufacturing companies,” he says.
Thirty years ago, New Jersey had 25,000 manufacturers. Today, that number has fallen to 12,000, according to the New Jersey Manufacturing Extension Program, a Morris Plains-based nonprofit organization that provides services to manufacturing companies. The industry base is expected to further decline in the state, says Bultman, who estimates that at least one out of five manufacturing companies in New Jersey are, or need to be, in a turnaround situation. With the down economy, “there will be a lot of turnaround opportunities,” he says. “I think you’re going to see a lot more of it in the next two or three years than you did in the last two or three years.”
Most investors shy away from companies that are losing money, but those who take the risk can reap rewards. “There’s a lot of upside return if you make a successful turnaround because you buy on the cheap and sell on the high side,” says Bultman, who estimates that about half of manufacturing turnaround attempts are successful.
One manufacturer currently being revitalized is Cheney Flashing Company, a Trenton-based maker of metal waterproofing material for buildings. In 2006, Richard Levine, a former commodities trader on Wall Street, and his brother, Harry Levine, a former real estate developer, purchased the then-78-year-old family-run business from its third-generation owner.
The two entrepreneurs sought a company that had a brand widely recognized in its industry but was under the radar of private-equity investors, according to Richard Levine, president. “We were looking for a situation where the target company that we wanted to acquire was not making much money,” he says. “We were hoping not to have to pay a significant financial premium for the acquisition.”
Since the buyout, sales at Cheney Flashing have risen by 250 percent, according to Richard Levine, who has invested more than $1 million in the business. The new owners have developed a five-year plan that would ultimately increase the company’s current sales by 400 percent. The company, which was operating at a marginal loss when purchased, is now operating on a six-figure profit, says Richard Levine. Rather than set a target return on investment, the new owners are focused on maximizing the value of the company for when they eventually sell it.
The turnaround is partly the result of investments in new machinery that allows the business to produce orders in one-fifth of the time previously required. The improved efficiency has reduced factory labor costs, which has allowed the company to drive its product prices lower in order to attract a greater share of the market, he adds. Richard Levine has also been aggressively reaching out to the top 20 masons in the country, and says his firm now does business with six of those companies.
But not every troubled manufacturer can be saved, says Lawrence Katz, executive managing director and founder of Summit Private Capital Group, a Cedar Knolls-based merchant banking firm that finances and restructures hurting manufacturing businesses. Katz says he looks for companies that have lost money but have a solid management team and a business plan that will enable the firm to weather tough times. “Most [manufacturing] businesses that are losing money don’t have a plan,” says Katz. “They’re just holding on for their life.”
Many manufacturers put themselves in jeopardy by failing to establish a range of customers, especially when companies are increasingly moving production overseas, he adds. “The problem is that small to medium-sized manufacturers do not have a diversified customer base,” says Katz. Many plastics and metals companies, for example, rely primarily on one customer for their business, he notes.
It’s important for manufacturers to create a niche for themselves, says Bob Loderstedt, president of NJMEP. “There’s a large enough marketplace for a small company’s products and services if you have some differentiation,” he says.
But even manufacturers on more solid footing worry that they will get put out of business by the competition. Unlike many other manufacturing firms, Cheney doesn’t find foreign firms to be a major threat, says Richard Levine. Because flashing material is heavy and tends to be ordered on relatively short notice, it would be too cost prohibitive and require too much time to ship from overseas, he explains.
The manufacturer, however, fears losing customers to more local companies.
One of the company’s concerns is that the industries it supplies will substitute sheet metal products with products that are cheaper, says Richard Levine. Prices for raw materials such as stainless steel, aluminum and copper have risen substantially in the past five years, he says. “We run the risk of pushing the cost of our products so high that there are more substitutes sought and taking market share away from us.”