Robroy Industries is a family business built through serial acquisition. In fact, every product the 103-year-old industrial conglomerate sells today is produced by one of the 17 companies acquired by the second and third generations of the McIlroy family. As the fourth generation prepares to assume leadership at company headquarters in Verona, Pa., near Pittsburgh, they’re planning to follow the acquisitive path.
That strategy has served the company well in many ways, according to chairman and CEO Peter McIlroy, grandson and namesake of the founder. Robroy has used it to diversify against risk, expand product lines and increase market share, fueling a steady growth in sales to well over $100 million annually and generating profit margins approaching 20%, truly spectacular for a basically low-tech industrial manufacturer. With no debt on the balance sheet and five strong years behind it, the company is poised for further expansion.
The McIlroy acquisition strategy has been handed off from generation to generation like a baton in a relay race. Peter’s father, Bob, brought him into the company in 1965 as a “floor boy” in one of the plants; in 1977, he masterminded his first acquisition under his father’s watchful eye. Peter’s own sons joined the company in the 1990s and helped in the takeover of two rival companies in 2001 and 2003 under the tutelage of Peter and non-family president and COO David Marshall. They’ve accepted the baton and are preparing to carry it down the next stretch.
Though acquiring companies has been effective for Robroy, the deal making has not always been executed perfectly. “Sometimes we got it right and sometimes we didn’t,” the 65-year-old McIlroy volunteers. “Sometimes we thought a company was in a niche that fit our business and had potential for good margins. After we bought them, we found our assumptions were not correct.” Several of the 17 companies bought since 1961 turned out to be less than perfect fits; one or two of them were out-and-out disasters that threatened the company’s survival. Even those acquisitions were valuable, though, in that important lessons were learned.
Early growth
It all began when patriarch Peter McIlroy, the current CEO’s grandfather, emigrated from Adiewell, Scotland, to McKeesport, Pa., where he landed a job in a steel mill earning five cents an hour as a machine operator. In 1905, he and a partner (whose estate sold its interest to the McIlroys after his death in 1950) founded Enameled Metals Company in a garage in Etna, Pa. Their product, an innovative paint coating, proved to be a boon to another new product just coming on the market, steel conduit used to carry electrical wires. The company had its ups and downs, surviving the Great Depression, labor problems, fires and even the Great Flood of 1936, during which water rose so high it flooded the vats of enamel in the company plant and floated it all over the town of Etna. When the waters receded, everything in town had a coat of shiny black paint.
When Bob McIlroy, one of Peter’s three sons, was named president in 1953, a relentless expansion of operations began that has continued to this day. The first acquisition was in 1961, when a manufacturer’s rep suggested the McIlroys look at a tiny Texas company that was putting plastic coating on Robroy’s steel conduit. Bob bought Houston Coating and Bonding for $25,000. The product it manufactured, Plasti-Bond Coated Conduit, is Robroy’s premium line today.
That acquisition also established the pattern for many of the successful deals to come. Not long after the takeover, the Houston plant was closed and the manufacturing operation moved into a new plant that Bob had built earlier in Gilmer, Texas. In 1967, the company became Robroy Industries, freeing it from identification with one product. The name was a combination of Bob’s name, “Robert,” and the “Roy” in McIlroy. Bob’s son, Peter, became president in 1980, CEO in 1988 and chairman in 1993.
A three-legged company
Robroy is essentially a stool with three acquired legs. The coated conduit business is the strongest of the three, representing about 65% of sales. It was shored up considerably by the two most recent acquisitions in 2001 and 2003, which gave the company three of the four leading brands in the business and an estimated 50% to 60% share of the market, according to Rob McIlroy, 38, one of Peter’s two sons. The only competitor in the coated conduit business is Ocal, a product line offered by $2 billion electrical industry behemoth Thomas & Betts.
The other two legs are roughly equal. Stahlin Non-Metallic Electrical Enclosures was acquired in 1977, and Duoline Technologies was bought in 1985. Stahlin makes molded fiberglass and plastic junction boxes from three to 90 inches tall, while Duoline produces corrosion-resistant PVC and fiberglass lining for oilfield steel tubing. Peter’s older son, Jeff, 41, has most recently served as the international business manager for Stahlin, which he says gave him a great appreciation of how important it is to uphold operational standards of excellence.
The two electrical product divisions serve the industrial construction and civil infrastructure markets. Peter says these markets are countercyclical, so the company hasn’t been much affected by the recent slowdown in residential and commercial construction. The oil field business, of course, is very strong, although he reports current problems with hiring a workforce in that labor-starved industry.
Learning from mistakes
While these and several smaller companies turned out to be good buys for Robroy, not every venture produced the desired results. The failures generally followed a pattern. The target companies tended to resemble Robroy’s other manufacturing businesses and used some of the same processes so it would appear that synergies—that well-known buzzword of the M&A world—were plentiful. But large problems arose when Robroy tried to compete in markets where it had no experience.
One of the first missteps was Warren Corporation, a company that made metal laboratory furniture. It was acquired in 1963 and moved into the then-unused Verona plant. It was never successful and eventually closed down. In the late ’80s, Robroy bought a metal enclosure business thinking it would fit with the fiberglass box operation. “It turned out to be such a commodity business that we eventually sold it,” Peter explains.
The worst foray into uncharted waters, though, was the 1990 acquisition of Trimm, a company that made computer enclosures. “That was really outside our core competency,” says David Marshall, Robroy’s president and COO.
The thinking at the time was that Robroy would be able to add value to the product through engineering, according to Peter. But, he says, “it turned out the customers saw it as a commodity and the pricing was very unattractive. On top of that, we’re kind of an old-line meat-and-potatoes business, and we’re not swift enough to develop products for the high-tech computer industry.”
There were internal problems, too, Peter adds. “We couldn’t integrate Trimm, for example, in terms of marketing and manufacturing,” he notes. “There were some similarities in metal fabricating, but the culture in the computer industry was totally different. It stood alone because there was no connection with anything else we did. We even had trouble integrating them from an IT standpoint.”
Another factor that undermined Trimm’s success was the largest intangible of all, according to Robroy CFO Mike Deane. “It all goes back to the people equation,” he says. “The people who came along with it weren’t creative and talented and diligent.”
On the positive side, Peter says, the Trimm fiasco demonstrated the wisdom of diversification of risk: “We had a lot of losses during that period that lowered our net worth. If our other divisions hadn’t been so strong, we would have been out of business.”
It was ten years before the Robroy team made its next move. When they did, they applied all the lessons learned to make sure the next acquisitions were successful. According to Peter, “The three most important things are, one, buy the right business, one that’s profitable as opposed to one that’s inherently low margin and trying to change it. Two, install operational excellence. Three, have a corporate culture of your own choosing. If you don’t develop a corporate culture, one will be developed for you that you might not like.”
Easy integration
PermaCote and KorKap, the coated conduit competitors acquired in 2001 and 2003, were almost the exact opposites of Trimm. “We knew what we were buying,” Deane explains. “We were very familiar with the products, the market and the customer base. In addition, we were able to plug them into our current operation, which was fantastic. We were able to take advantage of economies of scale, throughputs and absorption. We were able to add volume without adding any fixed costs.”
Essentially, when they bought the two companies, all Robroy acquired were the brand names, customers and distribution relationships. As Rob McIlroy points out, “We bought no bricks-and-mortar, no people, not even any machinery.” Without any acquired employees, there was no need to integrate benefit plans, payroll records and the like, much less deal with the attitudes and culture of another workforce.
Robroy didn’t even bother to acquire the work-in-progress inventory of the companies, according to Marshall. “If you have, say 2% of the value of your inventory in WIP, the cost of trying to handle that may be more than it’s worth,” he explains. Since Robroy didn’t buy the physical plants, it made no sense to move half-finished products to Gilmore.
The plants and employees may have been jettisoned, but the customers weren’t, according to Marshall, who says a major part of the company’s planning for an acquisition is ensuring that as many buyers are retained as possible. It’s not difficult, he says, if you recognize a key principle: “The customers aren’t really attached to a company; they’re attached to the goods and services they provide. For most customers, the fear is that change will cause disruption. If you eliminate that, the customer base adapts very quickly. Ensuring that you do nothing to diminish and everything to enhance the service they receive really makes it simple.”
Integrating systems
Robroy also worked to maintain the acquired companies’ distribution networks, since the company has exclusive representation deals with distributors in the coated conduit lines. “Today,” Peter says, “we won’t acquire anything unless we’re prepared to integrate them quickly and fully into our information systems. Having access to an enormous amount of information on a real-time basis is so important in this company because of our performance measurements leading to operational excellence. We could never get that in a company we acquire if we can’t use our own information systems quickly.”
“You really have a choice,” Marshall explains. “Do you operate more than one IT system, which will add cost somewhere, or do you standard-ize the system and adapt the people’s behavior? It is probably, long-term, a lot easier to adapt the user’s -behavior.”
All Robroy divisions are run using the same off-the-shelf software package and the acquisitions are integrated into it on Day 1, a tactic that was adopted with the PermaCote and KorKap takeovers. “There were some challenges with our bills of material, our part numbers, and our order entry,” Deane recalls, “but once we overcame those, it was pretty much plugged in.”
As little as possible is left to chance, according to Marshall, who says the takeover planning itself takes 60 to 90 days and occurs while the due diligence is going on. “You’re learning and planning at the same time,” he says. “You’re not trying to attack all the issues the day the deal is done. If you identify the priorities and think through the issues around the priorities, you’re not taken by surprise.”
The company decentralized operational management in 1995, another lesson about absorbing acquisitions learned the hard way. “By decentralizing and putting one person in charge of each business, we got accountability and speeded up the process of making decisions,” Peter says. The company went from 58 people at headquarters to 14 today.
Planning for the future
As you might imagine, surprises aren’t high on Peter McIlroy’s hit parade, so he’s working on a long-range succession plan already. Peter will retire when 57-year-old David Marshall retires, he says, but that’s not happening anytime soon. In preparation, though, Peter’s two sons moved back to headquarters this year specifically to gain experience in corporate affairs after working in operations since the early 1990s. Jeff has been with Stahlin, while Rob has been leading national sales for the coated conduit companies.
“They haven’t seen what goes on in acquisitions, what goes on in legal battles, accounting, IT, the other things that are centralized here,” Peter explains. Robroy has fought its share of legal battles, particularly with unions, including one that landed on the front page of the Wall Street Journal in 1937. Strikes in the late 1950s caused the company to close the Verona plant for two years and prompted the eventual move of manufacturing operations to Texas. “My goal is to let them see the non-operational side of the business and to work with me so they’re prepared to make their own decisions when the time comes,” Peter says.
Peter’s son Jeff confirms that the future almost certainly holds more acquisitions for Robroy Industries. “We’re never satisfied with the status quo,” he says. “A lot of family businesses that reach the fourth generation kind of peter out. My brother and I are very committed to seeing this company continue to grow profitably.” FB
Dave Donelson, a business journalist in West Harrison, N.Y., is also the author of Heart of Diamonds, a novel about diamond smuggling in the Congo.