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Written by Mike Buetow   
Monday, 31 March 2008 19:00
Talkig Heads ImageFresh off a short sabbatical, ex Speedline chief executive Pierre de Villemejane in March announced he would team again with the investment group that helped turn around his former company. As an adviser to KPS Capital Partners, de Villemejane will look for distressed companies in capital equipment, engineered products, and high value-added assembly industries in North America and Europe. KPS took the further step of actually inviting businesses to come to them, rather than waiting for the time-honored approach of bankruptcy auctions. He spoke with Circuits Assembly’s Mike Buetow in March.

CA: You have been hired to advise KPS in its acquisition activity. What types of companies will you specifically be looking at?

PdV: We’re looking at companies that have a fairly high content of engineering and product development. Broadly, we’re interested in companies that make value-added products in a different number of industries, where we can really capitalize on my background on managing highly engineered companies and processes. Those in capital equipment and machinery are of interest, obviously, given KPS’s Speedline background, but we are really extending our search to the broader engineered products, value-added and sub-systems assembly industries. We value companies where we can apply what we call “operating leverage”: Lean manufacturing, product portfolio redefinition, product development streamlining by implementing such management techniques, we can drive productivity and reduce time-to-market for new products. Also, we are looking at companies where we can take advantage of our Asian outsourcing experience. We’re looking for companies with sales of $500 million to $2 billion or more. These would be companies that are having some trouble, as that’s what KPS does: focus on distressed companies, ones that are close to the extremes, like bankruptcy, or orphans of a big conglomerate.

CA: Being purchased by a Special Situations fund can have implications, such as creating a level of uncertainty among one’s customers. Do you feel the success with Speedline will mitigate those implications?

PdV: Yes, and not only my experience, but that of KPS’s. They’ve done a lot of transactions. When they bought Speedline in 2003, they were just starting their second fund. They are now into their third fund. They have bought a number of companies in trouble and in bankruptcy and have done really well. They’ve transformed them into really good businesses. I should add that they have also changed their name to KPS Capital Partners, which gets away from some of the negative connotation.

CA: Having completed a successful turnaround, what are the key lessons you learned? And what would you try to avoid repeating, if possible?

PdV: I think the lesson I learned in terms of turnarounds is if you get in a situation where the company is in trouble and losing money, you need to stop the bleeding right away. That’s how you can build the company back to success. If you don’t stop the bleeding, there’s a lot of tension in terms of financing that can limit you insofar as what you are trying to do to turn the company around.

Second, you need to maintain a very, very strong focus on cash flow – even more so than on profitability or sales – to ensure you have the liquidity needed to grow or turn around the company or, depending on the environment the company is in, sustain the ups and downs of the industry. That was the key with Speedline; even when we were starting to do well, we needed the funds to grow the company when business went through the inevitable cycles. This is particularly true these days, with liquidity tighter than it has been.

The way most private equity firms work, they supply capital, but also make sure they leverage the company. So you need to have enough capital to grow and not be in a cash crunch.

CA: Public or private: Who has the advantage in today’s market?

PdV: I don’t know…that’s more of a personal view. I think private has the advantage in terms of flexibility. When you are private, you don’t have the pressure of meeting returns for a particular quarter or a particular year. There’s not that clock ticking every quarter. That gives you some flexibility. You don’t have to have a particular number for the balance sheet or for the end of the year. You manage the business like you need to with the obvious goal to create shareholder value within a specific period of time. And you don’t have all the cost of being public, like Sarbanes-Oxley compliance, which is driving a lot of companies to look to move from public to private. But in terms of financing, with it tightening, public companies may have an easier or cheaper access to capital.

CA: They say in real estate you make your money on the buy, not the sale. Does that hold true for equity investments?

PdV: Henry Kravis of Kohlberg, Kravis, Roberts was quoted recently as saying, “Any fool can buy a company. You should be congratulated when you sell.” That’s when you measure your success. Your value creation is when you sell.

 

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