Until last December, The Oilgear Co., a Milwaukee manufacturer of hydraulic pumps, valves, controls, cylinders, motors and fluid meters, was a thinly-traded public company. Oilgear then became the first publicly traded Wisconsin-based company to be taken private by a private equity firm in years.
The company was bought in December by Mason Wells of Milwaukee. Minority shares were bought by Richard Armbrust, who became the company’s new president and chief executive officer, and Roland Parker, who became chief financial officer.
The purchase price has been estimated at about $70 million, including assumption of liabilities such as a pension plan and other financing costs. More than 2 million in outstanding shares of stock were bought at $15.25 per share.
The purchase transformed Oilgear into a privately held company. The company needed to be taken off the Nasdaq Stock Exchange, its new owners say, because the pressures of being publicly traded were not paying off.
Tough market
Between 2001 and 2003, the company lost about $9 million during a downturn in the fluid power transmission industry. In 2004 and 2005, Oilgear recovered with profits of about $251,000 and $2.1 million, respectively, when the industry began to recover.
In 2003, Oilgear retained Cleary Gull Inc., a Milwaukee investment banking firm, to help raise profitability and bring the company to market.
Oilgear was a natural take-private candidate because of how difficult it would be to grow as a public company, according to John Peterson, a managing director of Cleary Gull.
Beginning in 2001, there was extensive consolidation in the fluid power industry, leaving Oilgear as one of the smallest players. Oilgear’s larger competitors had broader product offerings, and if Oilgear was to pursue an acquisition, it would face tough bidding from those better-financed competitors.
“Effectively, they had no access to equity capital,” Peterson said. “There isn’t a market for a company of its size to sell more stock to increase the size of its business.”
John Byrnes, executive managing director of Mason Wells Funds, agreed.
“It was undercapitalized, and it suffered as a result,” he said. “We think that the unnecessary expense and complexity of being public made it a good candidate for a go-private transaction.”
Reporting challenge
One of the biggest obstacles facing Oilgear as a public company was the looming requirements of the Sarbanes-Oxley Act of 2002 (SOX). Passed after corporate scandals at publicly traded companies such as Enron and WorldCom, SOX has stringent accounting requirements for publicly traded companies, and stiff penalties for noncompliance. Those requirements are even tougher for companies with geographical footprints similar to Oilgear, which is based in Milwaukee, but operates plants in Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Korea, Mexico, Spain, Japan, United Arab Emirates and the United Kingdom.
“When you’re both a widespread organization and a small company, you don’t have a lot of resources in all of your locations,” Armbrust said. “The difficulty comes into when you have widely spread operations. You’ve got to have bulletproof accounting in all locations.”
SOX compliance for Oilgear was expensive, Armbrust said.
“Because of the penalty side if you get things wrong, you have to be more diligent, and your bills go up,” he said. “I’d rather spend my money on new products and salespeople that add value to the business. (Going private) puts us in a position where we have the ability to do those kinds of things downstream.”
Amy Connoly, vice president with Grace Matthews Inc., a Milwaukee middle-market investment bank, said SOX-related costs for a company such as Oilgear can easily reach $1 million per year.
“Those are huge savings for a company of that size,” Connoly said. “And with public filings, you need attorneys to do them with. Quarterly earnings statements can also be a management distraction when you’re a smaller company like that.”
Oilgear will save about $2 million per year because it no longer needs to comply with SOX, Parker said. The company has cut its expenses for legal advice, insurance for its board of directors and re-filings of financial statements, he said.
Despite the challenges it faced as a public company, Oilgear’s strong position in its market and its potential made it a highly attractive acquisition target, Armbrust said.
“It’s a good opportunity for me to provide my experience to the company and do what I’ve been doing all my life,” Armbrust said. “I’ve helped lift companies up and take them to a higher level. I think I can do that at Oilgear.”
Both Parker and Armbrust have extensive experience running public companies as high-level executives and presidents. Parker previously led several companies owned by New York-based Dover Corp., a global manufacturer of industrial products. Armbrust previously worked for Bowling Green, Ky.-based Renaissance Mark Inc., London-based Invensys PLC and Switzerland-based ABB Ltd. Both Armbrust and Parker have helped turn around companies that weren’t performing well.
“They’re a perfect fit with the deal – we would not have pursued it without them involved,” Byrnes said.
Mason Wells also liked Oilgear’s global footprint, which has access to markets in India, China and other developing countries.
“The thing most people don’t realize is that half of the business (Oilgear) is international,” he said. “The thing that appealed to us is that it was a way for us to participate in what is happening globally with a company that has a local footprint. For a fund like ours or anyone from the Milwaukee financial community, to create beachhead investments in China or India is difficult. With operating talent that has experience in those markets, we felt we could leverage our capital more effectively.”
Growth plans
Going private has removed distractions commonly associated with running a public firm, Armbrust said, including shareholder meetings, filing financial statements and meeting with a board of directors that might have many different agendas.
Furthermore, privately held companies can invest more in research and development that could pay long-term dividends, without worrying so much about meeting Wall Street or shareholder expectations for net income in the current quarter.
“You can do what’s right for your company, not just what’s right for this quarter,” said John Beagle, managing director at Grace Matthews.
“A private equity firm is a good source of capital,” Armbrust said. “Their interests are usually closely aligned with yours, and therefore your board (of directors) will be closely aligned with yours.”
Oilgear’s new leadership has plans to triple the company’s revenues to $300 million within five years.
The company is now closely examining its suppliers’ prices and its own in-house processes, Armbrust said. That process will free up additional capital for research and development and market research.
“It’s not a defined plan to precisely go from A to B,” Armbrust said. “We know we’re trying to get the company to a higher profitability, more commensurate with our industry and competitors.”
Oilgear does business in three categories – custom systems engineering, high-volume manufacturing and after-market repairs. Each of those markets and the divisions that serve them are being examined separately, Armbrust said.
Centralizing some basic office functions could both simplify the company and result in savings, he said.
“We need to have a low gross margin structure, and share resources with our people,” he said. “The office structure is decentralized. There needs to be more of a resource-sharing model to the company itself. We have lots of offices. There are a lot of intangibles around being local that gives us a lot of advantages. But if you don’t manage those carefully, they can be disadvantages.”
Although the company is looking for efficiencies, it has no current plans to reduce its workforce, Armbrust said.
“There should be no massive changes one way or another,” he said. “Will there be some tweaking and moving some product lines around? Yes. Will we be closing plants? No.”
Additional marketing also will play a big role in the company’s future, Armbrust said, capitalizing on the company’s extensive engineering and technical know-how.
“We can evolve ourselves from making the same money as our peer group to investing in a more clever fashion than our peers and growing, hopefully, at the expense of our competitors,” Armbrust said.
“Oilgear is richer in technology and people resources than we thought from a technical standpoint,” he said. “I think we have more to work with than we perceived initially.”
Equity incentive
Partnering with a private equity firm behooves Oilgear, Peterson said, because additional capital will be available if it is needed.
“They now have access to a bigger equity capital base,” he said. “If acquisition opportunities arise, the company has a way to take advantage of it.”
Acquisitions are likely in Oilgear’s future, but they won’t happen until at least six months from now, Armbrust said.
“The business and management have to earn the right to make an acquisition – they have to show they can make this business work before we buy another company for them,” Byrnes said. “We think Rich and Roland are capable managers, but they have a lot to do before we start looking for other things.
“Usually, after we’ve been in a deal for a couple of years, other things come to us. I’d guess there’s a 50-50 chance we’d do one in three years.”
The rapidly growing private equity market has purchased many publicly traded companies in recent years, particularly on the East Coast, where billion dollar funds have taken several Wall Street players private.
Mason Wells will likely keep Oilgear for five to seven years, Byrnes said.
“Any time you get past 24 months, it’s difficult to predict,” he said. “All you can have is a strategy. Our attitude is that we think it will take five to seven years to accomplish all of the things we want to do with the business. It may go faster, or it may take a little longer.”
Although Mason Wells will probably sell its interests in Oilgear some time in the future, Armbrust is not concerned about who the next buyer might be.
“The truth is, when you get companies like Oilgear, they’re usually better companies afterwards (being owned by private equity),” Armbrust said. “And when you’re a good company that’s being sold, the likelihood of you remaining in charge is good. The buyer doesn’t want to change the formula when you’re doing well.
“The only thing you can control is your own performance,” Armbrust said. “And if you improve that, you control your own destiny.”
Both Armbrust and Parker are Wisconsin natives. Both are married with families and want to keep their company in the Milwaukee area for the long term.
“I don’t envision myself retiring,” Armbrust said. “I can see myself working at 75 or 80 years old. It’s a logical step to say, ‘I’m going to get into more of my own business, find a way to grow it and do locally what I did for the large companies I’ve worked for.'”
The Oilgear Co.
Address: 2300 S. 51st St., Milwaukee
Industry: Manufacturer of hydraulic pumps, valves, controls
and related equipment.
Employees: More than 700, including about 210 in Milwaukee.
Revenues: About $100 million for 2006.
Web site: www.oilgear.com
Ownership: Mason Wells, a Milwaukee private equity firm, holds a majority share. Richard Armbrust, president and chief executive officer, and Roland Parker, chief financial officer, are minority shareholders.
