What was your position at Marsulex?
L: I was hired as the CFO because I had operating experience. But they also were hiring an operating person with good business judgment. This was the first time I was exposed to private equity so I had gone from the big corporate Suncor to an entrepreneurial Dynatec.
So what was their perceived need? Did they have a CFO?
L: Marsulex had been spun out of CIL, so it had been operating for five years.
At first, it was “manage the cash and pay down the debt” because it was a leveraged buyout and private equity-owned. The first CFO had come from CIL and left after three years. Somebody from the private equity firm was the acting CFO for the two years prior to my arrival. When I arrived there was recognition that they wanted to keep and grow the business and creating a new management team was necessary to achieve all of that.
Who was the original Private Equity group?
L: Brent Belzberg and David Bookbinder when they were at First City. After First City they formed Harrowston and acquired Marsulex from First City.
Tell us about life at Marsulex.
L: It had started with divisional management. I had come out of CIL and was running the business with help from private equity. Now it was time to take it to the next level. I still remember the first three mandates or goals that I was given — probably a good thing for a boss to do with a new employee. That avoids having to figure out what the priorities are.
I was given the goals the day I arrived and one of them was find a new system. I didn’t know anything about systems. I knew I would have to deal with the offices. There was essentially a U.S. head office and there was a tax issue that needed addressing. I knocked the first two off in the first couple of months that I was there. The challenge was the new system. Marsulex came out of CIL, and CIL actually happened to be the first Canadian SAP installation of SAP. The SAP system at Marsulex had not been updated because it was very customized if we wanted to stay with SAP we would need to treat SAP as a new install. What I was told was that we needed a new system. SAP had already had the reputation of being difficult to operate and expensive and so I could do anything I wanted as long and it wasn’t SAP. However, the first thing I determined was that the only real solution was SAP. I was starting off not knowing anything about systems so I had to figure that one out very quickly. The fact that I didn’t know anything about systems and that I had to learn it on the fly allowed to be unbiased and therefore I chose SAP as the best solution.
You came in unbiased, other than what you were being told?
L: I didn’t even know what SAP was when I arrived. That was an advantage of just using some basic business judgment and logic and going through the analysis and coming up with the conclusion that I couldn’t do anything but SAP. The simple reason was that we already had a lot of the efficiency built in as a result of using an enterprise-wide system and to go away from that would have been a backward step and we couldn’t have operated efficiently without adding more staff. Try and tell someone that you need to put in the new system and by the way we have to add staff — that just wasn’t going to fly. Needless to say a big challenge was convincing the board that we needed to put in a new SAP installation. But that’s what we did; bearing in mind the strategy was to grow the business so that it was consistent with the strategy. SAP is highly scalable so if we had done anything else we would not have been able to grow the business the way we did and integrate businesses into Marsulex. It became the backbone from a systems perspective.
What was the cost, over what time period?
L: It was over $2 million, over the course of less than two years on top of whatever the licenses would be. It was the second biggest capital project that the company had in its history until then.
Did it work?
L: It was one of the few installations at the time that was both on time and on budget. The methodologies that we developed, SAP actually adopted to install in medium-sized or businesses of a similar size. It accomplished everything we said it would and we were did it both on time and on budget – and it touched everyone in the business.
Well, if you think about the cost, we had about 100 employees. At that time the new version of SAP was what we all take for granted today thinking of Windows and how intuitive that system is, everything prior to that was still DOS-based. We hadn’t invested in any PCs; we still had a lot of terminals inputting into a mainframe, so it was a terminal mainframe environment. There were two things that became very clear. One was that I had only a half dozen people that knew how to use a PC. Everybody else was operating with a terminal on a mainframe. We had to teach everybody how to use a PC as well as how to use SAP. I realize it wasn’t wise to do both at the same time so the first half million was spent buying everyone brand-new PCs. This was 1994 and PCs still were not commonplace in the business environment. We did an acquisition of a business in 1996 of a couple chemical plants in operation and the first thing I did was integrated them into SAP. Again, the same issue came up where the only computers they had were three or four PCs in a room all together and if somebody wanted to one he went over from his desk and used the computer in a separate room. Nobody had a computer at his desk.
How did you go about installing the system and training the people?
L: The advantage of not having much systems experience was helpful because I too had to learn it, using a combination of experts and advice and one thing I have gotten pretty good at is knowing how to decipher who is a good advisor and who is not. The other aspect of the install was my experience at Suncor and to a certain extent, both at Tricil and Dynatec. I learned at Suncor how to execute capital projects and the biggest mistake people make in terms of systems projects is that they forget that it is just a capital project. The easiest way to blow your budget and your schedule on a capital project is to change the scope after you start. Most people change the scope on a systems project or never define it at the start.
We determined what the scope was, and insisted on a couple of simple rules. One was to not allow anyone else to change the code. We changed it twice and that was only because SAP agreed and said that we needed to and they changed it for us. But otherwise it was a pure SAP application as it was intended. The second thing was that we didn’t change the scope. It was run like a capital project, which I think some people found strange because no one ran a system installation like a capital project.
What about the tax issue?
L: That was more of a straight analytical exercise and that one I was able to accomplish. Management thought it was probably a fairly significant thing and I was able to justify by using basic analysis to figure out what we needed to do and so that one was probably pretty easy to knock off.
And dealing with the other offices?
L: That was what you would call more political. Having two administrative offices didn’t make sense from a business point of view. The tough part about that was that we had to let everybody go out of one office and consolidate it and so it was a case of a half a dozen lay offs in Connecticut and hiring half of the people back in a different location.
It didn’t make any sense that the office was in New England. The two offices didn’t work well together and the tough part was the feeling was that there could have been greater savings but because a many were finance and admin staff, it allowed me to hire the right people in one Toronto location. It was a little bit of a reverse with what typically happens with Canadian companies where the jobs in Canada are eliminated and moved to corporate offices in the US. It was the opposite of that but it wasn’t an easy decision because you are laying off people and you then have to rehire them in one location. It didn’t make sense long term to have two offices.
What were Marsulex’s prime functions at this time?
L: At the time Marsulex was primarily a chemical distribution business and didn’t have any operating plants. From the point of view of the biggest contract, the business involved taking all of the sulfuric acid out of a smelter and moving it to market. We had the infrastructure to do that all the way from the railcars to the storage capacity closer to market. Pretty traditional chemical sales and distribution. Starting in 1996 we acquired our first chemical plants and Marsulex was predominately a chemical manufacturer with chemical operations by the time I took over in 2004 as the CEO.
Sulfur and sulfuric acid or SO2 was a major chunk of the business, but our biggest customer group at the end was refineries for which we processed byproducts and waste streams or emissions. So we touched on chemical, manufacturing and environmental services and as a broader definition we were in industrial services.
What was that like when you had the keys to the kingdom finally in 2004?
L: What was different for me was that I felt like I had been in training for most of my career to become the CEO. It wasn’t as if I suddenly found myself as the CEO, not knowing what to do. I felt I knew exactly what I wanted to accomplish. When I took over as CEO in 2004, ownership of Marsulex had changed. We had become a public company in 1996 but still private equity controlled it. There were new private equity owners when I was appointed in 2004. TD Capital bought Harrowston and its managers were spun out of the bank to form Birch Hill, primarily comprised of ex managers from TD.
The feeling was that I was capable of getting them to a transaction or to an exit. The private equity owners are always going to exit the business and I think they saw me, given my background, as someone who was really there to provide that exit. I wasn’t given a mandate to grow the business but I took it back to the board that I felt that there was an opportunity to do more with the company. Rather than being a short-term CEO for an exit, I ended up holding the office for close to seven years and the company became substantially larger.
What was the measure of that? How much larger?
L: We more than tripled the number of employees and doubled the revenue. But from a profitability point of view, it was close to three times. There was no more equity put into the business and we actually paid down debt through that period of time. I was running the operations from the time Birch Hill/TD Capital (if you look at them from a fund perspective) took over and by their measures it was a four and a half times return of capital for them and over $200 million of value created. From a private equity perspective these are good returns.
What new measures did you suggest when you went to the board?
L: It started with a couple of acquisitions and it was a combination of that and organic growth through that period of time to create that value.
What were the major leanings from the seven years? What was different?
L: Most CEOs need to be conscious of is the statistic concerning CEO longevity — and it’s something like eighteen months. So there are two things. You need to survive more than a couple of years so you had better have a plan in terms of what you will do with the business. The second is that even if you have three to five years of success, you then have to reinvent yourself and the company somewhere along the way. Most strategies and most things that you can do with the business only last for that amount of time. There are a host of reasons why CEOs are going to fail early. If you take a look at it then, the complacency can set in and if you don’t reinvent yourself, you are going to hit a wall. I was very cognizant of the reasons CEOs fail. When you are private equity-owned, you also know that your job is ultimately to create shareholder value through an exit. All CEOs must create shareholder value but the difference for private equity is that they also want to be able to liquidate and exit the business, which means the business is going to get sold and usually you are going to exit with it. You have to make sure that you can take the company to the next level while at the same time you have to be ready to exit the business.
How did that moment arrive?
L: It’s challenging because at Marsulex, after being CEO for seven years, things were starting to hum. The more successful you are, the more likely it is that you can create that value and that exit for the shareholders, so it is always a challenge to see all that disappear, especially when it goes to somebody else.
How did you feel at that moment? You knew it was coming.
L: There are always mixed feelings on that front and the reality is you have done your job and you have done your job well and at the same time it is hard to let go. In our case, it wasn’t a liquidation. Most of the employees continued on but the management team didn’t. Ironically, you have spent a lot of time and effort creating a management team because you have the option of running the business. But at the same time, if the business is sold, that management team will be dispersed.
How many people were on the management team? What happened to them?
L: There were six divisional people, on the next level down. My direct reports left, with the exception of one.