Jim Karman co-led more than 200 acquisitions as president and COO of RPM International Inc., working alongside his college friend and retired RPM Chairman, Tom Sullivan. But there’s just one that sticks in his mind for the wrong reasons.
“We only had one deal that performed below expectation, one that we wished we had not done,” says Karman, whose M&A expertise helped grow RPM into a $3 billion company.
The failed acquisition was a turnaround play, which he now warns others against pursuing.
“Don’t waste your time on those when there are so many good companies out there to buy,” says Karman, who retired in 2003. “These companies have good management teams and people you can get along with who know their business. They also have a good track record and a good reputation in the industry.”
This week, Karman reflects on the deal that convinced him to steer clear of turnaround acquisitions and other lessons learned from his dealmaking career.
When one problem leads to another
It was the 1970s, and RPM had an urgent need for steel drum containers that could be used to ship its product. Along came Globe Steel, a producer of steel drums that just happened to be located in The Flats.
“When Globe Steel came up, we thought it was a way to solve that problem,” Karman says. “It wasn’t to get into a market or grow a company, although we probably hoped that would happen. It was a supply situation. We didn’t look at it very carefully from an earnings standpoint. We just said, ‘This will solve our problem.’”
Instead, it created several new problems. Globe Steel wasn’t profitable. It was selling a commodity in a price-sensitive industry, which made it very difficult to boost revenue. So, after a couple of years of trying to make it work, RPM found a buyer for the company.
“The people that bought the company weren’t interested in the steel drum business at all,” Karman says. “They just wanted the location in The Flats and turned it into a big entertainment complex. So, for every reason, it just wasn’t right. That’s the only one we went into not thinking to add a product line or some new lines to RPM. It was the wrong thing to buy.”
M&A isn’t a cure-all
Nearly as risky as making a turnaround acquisition is the belief that buying another company will solve what ails your business.
“It gets you in the wrong field, like getting in the steel drum business,” Karman says. “That was going to solve a problem. No more worries about getting steel drums. But it created its own problems because we did not know the business.”
Consultants will often advise companies that are struggling to look outside of their core expertise to build a new market.
“They will come in and say, ‘Well, you’re in this industry, but this one is kind of close to it.’” Karman says. “‘Why don’t we make some acquisitions in that field and solve your problem?’ That doesn’t work.”
Seek out familiar faces
There are, of course, no guarantees in dealmaking. But one way to minimize your risk is to approach acquisitions organically, working through companies you’ve previously acquired.
“If the president of Rust-Oleum brought us an acquisition, you can be pretty sure he’s careful about who he is bringing in,” Karman says. “When you join us, one of the questions we ask is, ‘Do you know other companies, maybe even competitors who are in our business, who might like to come with us?’ We made a lot of acquisitions that way, with companies that were formerly competitors, and they worked out well.”
Follow a checklist
Every time RPM made a deal, Karman would bring a 100-point checklist that laid out everything that needed to be done to maximize that deal’s potential. The document was constantly evolving to incorporate new lessons learned and remove items that were no longer relevant.
“It assigns responsibility not only to the person responsible for doing each task, but also to those on his team who will be responsible,” Karman says. “It also has a report date on each item. When do we have to get this item accomplished? If you assign responsibility on a timetable, it gets done. If it wasn’t there, it would be very easy to put it aside and think, ‘We’ll get to it later.’”