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$2.00/JANUARY 28 - FEBRUARY 3, 2013
Vol. 34, No. 4
Employers look LOOKING BEYOND to escape health THE DOORS care mandate LOCAL APPROVAL RATINGS How employees see some of the largest companies and institutions to work for in Northeast Ohio, according to Glassdoor.com: TOP FIVE ■ 1. Lubrizol Corp. — 3.9 stars, 26 votes ■ 2. University Hospitals Health System — 3.8, 32 votes ■ 3. Tie: University of Akron — 3.7, 34 votes; ■ Swagelok Co. — 3.7, 21 votes ■ 5. Tie: Eaton Corp. — 3.6, 219 votes; ■ Cleveland Clinic — 3.6, 145 votes; ■ Case Western Reserve University — 3.6, 37 votes
BOTTOM FIVE ■ 18. FirstEnergy Corp. — 3.0 stars, 49 votes ■ 19. Sterling Jewelers Inc. — 2.9, 126 votes ■ 20. American Greetings Corp. — 2.8, 97 votes ■ 21. Jo-Ann Stores Inc. — 2.5, 122 votes ■ 22. InfoCision Management Corp. — 2.2, 52 votes ■ Average rating for all companies on Glassdoor.com — 3.2 — Chuck Soder
INSIDE: A breakdown of the approval ratings of local CEOs. Page 43
Popular website can be a valuable resource for job seekers, companies and employees, but experts say ‘it’s just a piece of the puzzle’ By CHUCK SODER csoder@crain.com
See DOORS Page 10
By MICHELLE PARK mpark@crain.com
Seeking to limit their costs under Obamacare, small and midsize companies are considering cutting jobs, slashing employee hours and using more temporary workers, and Northeast Ohio staffing firms are hiring more people to meet the anticipated demand. The federal Patient Protection and Affordable Care Act as of Jan. 1, 2014, requires businesses with 50 or more fulltime-equivalent (FTE) employees to offer health insurance that meets certain requirements or to pay to the government a penalty of $2,000 or $3,000 per employee.
INSIDE
Meeting of minds on shale We get you ready for the Feb. 5 event at Executive Caterers of Landerhaven by looking at where the oil and gas industry stands, how communities stand to benefit from increased drilling and preview the day’s panels. PAGES 13-16 That mandate has companies — particularly those flirting with the 50 FTE employee mark — strategizing how they can avoid being big enough to comply, local attorneys say. See TEMPORARY Page 6
Geis Cos. emerges as key downtown player with Ameritrust win Company known for big industrial developments has come a long way from humble beginnings By STAN BULLARD sbullard@crain.com
When the late Erwin Geis in 1967 built his first Northeast Ohio industrial building in Warrensville Heights, his family spent a Saturday doing the landscaping. A
grade-schooler at the time, Erwin’s son Greg Geis once talked about how he got hungry and tried the green fertilizer as a would-be lunch — one he quickly lost. However, Greg and older brother Fred Geis developed an appetite for construction and property development that has propelled the now Streetsboro-based Geis Cos. far from its humble beginnings. Today, its website says, it has active projects in 16 locations in 10 cities and has developed more than 9,000 acres and 600 projects. When Cuyahoga County Council last week unanimously declared Geis Cos. the winning bidder for the old Ameritrust
04
Lubrizol Corp. is the best place to work in Northeast Ohio, if you believe current and former employees who rated the company on Glassdoor.com. Not that the maker of specialty chemicals and lubricant additives — or any other business — is immune from criticism
on the increasingly popular website, which promotes itself as a place where outsiders can gain insiders’ views of their employers. For instance, one reviewer who gave Wickliffe-based Lubrizol a perfect five-star rating in December 2008 still found the need to call its marketing group “clueless and not too bright.”
Staffing firms staff up, lawyers field calls as clients try to avoid key employment threshold
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CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
JANUARY 28 - FEBRUARY 3, 2013
THE STATE OF THINGS
COMING NEXT WEEK
Thirty states in the past year have seen what the federal government considers “statistically significant changes in employment,� and Ohio is near the top of the list. Most of those states, not surprisingly, are among the largest states in the nation. Among the big job-gaining states, though, Ohio is one of only three with a December 2012 unemployment rate below 7%. Here’s a breakdown of the data for the five states that added the most jobs:
Legal affairs Crain’s special section will run the gamut, from the effect of big-name staff additions to the reasons behind the seemingly nonstop cycle of name changes among the region’s law firms. In addition to covering issues facing Northeast Ohio’s legal sector, we’ll also touch on some developments in employment law.
State
Employment (As of Dec. 2012)
Jobs added (Dec. 2011 (to Dec. 2012)
Unemployment rate (As of Dec. 2012)
Texas
10,904,000
260,800
6.1%
California
14,398,800
225,900
9.8%
REGULAR FEATURES
New York
8,840,600
123,600
8.2%
Big Issue .......................8 Classified ....................42 Editorial ........................8
Ohio
5,185,000
90,700
6.7%
Georgia
3,971,100
74,100
8.6%
Going Places ...............11 Milestone ....................43 Reporters’ Notebook....43
SOURCE: U.S. BUREAU OF LABOR STATISTICS; WWW.BLS.GOV
700 W. St. Clair Ave., Suite 310, Cleveland, OH 44113-1230 Phone: (216) 522-1383 Fax: (216) 694-4264 www.crainscleveland.com Publisher/editorial director: Brian D. Tucker (btucker@crain.com) Editor: Mark Dodosh (mdodosh@crain.com) Managing editor: Scott Suttell (ssuttell@crain.com) Sections editor: Amy Ann Stoessel (astoessel@crain.com) Assistant editor: Kevin Kleps (kkleps@crain.com) Sports Senior reporter: Stan Bullard (sbullard@crain.com) Real estate and construction Reporters: Jay Miller (jmiller@crain.com) Government Chuck Soder (csoder@crain.com) Technology Dan Shingler (dshingler@crain.com) Energy, steel and automotive Tim Magaw (tmagaw@crain.com) Health care and education Michelle Park (mpark@crain.com) Finance Research editor: Deborah W. Hillyer (dhillyer@crain.com) Cartoonist/illustrator: Rich Williams
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CRAIN’S CLEVELAND BUSINESS
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Howard Hanna opens door to ‘branchises’ Big home seller looks to extend its reach to more rural areas by interesting independent brokerages in franchising option By STAN BULLARD sbullard@crain.com
Howard Hanna Real Estate Services plans to bolster efforts to expand through franchising to supplement the acquisition and merger strategy that dramatically hiked its foothold in Northeast
Ohio this last decade. Howard “Hoby” Hanna IV, president of Howard Hanna Ohio, said the company is interviewing and plans to hire within the next two months a person to pursue franchises with existing brokerages south and west of Cleveland through Michigan and the Midwest.
The Pittsburgh-based residential real estate brokerage signaled increased franchise efforts this month as it hired Tom Schoeller, a veteran franchise salesman with more than 150 franchise sales and merger deals in his career, as a vice president to focus on locations in eastern Pennsylvania.
Mr. Hanna said Howard Hanna Ohio has grown so much it needs more people to “take a little off my plate and open new doors and opportunities for us.” The company added owned offices in Columbus and Michigan over the last year. Emphasizing franchising — termed “branchising” in typical Howard Hanna fashion to distinguish itself — will let the company expand its reach to more rural areas outside cities where it has grown through acquisitions and mergers.
INSIGHT
The “branchise” page on Howard Hanna’s website includes a map of its existing offices and franchise areas. It includes a vast yellow area identified for “new branch locations” roughly covering the area west and south of the Cleveland-Akron area to just outside Columbus. The heightened franchise effort responds to increased calls from owners of smaller, independent brokerages that want to grow following the downturn, Mr. Hanna said. See HANNA Page 7
Next up at Case: a fresh strategy University has emerged from budget woes, set to tackle new 5-year plan By TIMOTHY MAGAW tmagaw@crain.com
MARC GOLUB
Under the leadership of executive diirector Natalie Ronayne, the Cleveland Botanical Garden has increased its attendance for five consecutive years.
BUSINESS IS I BLOOMING
By TIMOTHY MAGAW tmagaw@crain.com
Botanical garden’s membership is at all-time high; attendance keeps rising
n the not-too-distant past, the Cleveland Botanical Garden’s balance sheet hadn’t reflected the vibrancy of the flora it displays. But with a new business plan in place and an executive director with a vision for transforming the garden’s once-passive experience for visitors, bulbs promising better times ahead appear to be emerging. Last year, the botanical garden’s membership blossomed to 7,300 — an all-time high — and attendance climbed for the fifth straight year to 160,000, nearly matching its record set in 2004. In addition, the garden launched “Glow,” a 5½-week holiday event at a cost of about $200,000; it brought in 37,905 people, which marked a 28% jump over the previous year’s holiday attendance. See GARDEN Page 41
When Barbara Snyder took the reins at Case Western Reserve University in 2007, staff morale was low, the school faced a nearly $20 million operating deficit, and the public’s confidence in the institution had waned considerably. At one point, Progressive Corp. chairman and longtime Case Western Reserve contributor Peter B. Lewis derided the institution as “a diseased university that is col- Snyder lapsing and sucking Cleveland into a hole with it.” But after five straight years of operating in the black, Ms. Snyder today steers a Case Western Reserve that is far different than the one with which the outspoken Mr. Lewis took umbrage early in the 2000s. With its finances in order, the university now is early in the process of piecing together its next strategic plan, which Ms. Snyder said will guide Case Western Reserve over the next five years and will take the school to greater heights. See CASE Page 7
THE WEEK IN QUOTES “A lot of people come downtown because they have been ignored in the suburbs. They (Geis Cos.) don’t need the job for their reputation. They already have it.”
“We believe there is more value in teaching people what employees want, which is teaching people how to make parts in a modern way.”
— John Ferchill, CEO, The Ferchill Group. Page One
— Tim Duffy, president, Cleveland Industrial Training Center. Page 9
“I believe this is a defining moment for our city. … This is the end of our decline, and we are starting to see a turnaround that will allow us to move forward and grow for years and decades to come.” — Canton Mayor William J. Healy II. Page 14
“You’ll begin to see more wells coming online, more natural gas, oil and liquid coming out of these wells and going into the production side, and more jobs.” — Jim Samuel, principal, Capitol Integrity Group. Page 15
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CRAIN’S CLEVELAND BUSINESS
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Suburbs are gathering in Circle
SOLD 2187 MURRAY HILL RD CLEVELAND (LITTLE ITALY), OHIO
Several communities on Cleveland’s East Side form group, hope to add to tax revenue By JAY MILLER jmiller@crain.com
Newmark Grubb Knight Frank is pleased to announce the sale of the former Theresa’s restaurant at 2187 Murray Hill Rd in Cleveland (Little Italy).
Terry Coyne represented the seller.
Full Selection of Commercial & Investment Offerings Available at
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JANUARY 28 - FEBRUARY 3, 2013
Several eastern suburbs are exploring how they jointly can market their largely residential communities as places that businesses, too, can call home. Calling themselves the Circle Heights Alliance, officials from Cleveland Heights, East Cleveland, Shaker Heights, South Euclid and University Heights have begun meeting with the goal of emphasizing the potential of their communities as places where people can live and work. The goal is to generate new tax revenue, largely through new income taxes. The cities have enlisted the assistance of neighborhood development group University Circle Inc., because they see the short-on-office-space University Circle area as a natural source of business leads. These suburbs lack the office and industrial districts of nearby communities such as Beachwood and Mayfield Heights. However, they’re not shooting to compete with those business centers. Rather, their focus will be on small businesses and professionals who want to work close to home in the Heights or have outgrown their spaces in University Circle. They are applying to the state of Ohio’s Local Government Initiative Fund for a $100,000 grant to assess
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the feasibility of an economic development alliance. “University Circle is one of the largest economic drivers going right now,� said Angie Pohlman, executive director of the Heights-Hillcrest Regional Chamber of Commerce, which is coordinating development of the strategy. “As companies are growing up and maybe out of University Circle, they still want to remain very close by.� At the same time, University Circle Inc. isn’t able to find space for everyone who comes looking to locate in the Circle, which is second only to downtown Cleveland as an employment center in the city. “We get a lot of calls from a lot of folks that want very small office space, a couple thousand square feet, all the time and there just is nothing in University Circle proper or in the surrounding area in Cleveland that can accommodate that,� said Debbie Berry, University Circle Inc.’s vice president of community development. So, an alliance makes sense for both. “We hadn’t been thinking about sending people to the Heights,� Ms. Berry said, using the traditional shorthand for this group of inner-ring suburbs. “Folks just don’t think of that as being a business community.�
New from the old Ms. Pohlman said one of the early jobs of the alliance would be to assemble an inventory of available office space. Each community has office/residential space in buildings in older retail neighborhoods as well as unique and new spaces. It also would create a joint marketing program to pitch their communities to businesses. Georgine Welo, mayor of South Euclid, said she sees the alliance giving her city “the opportunity to attract (companies) we’ve never had for our office space.� Most of the communities would like to capitalize on redevelopment projects under way or in the planning stages.For instance, the new Oakwood Commons, a planned retail center on the site of the former Oakwood Country Club, will shake up the western end of South Euclid and threaten the aging Mayfield
Road business district. In Shaker Heights, the city is working on a plan to reconfigure the shopping district at Van Aken and Chagrin boulevards into a mixed-use business district. East Cleveland was asked to join the group because of its proximity to University Circle and its inventory of redevelopable properties along Euclid Avenue. “We understand there is a key role in the region for those (communities) that have land where people want it, and we are one of those places,� said East Cleveland Mayor Gary Norton. Euclid Avenue is lined with older homes, some of which could be rehabilitated into unique office space while others could be demolished for new construction, Mayor Norton said.
Rivals come together Arguably, the pioneer of this concept of injecting businesses into nontraditional, inner-ring suburban locations was Goldstein, Caldwell & Associates, an early-stage investment firm. It was looking for a new home in 2010 because the University Circle building that was its home was to be torn down. At the same time, Shaker Heights was figuring out how to become more of a business center to help it expand on its largely residential tax base. It hit on a strategy of attracting young, entrepreneurial professionals who want reasonably priced business space in a community they also would want to live in with their families. Together, the city and the investment firm transformed a former auto dealership into Shaker LaunchHouse, a business accelerator that at any time is home to 10 or more startup firms. If the suburbs can pull it off, the alliance can be another step in bringing closer together cities that are learning to collaborate after decades of friendly rivalry. “This will bring a cohesiveness to economic development for our communities,â€? South Euclid’s Mayor Welo said. “It’s the next step for us in working in collaboration and learning to trust each other so that we can work on even greater successes.â€? â–
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CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
JANUARY 28 - FEBRUARY 3, 2013
Temporary: Staffing firms stay busy continued from PAGE 1
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“They’re worried that they can’t afford it, and they’re angry that they’re having this forced upon them,” said Seth Briskin, chairman of the labor and employment group at Woodmere law firm Meyers, Roman, Friedberg & Lewis. “I’m getting a lot of calls from clients asking about ways to escape from Obamacare,” Mr. Briskin said. So is John McGowan, an employee benefits attorney with Cleveland law firm BakerHostetler, who says he and his colleagues are “buried” in work — almost twice as busy as they were this time last year. “Anyone who’s on the bubble (is thinking), well, if I just drop a few folks, reclassify a few, cut hours, then magic happens,” Mr. McGowan said. “Then life’s good, and I’m not affected.” The likelihood that some employers will restructure their work forces is unfortunate, Mr. Briskin said, “because it prohibits growth and it limits employment.” But if more employers do use temporary workers, that would be a boon for Cleveland-based staffing firm Area Temps Inc., even with the additional costs it faces in offering health insurance to more workers on its payroll, president Kent Castelluccio said. “I think your average employer is going to say, ‘The heck with it,’” Mr. Castelluccio said. “They’re not going to want to take on the responsibility of health care. They’re going to want to outsource that to a (staffing) specialist. They’re going to make it my responsibility as the employer of record.”
Pass it on To stay ahead, Area Temps has hired two people this year and plans to bring on another 10 to 15 in
2013, Mr. Castelluccio said. “The worst thing in the world would be to not have enough staff to take care of this influx of business,” he said. The firm also is considering enhancements to its internal system so that it can report in a streamlined way who of its thousands of temporary workers works enough hours to be considered a full-timer under the Affordable Care Act. Obamacare only requires employers to offer health coverage to workers who log an average of 30 hours a week, attorneys said. For those that employ workers whose hours are more unpredictable, such as staffing firms, there is a lookback period of up to 12 months. Also beefing up their staffs are Everstaff International — “we know we need to be prepared,” said CEO Danny Spitz — and Alliance Solutions Group LLC, both headquartered in Independence. Alliance has hired six employees already this year and has another 25 hires in the 2013 budget, particularly in its industrial business unit, president Aaron Grossman said. Also, for the first time in its 12 years of operation, Alliance has a dedicated outside sales person. “We think there’s a lot more opportunity, and we want to be more aggressive in the marketplace,” Mr. Grossman said. Businesses can bet on paying more for temporary workers: Staffing firms say they will pass on some of the cost of offering health care coverage to workers to the companies that use them. “Paying a higher bill rate to ABC Staffing so that I don’t have to cover health insurance for this employee — (businesses are) going to be OK with it,” Area Temps’ Mr. Castelluccio said.
Time for a shave Even those with no intention of cutting their ranks below 50 are strategizing. Some plan to shave hours of part-time staff so they won’t be required to offer coverage to them, BakerHostetler’s Mr. McGowan said, and he knows of at least one company that is considering splitting up into multiple entities so that each employs fewer than 50. Those employers trying to mitigate the mandate’s impact will want
to steer clear of violating anti-abuse rules from the Internal Revenue Service and the Treasury Department, attorneys said. A hearing on those rules, which were proposed Dec. 28, is scheduled for April 23. According to the rules, for example, the government almost always will consider a company to be employing someone full time if it were to employ the worker for 20 hours a week on its payroll while hiring the same person through a temporary staffing agency for the rest of the week. “Regulators are concerned about employers that are going to have a rolling list of temporary employees,” Mr. McGowan said. “They’re aware right now that employers are going to play games around the margins.” It’s prudent to watch for any expansion of those anti-abuse rules and to plan this year for next year, said Dan Clevenger, a partner at Canton-based law firm Day Ketterer Ltd., who serves as outside counsel for small to midsize companies. Mr. McGowan said he’s advising his clients to put together longterm plans, not a “one-trick pony solution” that may be disallowed eventually. “If it quacks like a duck and walks like a duck, it’s a duck,” Mr. McGowan said. “You can’t just do a paper shuffle and assume that somebody’s no longer your employee because you shuffled the papers in a different way.” Alliance’s Mr. Grossman anticipates the uptick in the use of temporary workers will take hold in the fourth quarter of 2013, particularly in the manufacturing and distribution fields, which employ a high number of lower-level workers. With the cost of employing fulltime, unskilled workers guaranteed to rise because employers either will need to offer coverage to them or pay the penalty, employers are likely to reassess the profitability of employing such workers full time, Meyers Roman attorney Mr. Briskin said. That’s why most agree that unskilled workers will lose out. “If a business is looking at an unskilled worker and says, ‘Look, I can’t afford to provide an offer of coverage, it’s just too expensive for me,’ I’m either not going to employ you or I’m going to employ you on a parttime basis,” Mr. McGowan said. ■
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Case: Three-quarters of current freshmen were ranked in top 10% of high school class continued from PAGE 3
CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
“We’re starting this process in a different place than we did last time,” she said. “We’re starting from a better place, and we’re going to be even more ambitious.” Now in its final year, the university’s current strategic plan already has reaped benefits, particularly on the school’s balance sheet. Ms. Snyder’s predecessor, Edward Hundert, had spent nearly $80 million of the university’s reserves to transform Case Western Reserve into what he had described as the “most powerful learning environment in the world.” It was a move that doused the institution in red ink for the better part of four years and led to Dr. Hundert’s abrupt resignation after losing a no-confidence vote by the faculty of the College of Arts and Sciences. Under Ms. Snyder’s leadership, the university climbed out of the budget hole in the fiscal year that ended in the summer of 2008 by posting a modest $127,000 surplus thanks to cost-cutting measures, hikes in tuition revenue and a boom in research and fundraising dollars. In fiscal 2012, which ended June 30, the university posted a $6.4 million surplus — a still-modest amount, according to Ms. Snyder, considering that the university had operating revenue that year of $973 million. “We all understand the importance that every expense must be well worth it,” Ms. Snyder said. “We have to very careful how we spend our dollars.” Maintaining its books will be top of mind for university officials as they hash out Case Western Reserve’s plans for the coming years. However, its transformation under Ms. Snyder into a fundraising powerhouse should help matters. The university in October 2011 launched a $1 billion fundraising campaign, which so far has brought in $787.5 million.
creasingly competitive in attracting top-notch students, which Ms. Snyder attributes to a strengthening of the university’s reputation in academic circles. Last fall, the university welcomed its largest and most academically prepared class in its history, as 75% of the students who enrolled were in the top 10% of their high school class. In addition, more than 18,000 students applied for admission to Case Western Reserve’s class of 2017 — a 25% increase over the number of applicants in 2012 and a 150% spike over those who applied five years ago. Richard Bischoff, vice president for enrollment management, attributed the growth in applicants to his department’s broader recruitment strategy in recent years. Mr. Bischoff said the university had been dependent on western Pennsylvania and Ohio for its applicant pool, but has intensified its efforts elsewhere. The university formerly spent two or three days recruiting in California, for instance, but has extended those stays to three or four weeks. “These are very positive and tangible things that parents and prospective students can look at and say, ‘This is a university where things are happening,’” Mr. Bischoff said. “You want to be associated with things that are moving forward.” Case Western Reserve officials also say the university is benefitting from its increased focus on globalization, which led to the opening of the Center for International Affairs — a hub of sorts for the university’s international activity. The effort has established links with several universities abroad and helped double the number of undergraduate international students. In fall 2007, about 3.2% of the undergraduate student body was comprised of international students; that number climbed to 8% last fall.
The best and brightest
Fortune favors the bold
The university’s undergraduate enrollment has ebbed and flowed since Ms. Snyder’s arrival, but Case Western Reserve has become in-
While the university will continue its efforts aimed at globalization and diversity in its next strategic plan, Case Western Reserve provost W.A.
“Bud” Baeslack III said officials plan to do something “bolder” this time around. Dr. Baeslack said a steering committee made up of faculty, students, staff and alumni hopes to have a draft of the next strategic plan completed by this spring, with a final product ready for the board of trustees’ approval by the end of the current academic year. Ms. Snyder was cautious in describing the direction the university would take in the coming years, other than to say it would be “ambitious” and would be important for setting the stage for Case Western Reserve’s 200th anniversary celebration in 2016. “People are invested in a plan they helped create,” Ms. Snyder said. “I can’t pontificate about a plan I didn’t create alone.” But given the upward trajectory Case Western Reserve has been on with Ms. Snyder at the helm, many in the community expect big things. “Her work ethic is superhuman,” Cleveland Foundation CEO Ronn Richard said. “I’ve seen her look so exhausted and then she’ll get up on a stage and look like she just woke up. Her work ethic is second to none.” ■
Hanna: Franchises cost $15K to $25K, plus 6% fee on annual commissions continued from PAGE 3
Many want to expand but do not want to sell their companies until they are ready to retire in about 10 years, Mr. Hanna said. Entering Northeast Ohio in 2003 by purchasing the former Smythe, Cramer Co. and later buying the former Realty One has worked out well for Howard Hanna, which has 144 offices in Michigan, New York, Ohio, Pennsylvania and West Virginia. Sales data from 2012, announced Jan. 24 by Howard Hanna, showed the Ohio market generated $3.6 billion in closed sales volume in almost 21,000 closed transactions, compared with $2.3 billion in about 12,000 closed transactions in Pittsburgh and southwest Pennsylvania. In typical franchise fashion, a Howard Hanna franchise costs $15,000 to $25,000, depending on the market’s size, and a 6% fee on annual gross commissions. The franchisees participate in Howard Hanna’s technology and training as well as Howard Hanna’s homegrown programs to boost results, such as its money-back guarantee for unsatisfied buyers.
No slam dunk Still, adding franchises, even as
the market recovers and agents want to spread their wings, may not be easy even for a firm with the market heft of Howard Hanna. According to John Ludwick, operating principal of residential brokerage Keller Williams Greater Cleveland, small independent firms that have survived the downturn may not need or want to affiliate with a larger firm because the market is on the upswing. “The money for franchises comes off the top,” Mr. Ludwick noted. Competition between the various franchise systems — of which Keller Williams is one — also is brutal. In Keller Williams’ case, the firm uses a model of agents sharing in profits of their office and the parent company that is a challenge to the traditional brokerage commissionsplit model. Franchising also adds the risk of diminishing a brand for a traditional brokerage, Mr. Ludwick said, because the agent may do business the same way as always despite the affiliation. However, room for growth via franchising does exist: Mr. Ludwick said his group added 98 agents over the last year to reach nearly 900 agents. ■
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PUBLISHER/EDITORIAL DIRECTOR:
Brian D. Tucker (btucker@crain.com) EDITOR:
Mark Dodosh (mdodosh@crain.com) MANAGING EDITOR:
Scott Suttell (ssuttell@crain.com)
OPINION
Do it right In time, the name Geis either will be revered or reviled in Cleveland. It all will depend on whether the developer behind the name comes through with its plans for the unused Ameritrust complex in the heart of downtown. Cuyahoga County Council last week unanimously declared Geis Cos. the winner of the competition to create a new headquarters for county operations. Part of Geis’ plan involves knocking down a couple old buildings at the Ameritrust complex and constructing in their place a shiny new, eight-story building for the county’s use alone. The added promise is that Geis will create sweet apartments in the long-vacant, 28-story Ameritrust office tower, will restore the old bank’s rotunda for retail or public use, and will convert another building at 1010 Euclid Ave. into apartments and/or office space. The excitement in civic circles isn’t about a new headquarters that the county will own after paying Geis nearly $7 million a year over a 26-year lease. Instead, it’s about bringing back to life a dead corner of East Ninth Street and Euclid Avenue, and particularly about seeing lights go on again inside the dark, brutalist-style tower that grimly has haunted the downtown skies for a couple decades. It is a transformation that will not happen over a couple years. But it is a transformation that, if it drags on year after year or doesn’t happen as sold by the developer, will be an abuse of the trust placed in Geis by County Council and County Executive Ed FitzGerald, whose administration recommended the plan. Jack Schron Jr., the head of tooling equipment maker Jergens Inc. who is a member of County Council, captured what’s at stake last week in comments to Geis officials upon the body’s approval of Geis’ plan. “You folks have a big, awesome responsibility to do it right,” Mr. Schron said. “It will be a statement for not only today but in the future for years and years to come.” The importance for Geis to “do it right” is magnified by the scary prospect that Cleveland could be left with two, hulking empty office buildings on East Ninth and Euclid if the developer doesn’t do what it’s promising at the Ameritrust complex. Optima Ventures, the most vigorous competitor to Geis for the county headquarters, had pitched the former Huntington Building — its vacancy-riddled, mammoth office structure at that key intersection — as the home for the county’s offices. And Chaim Schochet, an Optima executive, indicated before County Council’s vote that his company could close the building if it didn’t win the county’s business. “We can’t keep a building open if it’s not making money,” Mr. Schochet told Crain’s. In the end, county officials made a decision they believe was in the county’s best interests — and, based on Geis’ track record, it appears they made a reasonable choice. How well Geis performs will determine whether that decision will look good five, 10 or 20 years from now. We share in Mr. Schron’s admonition — do it right.
FROM THE PUBLISHER
Energy galore at Shale Summit 2013 York bond rating agency predicted that ell, the pomp and circumshale development could mean trillions stance of the presidential inof dollars in activity across the country. augural is over and the frigid Indeed, in places such as North winter cold has reDakota, shale oil drilling has resumed its rightful place, but BRIAN duced the unemployment rate there was small indication last TUCKER to near zero, something unfathweek that things could improve omable in these parts. in our nation’s capital in the It appears the Obama adminearly days of this president’s istration and the Republican second term. governor in Nebraska may find Partisans will argue what a solution to continue the onceprompted the step, but when maligned Keystone Pipeline the House of Representatives from Canada. That oil, coupled voted on a three-month suswith all the shale deposits in the pension of the federal debt limUnited States, promises to make North it, it was a positive signal to the world’s America the pre-eminent energy source financial markets. in this new century. Here in Northeast Ohio, there are Make no mistake: the Utica Shale is a signs of hope. Residential real estate, development unlike any other I have buoyed by historic low interest rates, seems to be strengthening. Our state’s seen in my life in Ohio. Being a true Baby unemployment rate remains a point or Boomer, my early years were spent durso lower than the national average. Aring the peak of Ohio’s economic power, guably, a significant part of that can be and the ensuing decades have brought attributed to the flurry of activity around far more challenge than opportunity to shale oil and gas, which creates jobs not the Buckeye State and its people. just in the oilfield, but at trucking comThe transformative potential of shale panies, road pavers, steelmakers and oil and gas is exactly why Crain’s and our restaurants. public television and radio partners at A recently released study by a New ideastream decided to create and con-
W
vene Shale Summit 2013, which will be held from 9 a.m. to 3:30 p.m. on Feb. 5 at Executive Caterers at Landerhaven. More details can be found in the special section in this week’s issue. From the start, the journalists at Crain’s Cleveland Business, WVIZ-TV and WCPN-FM have wanted to make this event content-rich, unbiased and useful to all who want an in-depth look at this rapidly developing energy industry. Its deep and transformative potential was one reason we decided to launch a quarterly magazine supplement dedicated to the Utica Shale. We are learning a lot in a condensed period of time. Dan Shingler, who as our manufacturing reporter spotted the early signs of just how sweeping the effects of this oil boom would be on Ohio and its businesses, is now editor of our magazine and will play a prominent role in the summit. As of the middle of last week, we had 350 registrants and were approaching a potential cut-off, so go quickly to our website at www.crainscleveland.com for more information and to register. This is an event that’s too important to miss. ■
THE BIG ISSUE Do you support increased taxes on the oil and gas industry in Ohio, even if it might result in slower economic and job growth?
MICK JONES
JOHN COLEMAN
SAM CHEYFITZ
SEAN VONDERAU
Lakewood
Cleveland
University Heights
North Olmsted
I think we should address job growth in Ohio first, before we tackle the bigger problem with the oil industry.
I think it’s a cash grab (by the state). … The fact of the matter is if they start the fracturing and drilling, there’s going to be a hell of a lot more money to be taxed. They’re going to make a lot more money, even if they don’t raise the taxes.
I wouldn’t support it. And I also don’t want to support fracking, either. I think it’s a danger and it’s going to ruin more land.
I guess I would support it because I don’t know if they would stop drilling. I would have to look into it more.
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Exec leaves NorTech Budding machinists flock to program to help offshore wind Cleveland Industrial Training Center to expand project enter phase II By DAN SHINGLER dshingler@crain.com
LEEDCo’s progress in 2013 could determine if group wins $47 million By CHUCK SODER csoder@crain.com
The nonprofit leading the effort to put wind turbines in Lake Erie is like a startup company that just got a round of financing, according to Dave Karpinski. It must get a lot of work done fast if it is to compete for a bigger, second round of money — as much as $46.7 million, to be exact. That’s why Mr. Karpinski was brought on board. Today, Jan. 28, he’s scheduled to become vice president of operations for the Lake Erie Energy Development Corp., which in December won a $4 million federal grant to help the nonprofit complete studies and secure the permits it will need to erect five to nine wind turbines about seven miles off the coast of Cleveland. Mr. Karpinski is no stranger to LEEDCo. For nearly six years, he has worked at NorTech, guiding the economic development group’s efforts to help Northeast Ohio establish itself as a player in the advanced energy sector. In that role, he helped launch LEEDCo and had been chairman of the nonprofit’s board until taking the new position. Cleveland Foundation president Ronn Richard will be LEEDCo’s new chairman. The nonprofit is at a point where it needs the help, said Mr. Karpinski and LEEDCo president Lorry Wagner. The group has one year to get the project to the point where it can make many of the decisions needed to go forward with construction. In that time, LEEDCo must complete engineering and design studies that, among other things, will allow the group to pick a foundation on which to mount the turbines and figure out how the foundations will be built. The nonprofit also will apply for most of the permits needed to put
turbines in the lake — a big job. LEEDCo is working with more than 25 state and federal agencies. “There is really a lot to do in one year,� Dr. Wagner said. LEEDCo has a big incentive to do a good job, because it is one of seven nonprofits that received grants from the U.S. Department of Energy for offshore wind projects. Only three of them will receive follow-on grants, which could be worth up to $46.7 million each.
Division of labor Although Dr. Wagner still will be involved in helping manage the project, he’ll spend more time focusing on strategic goals, such as involving local businesses with the project, building corporate support for the effort and securing an agreement to sell power from the wind turbines to a utility. Mr. Karpinski will focus on managing the project and putting the infrastructure in place to get it done, which will involve upgrading LEEDCo’s software and working with partners in six countries. Through the project, LEEDCo seeks to find ways to lower the cost of building offshore wind farms in the Great Lakes to the point where private developers will want to put more turbines in the water. The group also wants to help companies in Northeast Ohio develop the expertise to serve those developers. Dr. Wagner said he chose Mr. Karpinski for the job because he has expertise related to engineering, managing projects and working with startups. Before joining NorTech, Mr. Karpinski was director of information technology and then director of engineering at injection molding machine maker Demag Plastics Group’s U.S. headquarters in Strongsville. Mr. Karpinski said he hopes to make an impact on Northeast Ohio’s economy. “I’ve always been excited about the prospect of creating a brand new industry in the region,â€? he said. â–
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The Cleveland Industrial Training Center has a new president and a mandate to continue the growth it has enjoyed in recent years in preparing skilled workers for machine shops. Tim Duffy, the new president of the school, known as CITC, has been there since 2007 as a program director. “We’ve taken it from one location to three,â€? Mr. Duffy said of his time so far with CITC, which in addition to its original Cleveland site has branches in Akron and Mentor. “Now I’m meeting with people about (opening a branch in) Dayton ‌ and we’d like to go to Cincinnati as well,â€? he said. The school operates differently than community colleges or many other sources of manufacturing training, because its branches are actual machine shops, Mr. Duffy said. That setup enables students to learn in a working environment, much like apprenticeships of old. “The advantage is you can discuss a topic, learn about it, do the math for the topic — then you walk out the
door and ‌ you actually make the parts,â€? Mr. Duffy said. The school does not try to turn students into a full-blown machinists. Instead it trains them to do set-up work on sophisticated computercontrolled machine tools. That means a student can go through the $4,500 program in about four months. It often takes years to become an actual machinist, Mr. Duffy said. “But you are on your way,â€? Mr. Duffy added, noting that many students take their training, get jobs in machine tool environments, and then continue their training on the job, at CITC or with another school. It’s been a formula for growth in recent years, as CITC has gone from 35 graduates in 2007 to more than 200 who completed training at the school in 2012. There’s definitely a need for skilled workers. “One of the continuing problems manufacturers across the board (face) is the need for skilled workers,â€? said Greg Krizman, spokesman for Magnet, a manufacturing advocacy and consulting group in Cleveland. Mr. Krizman said Magnet last week “convened a session with
manufacturers from Youngstown to Mansfield, Cleveland to Canton, on how to fill the pipeline of employees needed by the region’s manufacturing community right now and well into the future.â€? And the need extends beyond Cleveland, Mr. Duffy said, which is why he and the school are trying to branch out downstate. Mr. Duffy works at expanding the school with his brother-in-law, Don Borman, the founding owner of the school and head of Borman Enterprises, a machine shop next door to the school on Brookpark Road in Cleveland. Mr. Borman gave Mr. Duffy credit for growing the school in recent years, including the outside training that it provides to specific employer customers. Employer support also is helping to fuel growth. Mr. Duffy said about 25% of student tuition is paid by an employer, while state job funds help to defray the costs for out-of-work students. Close relationships with manufacturers also help the school ensure it is teaching skills employers actually need, Mr. Duffy said. “We believe there is more value in teaching people what employees want, which is teaching people how to make parts in a modern way,â€? he said. â–
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Doors: Lubrizol receives highest rating among largest local employers continued from PAGE 1
anything. The goals are insane.”
Other reviews suggest Lubrizol needs to take more risks. But the good comments outnumbered the bad: Lubrizol received an average rating of 3.9 stars, beating every other large local employer that received a minimum of 20 votes on Glassdoor. Only 22 employers on Crain’s 2012 list of the 100 largest employers in Northeast Ohio received at least 20 votes on Glassdoor — the threshold we set in looking at how local companies faired in its rankings. Among this group, University Hospitals Health System placed second with a 3.8 rating, edging out the 3.7 earned by both the University of Akron and fluid systems manufacturer Swagelok Co. of Solon. On the flip side, telemarketer InfoCision Management Corp. ranked last with an average score of 2.2. But just as Lubrizol didn’t receive all positive comments, not all of the posts about InfoCision were negative. Several people wrote that InfoCision offers decent pay and benefits. But many comments contain complaints about the rapidfire pace of incoming calls, poor training and managers who don’t seem to care about employees. “If you sit for more than 10 seconds without taking a call you get yelled at,” according to a July 2012 post attributed to a former “communicator” at InfoCision’s Austintown call center. “ … Then the calls come in every 1-5 seconds. You never get a chance to breathe or
A chance to vent Just how much weight to give reviews on Glassdoor and other ratings websites is a matter of debate. Anonymous comments can provide an interesting look into what it’s like to work at a company, but they don’t always paint a full picture, according to people who spoke with Crain’s. For instance, InfoCision looks a lot better from a different perspective: It has won 11 North Coast 99 awards — which are designed to identify the best places to work in Northeast Ohio — over the last 14 years. Only eight companies have won more North Coast 99 awards, which are based on applications submitted by the businesses. One of those eight companies is Shearer’s Foods, the only company that has won the award every year. When asked to name one of the best employers in Northeast Ohio, Shearer’s was the company cited by Marty Mordarski, director of research and membership for the Employers Resource Council of Mayfield Village, the human resources group that chooses the winners. Mr. Mordarski described how the Brewster-based potato chip maker worked to avoid laying people off during the recession. Instead, the company asked employees for ideas on how to save money — and ended up saving more than $2 million by implementing them. But the 10 people who rated
Shearer’s on Glassdoor were not kind. The company received an average rating of just 1.7 from the small group. Mr. Mordarski said companies can identify problems that need to be fixed by reading comments on Glassdoor. However, people trying to decide whether they want to apply for a job at a company may want to get information from other sources, too, Mr. Mordarksi said, noting that the site might have a tendency to attract people who are angry and want to vent. Companies that trust their employees can mitigate that tendency by asking them to add their own anonymous reviews to the site, “so it’s not just mad people,” said Melissa Carney, an account supervisor at the Cleveland office of marketing and communications firm Fahlgren Mortine. They also can respond to comments on Glassdoor, but they should do so sparingly, so they don’t look too defensive. Companies also can pay to post promotional videos and text at the top of their Glassdoor pages. Ms. Carney said she has friends who have used Glassdoor and a similar, lesser-known site called CareerBliss.com while looking for jobs. Job-seekers should remember that anonymous critics tend to be more aggressive and that the opinions of a few may not represent an entire company. “Maybe what’s true in the Cleveland office may not be true in the Dallas office,” she said.
Finding the right fit Roughly 15% to 20% of content shared on Glassdoor is rejected by the site, said Scott Dobroski, community expert at Glassdoor Inc. of Sausalito, Calif. Posts that don’t make an attempt to mention a few of the “pros” of working at a company don’t get posted, Mr. Dobroski said. Big-name technology companies such as Facebook and Google tend to receive particularly high ratings on Glassdoor. Mr. Dobroski declined to say what types of companies usually receive low ratings on the site, which was launched in 2008 and now has about 15 million registered users providing data on 250,000 employers. Visitors are asked to list the pros and cons of working for an employer, give advice to senior management, list their salary and describe the interview process. They also can rate the CEO. Once again, Lubrizol did well: Employees gave CEO James Hambrick a 92% approval rating. That figure puts him one percentage point behind Case Western Reserve University president Barbara Snyder, who had a higher approval rating than any other head executive of a large local employer that received at least 20 votes. Lubrizol spends a lot of time and money trying to keep employees happy, said Andy Panega, vice president of human resources. He said the company trains managers to become good coaches who treat employees with respect and has a
rewards program with a budget “approaching seven figures.” However, one of the biggest factors in keeping employees happy is hiring the right people in the first place, Mr. Panega said. “We’re very careful about the people we hire. We want to make sure there’s a fit,” he said.
Company men Among those employees are Chris Mileti and Alex Michlberger, who are mechanical engineers in Lubrizol’s mechanical testing division. Mr. Mileti didn’t know about Glassdoor when applying for the job, though he did read message boards about Lubrizol on Yahoo.com and comments on news stories at Cleveland.com. But the best information came from other University of Akron engineering graduates who had worked for the company. During the conference call, Mr. Michlberger said Lubrizol has a good worker safety program, noting that he formerly worked at a machine shop where people were always getting hurt. And Mr. Mileti likes how Lubrizol’s managers build relationships with rank-andfile employees, which he said is one reason why so few employees complain about the company. “I’m 36 years old,” Mr. Mileti said. “I have every intention of retiring from Lubrizol.” Mr. Michlberger chimed in: “I’m 28 years old. I have every intention of retiring from Lubrizol.” ■
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GOING PLACES JOB CHANGES ARCHITECTURE
BOARDS
ARKINETICS: Frank Castrovillari to principal and director of production.
HOSPICE OF THE WESTERN RESERVE: James W. Rogerson (Therapy Partners) to chair.
HSB ARCHITECTS: Brian Veverka to project architect.
DISTRIBUTION OLYMPIC STEEL INC.: Richard A. Manson to vice president, treasurer; John Mooney to vice president and general manager, Mid States; Michelle Pearson-Casey to director, human resources.
EDUCATION URBAN COMMUNITY SCHOOL: John Hagerty to annual fund director.
FINANCE FIRSTMERIT CORP.: Mark D. Quinlan to executive vice president, chief information officer. LORAIN NATIONAL BANK: Chris Massie to vice president, relationship manager.
FINANCIAL SERVICE BCG & CO.: Jennifer Hertzig to manager of practice growth; Albert Macso and Dana Howell to managers; Kathy Adkins, Lisa Reidy, Dave Kinney and Sean Buck to supervisors; Maureen Aebi, Dustin Bormet, Jenni Davies, Corey Centofanti and Kristian Doty to senior associates; Julie Moldvay to senior manager.
Massie
Castrovillari
Berkovich and Robert Jackson to associate directors, tax; Valerie Wawrin to associate director, assurance services. SS&G WEALTH MANAGEMENT LLC: Mary Wallace to director.
HEALTH CARE EMERITUS AT CANTON: Sheila James to community relations director.
INSURANCE MARSH: David Carlson to lead, Manufacturing and Automotive Practice. MEDICAL MUTUAL: Traci Fabrizi to vice president, corporate controller; Debra Green to director, community outreach; Ann Vickers to senior marketing director; Gregory Young to director, strategic initiatives.
LEGAL JONES DAY: Michael A. Platt, Kimberly J. Pustulka and William R. Stewart Jr. to partners. REMINGER CO. LPA: Stephanie S. Hathaway, Brian C. Lee and Courtney J. Trimacco to shareholders. TAFT STETTINIUS & HOLLISTER LLP: Michael J. Zbiegien Jr. to partner.
CREEKSIDE FINANCIAL ADVISORS LLC: Jeanne Cowart to client manager.
TUCKER ELLIS LLP: Clifford Mendelsohn and Sanford Watson to partners.
HOWARD, WERSHBALE & CO.: Michael R. Muniak to principal.
ULMER & BERNE: Sean T. Peppard and Lori A. Pittman to partners.
MCMANUS, DOSEN & CO.: Tracey M. Jacob to member, accounting and audit services group.
MANUFACTURING
RETIREMENT SOLUTIONS: David Donges to associate financial consultant. SS&G: Kimberly Flett to director, retirement plan design and administration; Steven Goykhberg to director, transaction advisory services; Steven Magovac to director, tax; David McClain II, Dmitriy
11
Attn: Manufacturers & Warehouses strategic advisory consulting.
VAN AUKEN AKINS ARCHITECTS LLC: Ashley Kristof to architectural designer.
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SIFCO INDUSTRIES INC.: Catherine Kramer to chief financial officer.
MARKETING LIEFKARSON: Latoya Hunter to account executive.
REAL ESTATE ALLEGRO REALTY ADVISORS LTD.: Donny Davis to associate,
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MENORAH PARK CENTER FOR SENIOR LIVING: Ira Kaplan (Benesch) to president; Peter Meisel and Beth Rosenberg to vice presidents; Becky Heller to secretary; Greg Marcus to treasurer.
AWARDS ASSOCIATION OF AMERICAN MEDICAL COLLEGES: Amy L. Wilson Delfosse (Case Western Reserve University School of Medicine) received the 2012 Alpha Omega Alpha Robert J. Glaser Distinguised Teacher Award. MENORAH PARK CENTER FOR SENIOR LIVING: Enid Rosenberg received the David N. Myers Distinguished Service Award; Dr. Peter DeGolia (University Hospitals and Case Western Reserve University School of Medicine) received the Dr. Arnold L. Heller Memorial Award; Beth Rosenberg received the Irving I. Stone Leadership Award.
Send information for Going Places to dhillyer@crain.com.
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JANUARY 28 - FEBRUARY 3, 2013
Severance tax battle in shale industry set to heat up State’s drillers say they will have ‘fight on our hands’ with Kasich in February By DAN SHINGLER dshingler@crain.com
In case you were wondering about the fight between Gov. John Kasich and Ohio’s growing oil and gas industry over severance taxes, it’s on the card as a main event in February, along with a new state budget. Or at least that’s the working assumption of Ohio’s drillers and their industry representatives, who have been at odds with the governor since he first proposed increasing severance taxes — which are the taxes they pay on the oil and gas they produce — just over one year ago. “I still think we have a fight on our hands,” said Tom Stewart, executive vice president of the Ohio Oil and Gas Association and an outspoken critic of the governor’s proposal. Gov. Kasich has indicated that personal income tax cuts will be part of the budget he is set to unveil Feb. 4 — and he previously has said those cuts could be paid for with
increased taxes on oil and gas extraction. But he hasn’t specifically stated whether a severance hike would be part of the budget. The gover- Kasich nor’s office did not reply to email requests from Crain’s Cleveland Business for more information before this story went to press. Linda Woggon, executive vice president of the Ohio Chamber of Commerce, as well as executive director of the Ohio Shale Coalition, said she expects the tax to be part of the governor’s tax proposal. She’s withholding judgment on it until she sees a comprehensive package. “We’re waiting to see what happens Feb. 5,” Ms. Woggon said. “We would like to see some income tax reduction, but it’s hard to say that every tax reform package that’s out there is one we would support.” Ms. Woggon might be at the po-
litical and economic crossroads of the entire issue, representing both Ohio businesses generally and the shale gas and oil industry specifically. Those roles are not inconsistent, Ms. Woggon said, citing the positive effect she and others say the shale gas industry already has had on specific industry sectors and the state’s job growth generally. Ms. Woggon is staying close to the fight, but out of the middle of it. She hopes the governor’s budget, or any specific tax proposals made separately, will reduce the tax burden on businesses and their owners generally.
Taxing ‘foreigners’ Dan Navin, assistant vice president of tax and economic policy for the state chamber of commerce, shares Ms. Woggon’s position on the tightrope. “The Ohio chamber’s perspective is you have to look at all of these things in a more comprehensive analysis, rather than simply isolating on the oil and tax severance tax,” Mr. Navin said. Not that the chamber doesn’t want to see an income tax cut, Mr. Navin said, noting that other near-
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“We’re waiting to see what happens Feb. 5. We would like to see some income tax reduction, but it’s hard to say that every tax reform package that’s out there is one we would support.” – Linda Woggon, executive vice president, Ohio Chamber of Commerce by states, such as Indiana, compete with Ohio for jobs by offering lower rates to prospective employers. “We support the objective of reducing personal income tax rates, because we think Ohio is not competitive with many of the states with which we are in competition for business investment and jobs,” Mr. Navin said. Gov. Kasich has not taken a position opposed to shale drilling — far from it. But, while he has said he supports the industry’s growth in Ohio, the governor often has rankled some of its participants with talk of “foreigners” taking Ohio’s resources in references to energy companies headquartered in places such as Texas and Oklahoma drilling in Ohio. Gov. Kasich has promised to make the state a more businessfriendly place generally, and apparently is in line with Ms. Woggon’s stated goal of lowering the burden on business overall. In media reports and public statements, Gov. Kasich has noted that Ohio’s severance taxes on oil and gas are among the lowest of any producing state in the nation. His position has been that Ohio’s natural resources are finite, that the
state should get something for those resources while they are used to generate profits for out-of-state companies, and that drillers aren’t going to abandon those resources if Ohio’s taxes are raised. He recently cited the industry’s continued investment in Ohio’s oil and gas infrastructure, even in light of his pending request for a tax increase, as evidence to support his argument.
‘It makes my head hurt’ An oil and gas industry lobbyist who asked not to be identified said the governor’s talks with some major oil producers might cause him to change his strategy, but not to abandon plans for a tax hike. For instance, the Kasich administration may ask for a tax on the BTU, or energy value, of the oil, gas and other resources extracted from Ohio’s Utica shale region, rather than a volumetric tax on each unit of each resource that is extracted. That setup would mean producers that do the best job of finding and extracting Ohio’s “wet gas” — which includes propane and ethane and often is found with crude oil — would pay more in taxes because of its higher BTU content, said Mr. Stewart of the Ohio Oil and Gas Association. “That seems a little regressive to me,” he said, adding, “It makes my head hurt.” It remains to be seen whether the governor and the oil-and-gas industry will come to terms. In the meantime, as Mr. Stewart notes, many areas of Ohio already are seeing increases in their tax receipts, including gains of more than 20% for major taxes in places such as Carrollton where drilling and hiring are active. ■
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Hofmeister
O Meeting your needs on all the key topics Summit at Landerhaven will bring together many of the brightest minds from rapidly growing field INSIDE: Communities are poised to profit. Page 14; Many businesses stand to benefit. Page 15; Panel perspectives on key issues. Pages 15-16
Cochran
n Tuesday, Feb. 5, Crain’s Cleveland Business and its public broadcasting partners at ideastream will host a summit, “Ohio & Shale: Getting it Right,” at Executive Caterers at Landerhaven. The summit will begin at 9 a.m. with a keynote address by John Hofmeister, former president of Shell Oil Company, Houston, Texas, and the founder and chief executive of Citizens for Affordable Energy, Washington, D.C. Mr. Hofmeister’s presentation, “Don’t Ruin It for Everybody,” will address why responsible development of shale oil and gas can bolster America’s economic future and strengthen its national security. He will speak from 9 to 10 a.m. Two general sessions will follow Mr. Hofmeister’s presentation. The first is from 10 a.m. to 10:45 a.m. and titled “The Utica Shale Now.” It will feature Edward W. (Ned) Hill, dean, professor and distinguished scholar of economic development, Cleveland State University; and Frank Tsuru, president and CEO, Momentum, which is leading the charge as Ohio prepares for more than $7 billion in midstream investment announced to date. Messrs. Hill and Tsuru will be discussing an overview of Ohio’s shale oil and gas development and a view of what 2013 might bring. The second general session, from 10:45
Hill
Tsuru
a.m. to 11:45 a.m. and moderated by Rick Jackson, host of Morning Edition on 90.3 WCPN ideastream, is a community leader briefing during which speakers from communities in Ohio will share case studies of key Jackson issues they’ve faced during the growth of shale development. (For more details, see page 14.) From noon to 1:30 p.m, Rich Cochran, CEO of the Western Reserve Land Conservancy, will be the luncheon keynote speaker, addressing ways communities can balance the financial benefits with strategies to protect the land long after the drilling is finished. Following lunch, participants can choose from one of four concurrent track sessions, held from 2 to 3:30 p.m. Each panel will address a different aspect of the business side of the shale boom. (For more details, see pages 15-16.) Tickets for the event are $85 for a single ticket or $600 for a group of eight. They must be purchased in advance by 5 p.m. Wednesday, Jan. 30. Walk-ins the day of the event will not be accepted. For information or to purchase tickets, contact Denise Donaldson at 216-771-5159 or ddonaldson@crain.com. More information can be found at www.crainscleveland.com/shalesummit. ■
Shale is booming, and business will only get more robust that end up right on the omeone asked me well sites, like truck trailDAN the other day, ers or water tanks. Some“When is this shale SHINGLER times they sell raw materiboom going to al, like steel that ends up happen?,” and it was all I as a well casing or a drill could do to keep myself bit. Sometimes they sell a from answering, “It’s gomachine or a part of a maing on now. I guess you chine that is used by anmissed it.” other manufacturer, like a True, there have barely roller that is used to turn been 200 horizontal shale flat steel into rolled tubes. wells drilled in Ohio so far Then there are the professional — but that’s hardly the real telltale service providers. Yes, that means sign of when the boom will hit wealth managers, accountants and Ohio’s economy. lawyers handling all of the paperThe real signs are all around alwork and financial planning for ready. It’s becoming more and companies and newly wealthy more common to visit an area landowners. But it also means enmanufacturer and find it making something for the shale gas indusvironmental science and civil engitry. Sometimes they make things neering firms — suddenly, that
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None of these midstream companies are in their first rodeo, and nearly all of them have far more insight into the oil and gas industry than nearly anyone trying to second guess the industry in Ohio. cousin we all laughed at for studying geology is having the last laugh. So yes, there is a boom going on right now in Ohio’s economy because of shale gas. But no, you won’t yet see it wholly reflected in the well numbers. If you want to see concrete signs of it in the shale fields, rather than on
businesses’ income statements, look to the midstream development that will take place this year. Companies like M3, Dominion and Caiman Energy, among others, are investing not millions, not hundreds of millions, but billions of dollars into the infrastructure that will be required to move oil and gas from well heads to processing centers and end markets. They’re building hundreds, if not thousands of miles of pipelines, along with myriad processing facilities — all the while buying a lot of pipe, hardware, compressors and other equipment from outside suppliers. None of these midstream companies are in their first rodeo, and nearly all of them have far more insight into the oil and gas industry
than nearly anyone trying to second guess the industry in Ohio. In journalism, the old saying is “follow the money,” and it would be tough to find a wider or better marked trail pointing to one fact: the Utica boom is on like Donkey Kong. If you want wells, they’re being drilled. If you want more, be patient. The smart money says you’re about to get years of fast-paced drilling and well construction. ■ Dan Shingler is editor of Shale magazine, a quarterly publication of Crain’s Cleveland Business. The next issue of Shale will be distributed in March with Crain’s and several of its national sister publications.
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Leaders seek ways to profit By KIMBERLY BONVISSUTO clbfreelancer@crain.com
T
he need for transportation upgrades, work force preparations, and improved housing and infrastructure are among the challenges that communities are facing in conjunction with heightened oil and gas activity. In 2011, 33 shale wells were drilled in Ohio. In comparison, more than 500 permits were OK’d last year to drill horizontal wells in Ohio’s Marcellus and Utica shale formations, according to the state’s Department of Natural Resources. And by 2015, the Ohio Oil and Gas Energy Education Program expects that about 4,000 new shale wells will be drilled in eastern Ohio. A report from Cleveland State
University, Ohio State University and Marietta College, meanwhile, predicts that increased shale well activity will create close to 66,000 new jobs in the state’s oil and gas sector and grow its economy by nearly $5 billion. Not surprisingly, economic development boards, port authorities, small businesses, local governments and landowners all are looking to cash in on what the Utica shale oil and natural gas fields have to offer. Jacob Duritsky, managing director of research for Team NEO, said Northeast Ohio will benefit through significant industrial investments. The Timken Co., for example, is investing $225 million into its Faircrest Steel Plant, which is near the company’s Canton headquarters, in an effort to expand its product range
and increase its capacity to serve the growing demands for specialty steel alloy bars. U.S. Steel Corp. is expanding its Lorain steel tube plant to make pipes for natural gas firms. “One encouraging thing about those investments is they are not just making those investments to serve Utica shale, but they are investments to serve the oil and gas industry throughout the country,” Mr. Duritsky said. “Product demand for what they are producing stretches beyond Ohio and Pennsylvania.”
On the ‘attack’ Mr. Duritsky said Ohio is uniquely positioned to “attack” the industry because of its long legacy of industrial activity. “We have a lot of talent here in the work force, industrial space, supply chain capabilities — things the oil and gas industry needs,” he said, adding that Ohio has a heavy supply of welders, machinists and commercial driver’s license holders. Paul Boulier, Team NEO vice president of business attraction, added that Ohio is a leader nationally in metal fabrication, chemicals and plastics customization. The challenge, however, will be to encourage and facilitate the use of natural gas liquids in the chemical, polymer and plastics industries. David Kaminski, director of energy and public affairs for the Canton Regional Chamber of Commerce, said the Canton region has become exactly what had been hoped — the business hub of the Utica shale oil and gas industry. Engineering firms, environmental quality and control consultants, and survey companies are among the industries expanding in or setting down roots in the Canton area. “We have the advantage of being the largest city in the heart of Utica, and we have the infrastructure in place,” Mr. Kaminski said. “We have a lot of engineering professional services coming to Stark County because it’s the most robust city to do business … in the Utica.”
A big score Steve Paquette, CEO of the Stark Development Board, said the region is just at the beginning of a 30- to 50-year development of the Utica shale. He said the future of the industry will be in the activities that grow around the natural gas liquids. “This will have a major impact on Northeast Ohio,” he said. Canton Mayor William J. Healy II said he has seen his community move beyond the initial fears of the impact of fracking to embracing the industry as the self-proclaimed Utica capital. “It’s a blessing for the first time since the steel industry came to town,” he said. Canton’s unemployment rate has dropped from a high in January 2010 of 14.9% to 7.4% in October 2012. He attributes the numbers to economic recovery in Ohio and the nation, the ability to attract non-oil and gas-related businesses to the region, and the explosion of businesses related to the oil and gas industry. “I believe this is a defining moment for our city,” he said. “This is the end of our decline, and we are starting to see a turnaround that will allow us to move forward and grow for years and decades to come.” ■
MORNING SESSION: COMMUNITY IMPACT During the second general session, which will run from 10:45 a.m. to 11:45 a.m., four speakers from communities in Ohio will talk about some of the key issues they’ve faced during the growth of shale development. The panelists are:
DOROTHY SKOWRUNSKI
LARRY KOSIBA
Executive director Coshocton Port Authority
Executive director Sustainable Opportunity Development Center
D
orothy Skowrunski, executive director of the Coshocton Port Authority, describes the area she represents as a small community in rural Appalachia. The Coshocton Port Authority about a year ago began a shale oil drilling dialogue with landowners, and it is watching what’s happening in other communities while beginning its own strategic planning. There are four permitted well sites in Coshocton — only one has been drilled and fracked. Mrs. Skowrunski, who heads the Port Authority’s Economic Development Resource Center, is bringing business and government entities together to discuss the opportunities and risks associated with shale oil drilling. She’s also created fact sheets, links and a video that can be found on the Port Authority website. Upcoming challenges she sees are preserving tourism and agriculture, training the work force for the future and providing ample and affordable housing. She’s also intent on promoting the amenities of the region to incoming companies. By introducing outside companies to the community, Mrs. Skowrunski said they may see value in contributing to foundations to support public assets like the park system. — Kim Bonvissuto
DENNIS SAUNIER President and CEO Canton Regional Chamber of Commerce
C
anton, which is marketing itself as the Utica Capital, may not be the epicenter of shale gas and oil exploration at the moment, but as the largest city in the heart of the Utica, Canton is positioning itself as its business sector. Dennis Saunier, president of the Canton Regional Chamber of Commerce, said his organization and the Stark County Development Board are interested in finding ways for Canton and Stark County companies to play a role in the midstream buildout of pipelines and processing facilities. The chamber has held a number of seminars for members to provide updates on legislation and transportation, and it’s working with the Stark State College of Technology to gear up the work force for the oil and gas industry. The college has announced plans for a $10 million downtown campus with a focus on oil and gas training. The chamber also is educating the community and its members about what the oil and gas industry does and how it does it. — Kim Bonvissuto
arry Kosiba, executive director of Salem’s Sustainable Opportunity Development Center, said right now a lot of his work is “dealing with the hype.” “What we’re seeing is a lot of our landowners and property owners are hearing about other areas where there is maybe more activity and wondering why it hasn’t filtered into our area,” he said. Mr. Kosiba said he is interested in sustainable development and doing strategic planning with his community’s resources. Two major issues are transportation and infrastructure. Rural county roads, he said, are not built to handle the heavy truck traffic that is coming. The area also lacks rail support, which is necessary to bring in the sands and water necessary for drilling wells. As in other communities, Salem businesses are seeing an increase in work, especially cyclone fencing, cement contractors, trucking firms and welders. Mr. Kosiba said the fact that Salem and Columbiana County are surrounded by manufacturing and rural areas makes the location ideal for the oil and gas industry. — Kim Bonvissuto
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BRAD EHRHART President Portage Development Board
B
rad Ehrhart, president of the Portage Development Board, said Ohio is about two years behind Pennsylvania and the Marcellus shale development. By looking at that experience, he said many communities are adjusting on the work force side and better preparing themselves from an economic development perspective. He said he is looking at Utica as an economic development opportunity. “The great opportunity I see is downstream,” he said. A strong plastics industry in Northeast Ohio can benefit from the raw materials produced through drilling, and companies could gain a competitive edge by utilizing natural gas, whether for hauling, transportation or other processes. Infrastructure, he said, will be one of the greatest challenges for many Ohio communities, as the wells that are drilled will be useless without the pipelines to carry the liquids out of the well. Preparing the workforce to fill needs at every level of development is another challenge. Mr. Ehrhart said finding skilled welders in the Portage County area has been difficult, but the local career center and a two-year college have added welding programs or ramped up exiting programs. — Kim Bonvissuto
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Shale adds fuel to economy By CHRISSY KADLECK clbfreelancer@crain.com
The first wave of Ohio’s shale boom has injected billions of dollars into landowners’ pockets, inundated attorneys with title work, and created a flurry of drilling related activities, all of which fall under a category of “upstream,� or development that happens before wells start producing. While there’s no definitive word on the exact number of shale oil and gas jobs added to the Ohio economy to date, industry watchers say a broad base of businesses around the eastern part of the state stand to benefit in the next two years, especially those surrounding the “midstream� — the capital investment phase that builds the infrastructure to process and deliver the oil and gas resources to an end user. Several companies, including Chesapeake Energy Corp., Momentum, MarkWest Energy Partners LP, have announced plans to invest billions in gas-processing plants in eastern Ohio. “We are looking at several hundred million dollars that are planned for investment in midstream infrastructure in the next couple of years,� said Jim Samuel, principal of Capitol Integrity Group. “That is what is really going to kick the play forward much faster. You’ll begin to see more wells coming online, more natural gas, oil and liquid coming out of these wells and going into the production side, and more jobs.�
Pipelines, compressors, processing plants, storage facilities and railroad terminals will all need to be constructed to handle the hydrocarbon production, said Andrew Thomas, executive in residence with the Energy Policy Center in the Maxine Goodman Levin College of Urban Affairs of Cleveland State University. All this infrastructure building will yield work for engineering firms, environmental services, design and construction firms, associated skilled workers in the building trades, as well as for businesses providing materials such as steel to build the pipelines. “Then there is another set of jobs relating to those service companies in Ohio that provide equipment or materials for the oil and gas industry worldwide,� Mr. Thomas said. “These include companies such as Ariel Corporation, which makes compressors for natural gas, and Fairmount Minerals, which supplies high-quality sand for hydraulic fracturing.� Kevin Thomas, an assurance partner at PricewaterhouseCoopers, said the low cost of natural gas — a result of the shale gas boom — clearly will benefit a broad base of companies across all industries as savings get passed on through the supply chain. Industries such as metal, chemicals or glass manufacturing that use large amounts of natural gas and electricity will be able to manufacture their products less expensively, leading to increased sales. Chemical industries that rely upon
natural gas as a feedstock also will realize substantial savings. Eric Planey, vice president of international business attraction at Youngstown/Warren Regional Chamber of Commerce, said his area is gaining a national reputation as a supply-chain hub for the shale industry. Mr. Planey said there is a mix of 15 to 20 companies — new and existing — that have been created or expanded because of industry opportunities. In the next 18 months, he expects to have netted close to 2,000 new jobs in the area because of shale oil and gas. In Canton, one of the biggest areas of growth in the downtown has been the addition of several engineering firms. The best example is Ceso Inc., out of Dayton, which opened its office in February 2011 with a few employees and now has 40, said David Kaminski, director of energy and public affairs at Canton Regional Chamber of Commerce, which welcomed 37 oil- and gasrelated businesses in 2012. Dana Matz, member services director for Zanesville-Muskingum County Chamber of Commerce, said his region has experienced significant growth in service companies and among existing oil companies already located in the area. The return of Halliburton Co., which broke ground last year in EastPointe Industrial Park in Zanesville and plans to add 300 jobs on its 178-acre site, has put “Zanesville back on the map in a big way,â€? he said. â–
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AFTERNOON SESSIONS: BUSINESS IMPACT Four concurrent sessions, from 2 to 3:30 p.m., will explore regulatory challenges as well as examples of business growth —
both from directly selling to the shale industry and from helping businesses exploit this new source of cheap energy.
Business is always
PANEL — SHALE’S IMPACT ON NORTHEAST OHIO BUSINESSES Business leaders will talk about the impact they’ve seen thus far from Utica shale development, and they will discuss how they are positioning their companies for future business related to shale. Business opportunities exist in serving companies developing shale fields, or for companies with products and services that will profit from increased use of natural gas. Panelists ■Dan Moore, owner, Moore Industries ■Andrew R. Thomas, executive in residence, Energy Policy Center, Maxine Goodman Levin College of Urban Affairs, Cleveland State University ■David Blair, senior vice president, GEM Energy Moderator ■Dan Shingler, editor, Shale magazine, Crain’s Cleveland Business
SOME PANELIST PERSPECTIVE “From your perspective, what are some of the most important issues that must be considered as the industry surrounding the Utica shale field develops?� ■Andrew R. Thomas: “For Ohio, I think the most important issue will relate to the realization of a robust oil and gas service industry. To be sure, Ohio industries and consumers will welcome cheap natural gas. And landowners certainly will happily cash their bonus and royalty checks. But if producing companies want to be welcomed to Ohio long term, they will need to create jobs here. High-paying jobs would especially be well received — sufficient to make a significant improvement on the economies of eastern Ohio. There will be much hand wringing over other important public policies — severance taxes, environmental regulation and support for the creation of new natural gas markets, to name a few. But in the end, the oil and
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gas industry has to make sure this does not turn out to be merely a windfall for a very small group of farmers. If the vast majority of Ohioans are left out of the economic renaissance, support for drilling will rapidly dissipate.� ■David Blair: “The development of natural gas reserves found in Ohio’s Utica shale is exciting news for several reasons. The promise of abundant natural gas with price stability for some time into the future — and coupled with recent technology innovation — sums into a game changer for Ohio business. My firm, GEM Energy (previously BHP Energy), is in the business of building power generation plants that are fueled by natural gas. Using “made-in-the-USA� Capstone MicroTurbines and advanced technology exhaust energy recovery, very high conversion efficiencies are achievable. The result is they are environmentally friendly and nearly noise free in operation. The modular nature of the plants allow for installation in close proximity to the point of use. This avoids further stress and strain on the existing electrical infrastructure while achieving maximum utilizations of natural gas fuel. The bottom line for Ohio business is lower operating cost, overall energy reduction and enhanced reliability. As I like to say, ‘It started out as a good idea, but now it’s an even better idea.’�
MORE: Information on the other three business-oriented panels scheduled for the afternoon of the summit. Page 16
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PANEL — MANUFACTURING FOR THE UTICA SHALE/API CERTIFICATION How can my company benefit from shale development opportunities by breaking into the supply chain? A look at API Certification requirements: when you’ll need it, and how to get it. Panelists ■ Eric Planey, vice president, international business attraction, Youngstown/Warren Regional Chamber ■ Ed Gonzalez, president, Ferragon Corp. ■ Rhonda Reda, executive director, Ohio Oil and Gas Association Educational Program and Foundation Halter ■ Ed Weston, director, Great Lakes Wind Network, WIRE-Net ■ Nick Ballas, president, The American Road Machinery Co. ■ Joe Halter, president, Solmet Technologies Moderator ■ Kevin Margolis, partner, Benesch
Planey
Weston
Gonzalez
Ballas
Reda
Margolis
PANEL — BUSINESS FUNDING IN THE SHALE PLAY How hungry are investors and lenders for opportunities to dig into the shale gas industry? Better yet, what does that mean for companies trying to raise money to expand? Panelists ■ Donald P. Fischbach, partner, Calfee, Halter & Griswold LLP ■ Michael Lundin, head of operations, Resilience Capital Partners ■ Dale A. Witt, vice president, commercial banking, FirstMerit Moderator Richardson ■ Sean P. Richardson, EVP, North Coast president and CEO, FirstMerit Bank
Fischbach
Lundin
Witt
Any new business opportunity of the size and magnitude of the Utica shale development is going to have an impact on the communities where they set up operation. This session will look at how exploration and production companies, community leaders and environmental groups can work together to create a development plan that benefits all parties for many years. Panelists ■ Jim Samuel, president, founder and principal, Capitol Integrity Group; fellow, Cleveland State University; founding partner, Ohio Shale Consortium ■ Jeffrey Dick, professor and director, Natural Gas and Water Resources Institute, Youngstown State ■ Jack Shaner, vice president, Ohio Environmental Council ■ Mike Chadsey, campaign director, Energy in Depth ■ Christopher Guith, VP/Policy, U.S. Chamber of Commerce’s Institute for 21st Century Energy; former deputy assistant secretary, U.S. Department of Energy Moderator ■ David Kaminski, director of Energy and Government Affairs, Canton Regional Chamber of Commerce
SOME PANELIST PERSPECTIVE
SOME PANELIST PERSPECTIVE “From your perspective, what are some of the most important issues that must be considered as the industry surrounding the Utica shale field develops?” ■ Donald P. Fischbach: “Uncertainty is one of the biggest issues facing Utica operators. First, uncertainty about what’s under their lease block. ‘What will it produce, how much will it produce, and can I develop it at a profit?’ They can make educated guesses but they won’t have real answers until they’re able to drill and produce wells. Then there’s uncertainty over who owns the exploration rights that can be caused by everything from inheritance issues, to interpreting a deed drafted over a hundred years ago, to validating or challenging an old oil and gas lease granted decades ago (Is that lease held by production?). Ownership issues need to be resolved so operators know who to work with and potentially pay. There are also questions about when and where to invest. Do they drill wells before there’s a pipeline to carry production to market, or do they wait for pipeline infrastructure to be built? They need the scientific data obtained by drilling the well to evaluate their leasehold, but they don’t want to spend millions of dollars to drill knowing it won’t generate revenue quickly. Meanwhile, with every passing day, the primary term of the lease block becomes shorter. The good news is that these challenges are not new or unique to Ohio. I’ve seen similar challenges over the past 30 years in several other resource plays, including in Oklahoma and Texas, and I’m confident these operators will make decisions that will result in a thorough development of the Utica.” ■ Michael Lundin: “Establishing a working relationship with the communities to be impacted by the development of the shale field: Establishing expectations up front and having the support of the community from the start is a key component to the success of the development and operation. Communication of what is to be expected in advance of and during the development will help to better establish a strong working relationship with the community throughout the life cycle of the shale play. Understanding the hub price of the hydrocarbons being captured: Even though the Utica is primarily a liquid play, it will still produce gas that has to be processed and transported to market. A sustained low natural gas price will likely be a disincentive to the overall development of the Utica. Also being aware of other influences on the development of the play such as a geopolitical event in the Middle East impacting oil
PANEL — BALANCING ECONOMIC GAIN, ENVIRONMENTAL SAFETY
STEPHEN HERRON
prices (but not gas) and what that might mean to drill rig mobilization and crew availability. Additional EPA regulation changes on coal and the potential impact to the demand for additional gas. Infrastructure development: During the earliest parts of the development stage, the supporting infrastructure to effectively supply materials and services is not fully developed. This generally results in higher than budgeted costs and time for the E&P (exploration and producing) companies and disrupts the schedules and financial models for the drilling programs. Having the support of rail, trucking, trained/skilled labor and drilling material supply is a key issue. In addition, having pipelines in place for the hydrocarbon transport out of the play is also critical.”
“What are some of the most important issues that must be considered as the industry surrounding the Utica shale field develops?” ■ Jeffrey Dick: “There are a number of important water-related issues that must be addressed as the Utica-Point Pleasant shale play moves from the exploratory phase to the development phase. The most critical issue is the vulnerability of our ground and surface water resources to contamination by production fluid spills. The anticipated scale of drilling and the large volumes of production fluids that will accompany operations require a strong review of existing regulations and the implementation of changes where necessary. Senate Bill 315 signed into law in 2012 is a good start. However, it falls short of expectations on a number of points. Disposal capacity and treatment options for produced brine water are another critical issue. While disposal through Class 2 injection was adequate to service Ohio’s conventional petroleum production, brine brought to Ohio from the Marcellus shale-producing regions of Pennsylvania and West Virginia is already straining the capacity of Ohio’s existing injection well infrastructure. Development of the Utica-Point Pleasant will increase demand for injection and quite possibly exceed capacity. Rather than increasing the number of injection wells and modifying capacity regulations to meet this demand, it makes sense to encourage brine water treatment options and decrease our dependence on injection disposal.” ■ Jim Samuel: “In these early days of the Utica play there are many issues to consider; if I had to narrow the scope, I would focus on waste streams. Waste streams represent the greatest risk from an industry and environmental perspective; a spill, an accidental discharge — not only does it impact the environment but the entire industry could face new, costly development hurdles and delays. Yet waste streams present a great opportunity for Ohio’s creative
Samuel
Dick
Shaner
Chadsey
Guith
Kaminski
businesses, R&D shops and manufacturers. Flowback water and drill cuttings already come to Ohio for disposal. What if wastes can be turned into raw materials for new ventures? I’m involved in an exciting effort to clean and reuse drill cuttings. This creative endeavor offers to spur a new niche, provide an environmentally safe outlet for drillers, and reduce the clogging of landfills. Overall, waste streams represent both liability and opportunity in a new industry. This is not one that burdensome regulations will drive. Rather, Ohio entrepreneurs must find their niche in this growing industry sector.” ■ Mike Chadsey: “Moving forward, education is the most important issue when we are discussing the development of Ohio’s oil and natural gas resources in the Utica–Point Pleasant formation. This education expands far beyond the discussion of the practices and processes involved in energy extraction. Not only is it incumbent on the industry to demonstrate the how, where and why in regards to how we are protecting our air, land and water in responsibly developing these natural resources, but also in educating our communities in how we can best take advantage of these geological gifts our state has been afforded. We stand at the precipice of emerging as a leader in domestic energy production, and returning our state to an era of prosperity in the process. Informing our communities on the needed steps to take full advantage of the oil and natural gas industry’s potential remains the priority in our future efforts.” ■ Christopher Guith: “The Utica Shale formation is a tremendous asset for Ohio and the region. In a recent IHS study sponsored by the U.S. Chamber of Commerce, we found that in 2020, shale development in Ohio will support 144,000 jobs, add $18 billion to the state economy, and provide $4.6 billion in state and local government revenue. This could be an amazing success story for Ohio, but the development of the Utica is in its infancy. Any significant regulatory or fiscal changes will add to production costs and make Utica exploration less competitive compared to other areas. American innovation has made oil and gas production possible across North America and if Ohio does not maintain a competitive regulatory and fiscal environment, jobs and economic growth will be jeopardized.”
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LETTER FROM THE PRESIDENT
ACG: What’s in a name? land include investment bankers, corporate M&A officers, private ften I am asked, “What equity, “C” level corporate offidoes Association for cers, senior asset based/corporate Corporate Growth lenders, junior/mezzanine lenders, actually mean?” Whose transaction attorneys, tax/assurgrowth? Is it the companies, the ance accounting professionals and corporate officers or the other service providers. financial professionals Earlier this year ACG who support businesses? Cleveland was recognized The short answer is yes, as 2012 ACG Large Chapyes and yes. ter of Year. We are proud To be successful you to be honored ahead of must always be looking to chapters in New York, develop new relationships. Chicago, Los Angeles, A strategy to consistently Boston and Dallas. This connect with deal makers SEAN MCCAULEY achievement would not ACG president and shapers will always have been possible withresult in new business opout the significant efforts portunities. The mission of ACG is of our current and past volunteer to provide this critical networkboard members, our chapter ing platform among participants members, and the thousands of in mergers and acquisitions and professionals who support our corporate finance. ACG Cleveevents each year. land’s primary networking efforts On Jan. 31, ACG Cleveland are the 25 to 30 diverse and awardwill host its 17th Annual Deal winning events hosted each year. Maker Awards. This signature Social media is important, but event to recognize significant building long-term relationships merger and acquisition accomis done by getting out, rolling up plishments attracts more than your sleeves and talking to people 800 financial professionals from face to face. No matter how big Northeast Ohio and around the or small the company, business country. M&A financial profesgets done between individuals sionals know that Cleveland is and not solely through a web page a deal-making town and an or phone call. important destination for netACG Cleveland has a 30-year working. The event is a unique tradition of connection and experience complete with nonengagement in Northeast Ohio. stop introductions and reconnecOur Cleveland chapter is one of tions, past and future deal discus58 around the world, including sions, and market observations Asia, South America and Europe, and frustrations. and part of a 14,500-member Our monthly breakfast meetACG global organization. ings showcase Northeast Ohio’s The 500 members of ACG Clevemost senior corporate and com-
By SEAN MCCAULEY
O
munity leaders. Twice a year, ACG Cleveland hosts workshop events that bring together a panel of industry experts to explore a specific business trend, issue, industry or community project. The Great Lakes ACG Capital Connection is a two-day event for capital providers and deal makers that attracts more than 700 M&A professionals. ACG Cleveland hosted the event in its first two years and we supported successful events in Indianapolis and Detroit in 2011 and 2012. Over the years ACG Cleveland has evolved its programming and expanded its mission to address the needs of future leaders, connect with Ohio’s graduate business schools and engage in the economic vibrancy of our region. Our ACG Cup brings together MBA student teams from the top graduate business schools in Northeast Ohio for a deal-specific case study competition. Over the last few years ACG Cleveland has developed programming specific to Women in Transactions (WIT) and a Young ACG (YACG) initiative to develop the next generation of deal makers. If you are serious about building or growing your own business network, I encourage you to learn more about our organization. Attend an event, talk to a chapter member, visit www.acgcleveland.org or contact me at 216-222-2847. ■
Sean McCauley is president of ACG Cleveland and a vice president with PNC Business Credit.
table of
contents
FILE PHOTO
S4 Sky’s the limit Cleveland’s diverse business base and wealth of service firms enhance private equity position. S3 Buyer due diligence S6 Purchase agreements S7 80/20 rule S7 Primary care revolution S8 Earn-out contingent consideration S8 Acquisition advice S9 Timing deals S10 Tax considerations for carve-out statements S10 Corporate divestitures S11 Managing M&A fees
“I work with Benesch because of their ability to get to the core of an issue and then develop the strategies to resolve it, whether an everyday matter or something out of the ordinary.” DAVID I. MANSBERY President, Duck Creek Energy, Inc.
David considers himself a “serial entrepreneur” and has relied on Benesch for a multitude of business needs. From handling real estate, leasing, litigation and general business matters for Duck Creek Energy to navigating the successful sale of a prior business and its intellectual property to incorporating a new venture, Benesch has the breadth and depth to help David go wherever his ideas take him. To learn more about our relationship with Duck Creek Energy, visit beneschlaw.com/myteam
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MY BENESCH MY TEAM
S12 Valuations S13 Purchase accounting rules S13 Sell-side due diligence S14 What is your corporate M.P.G.?
COVER PHOTO: The Veterans Memorial Bridge with 200 Public Square, Terminal Tower and Carl B. Stokes U.S. Courthouse in the background. Photo by Eureka Lott
DISCLAIMER The articles in this section were prepared by the respective contributors for general information purposes only and are not intended as legal, tax, accounting or financial advice. Under no circumstances should any information contained in any of these articles be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed in the article are those of the respective contributor and are subject to change without notice due to market conditions and other factors.
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S14 Prepare for selling family held business S15 Tale of M&A markets S16 Combining ABL with syndicated term loans and high-yield bonds S17 Noncorrelated investments S18 Lending alternatives S19 Leverage buyout trends S20 Global M&A S20 Conflict minerals rule S20 Private equity survey S21 Judging a private equity firm S22 Transactional insurance S23 Asset-based lending S23 Deal Maker awards
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JANUARY 28 - FEBRUARY 3, 2013
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Best practices in financial due diligence Target firm’s earnings quality key to crafting solid transaction By MARK BOBER
T
horough due diligence is an important component of a transaction that, if done properly, provides a prospective buyer with an in-depth understanding of the quality of earnings of the target company. Knowing a target’s quality of earnings can further assist a buyer in establishing pricing, deal structure and postacquisition planning. Generally, it would not be disclosed in their audited financial statements or a confidential information memorandum, which is a description of the business and its financial performance. While every situation is different, following are typical focal points of a quality of earnings investigation:
ment of revenues and margins by customer, product line and channel to assess the quality of such revenue and the sustainability of the revenue stream.
should be closely assessed to determine the appropriateness of such valuation given its direct impact on reported earnings.
■ Accounting adjustments impacting earnings: The nature of activity within reserves and accruals, such as allowance for doubtful accounts, inventory reserves, warranty reserves, accrued liabilities, etc., should be analyzed to determine potential inflation of reported earnings.
■ Pro forma cost adjustments: Pro forma costs might include restructuring or financing costs. These need to be carefully analyzed in order to determine the appropriateness of such adjustments. This will require assessment of both the qualitative and quantitative aspects of these adjustments.
■ Inventory valuation: Capitalization of costs into inventory
Other due diligence areas to consider include the following:
■ Scalability of the business, depth of the management team, adequacy of information systems and related items ■ Debt and debt-like liabilities. Items are often not recorded on the balance sheet ■ Working capital requirements and thresholds established in the purchase agreement or letter of intent ■ Capital expenditures, both past and future Acquisitions provide tremendous opportunities, but without adequate due
■ Revenue recognition: Revenues should be recogMARK BOBER nized in the Bober Markey proper period Federovich as well as costs related to generating such revenues. Generally accepted accounting principles (GAAP) applied on a consistent basis would be the standard that would govern such treatment. ■ Normalization adjustments: This would include validation of seller discretionary items including compensation in excess of fair market value, perks, etc. It would also include the appropriateness of other non-recurring income and expenses that would not be anticipated to impact future earnings. ■ Quality of revenues: This entails a comprehensive assess-
Crain’s Cleveland Business Custom Publishing
diligence, it’s buyer beware.
Mark Bober is a partner with Bober Markey Federovich. Contact him at 330-255-2425 or email mbober@ bobermarkey.com.
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Dealmakers elevate position of private equity industry Professional service firms augment burgeoning sector By CHERYL HIGLEY
B
uilt on the shoulders of visionaries such as Kirtland Capital’s Jack Turben, Linsalata Capital Partners’ Frank Linsalata, Morgenthaler’s David Morgenthaler and Primus Capital’s Loyal Wilson, Cleveland has quietly and steadily cemented itself as a private equity powerhouse over the past 30 years. There are no signs of wear on the industry, as both established and up-and-coming firms continue to evolve to meet the changing needs of their investors and portfolio companies with the same “roll up your sleeves and get to work” mentality for which Northeast Ohio is famous. “Private equity in Cleveland is growing up. Firms are learning
from each other and from the markets we’re in, and our investors are refining how they do business,” says Jim Marra, director of business development for Blue Point Capital Partners. Despite the long legacy of private equity in Cleveland, performance is still key — and it is those companies that embrace their history and work to build a different future that continue to thrive. Tim Healy, senior vice president of Linsalata Capital Partners, says: “It’s a different world than it was in 1984. To survive in any industry, you have to be open to change — or you will have a limited life span. We are lucky to have some really good, smart, hard-working individuals who have been successful and have been able to evolve and adapt in
their thinking to continue to perform well.”
AN EVOLUTION The evolution of private equity in Cleveland includes focused yet flexible approach to getting deals done: More firms are taking a more targeted approach to deals, focusing on specific types of deals, industries or ownership styles — all important criteria to consider given the competitive market. “With so many private equity firms bidding for good businesses, this has become a much more efficient market today. As a seller, it’s great — however, if you’re buying, it is much more challenging,” Marra says. Primus Capital Director Scott
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right here! And that’s why we’ve called Cleveland home for over 20 years. To learn more about Riverside’s strategies to grow companies with $1 million - $30 million in EBITDA, contact:
Seelbach says while many firms get away with it. But as company began (and some remain) as genvaluations have gotten more eralists, a trend toward building robust, if you don’t understand expertise in certain sectors is the competitive landscape facing taking hold. the target company, you can “We find that make serious focusing on mistakes. Getting “By bringing financial and specific industry deeply familiar intellectual capital to the sectors where we the industable and looking at different with have had past tries in which ways to help companies success and can companies comcontinue to grow, it opens a broad slate pete helps mitileverage a gate our risk of opportunities.” segment specific and adds more – Stewart Kohl, The Riverside Co. knowledge base value to the is imperative deal.” to generate favorable returns. Stewart Kohl, co-CEO of The Within health care specifically, a Riverside Co., says multi-sector constantly evolving regulatory specialists can thrive — with and reimbursement landscape good due diligence: “We like the requires a significant amount of generalist approach; it’s in our focus to properly assess investDNA. But we succeed because ment risks.” we’re big on comparison shopMarra agrees: “When compaping and choosing only those nies were relatively cheap, you companies that offer the best could invest in companies you risk-reward opportunities for our didn’t know much about and investors.”
Why Cleveland? What is it about Cleveland that makes it a prime hub for private equity deals? Cleveland private equity insiders attribute it to three keys: ■ Diverse industries/ Fortune 500 history. While a smaller number remain, a number of Fortune 500-size corporations were founded and headquartered in the region in the last century — giving root to smaller support businesses. “Both the large and small businesses have developed a lot of management talent
Scott Gilbertson Principal, Origination sgilbertson@riversidecompany.com
that helped develop the private equity community. There are resources that were invested here decades ago that continue to benefit the community today,” says Tim Healy, senior vice president of Linsalata Capital Partners. Clusters of economic development and manufacturing specialties in a variety of company sizes (rubber, health care, manufacturing, etc.) give Cleveland a competitive advantage, he says. ■ Midwest moxie. “Cleveland and the Midwest in general are
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COMPLEMENTARY PLAYERS
FOTOLIA
DIFFERENT DEALS Another key factor in the evolution of private equity in Northeast Ohio is that firms are taking more interest in the operations of the companies they are buying. “Twenty years ago, we were talking about how much to borrow from the bank to get a deal done. Today, there is relatively little talk on the financing side. You have to do it well, obviously, but now the question is ‘How are we going to help the companies we’ve invested in become more profitable?’” Kohl says. Tied to the operational focus is that more owners are looking for private equity partners not because they want to sell and exit the business but because they want to grow. “Recapitalization transactions wouldn’t have been considered 10 to 15 years ago, but they can be very profitable for both parties,”
hotbeds of lower middle market, founder- and family-owned businesses,” says Karen Tuleta, partner with Morgenthaler Private Equity. “There are a lot of high-value manufacturing companies in Northeast Ohio, which helps fuel the private equity deal flow. They are deeply rooted in product innovation and engineering talent.” ■ Organic growth. The diverse, middle market company base found in Cleveland keeps the deals churning. “If you look at Detroit and
Marra says. “We’re seeing a lot of older owners that are making a decent living, love their company but have their money wrapped up in one asset. Recapitalizing the business gives the founder deeper pockets to invest back into the company.” Primus Capital’s Seelbach is also seeing more minority deals being consummated — taking complete control and changing management isn’t always the order of the day. “Some firms only want a majority interest, but we’re seeing success with tailored investment structures where there is minority control and the private equity firm is adding more value at the Board of Directors level with growth strategies, leveraging contacts and evaluating acquisition opportunities.” Kohl says Riverside is seeing more add-on acquisitions and expects that trend to continue.
Pittsburgh, for example, those cities are highly dependent on a narrow slice of a particular industry. As those companies became huge, they dwarfed the abilities of local service providers and went to New York City to get capital,” says Stewart Kohl, coCEO of The Riverside Company. “In Cleveland, the diverse middle market and smaller Fortune 500 companies are well-served by local providers. The whole private equity ecosystem has grown here and now people come to Cleveland to pursue private equity.”
While deal structures and targeted acquisitions continue to evolve, a critical component of private equity’s success in a given geographic market — the presence of complementary professional service companies — has also taken hold. Attorneys, accountants, transactional advisory consultants, investment bankers and commercial banking specialists all play key roles in the deal-making process — and Cleveland is fortunate to have a robust cadre of such specialists. “The third-party private equity resources within Northeast Ohio are amazing and have helped establish the region as a strong PE community,” says Karen Tuleta, partner with Morgenthaler Private Equity. Kohl says the growth of those sectors has helped to keep Cleveland’s private equity hub thriving, providing an economic boost to the region. “For a city our size, we are blessed to have a rich pool of human capital across all the service firms. The private equity network is a real economic engine … we have a lot of smart people making good investments and creating wealth for our city.” ■
JANUARY 28 - FEBRUARY 3, 2013
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Private equity synergy at work The synergistic relationships that exist in Cleveland’s private equity world help set it apart. Working together to get a deal done, and trends such as add-on transactions taking hold, makes PE hum: Western Reserve Partners introduces Morgenthaler Private Equity to Avtron, an Independence-based and family owned business in November 2007. Avtron operated three business units, designing and manufacturing aerospace test equipment, power generation test equipment and high-end encoders and drive systems for industrial automation. After 53 years, the company’s family owners were seeking liquidity and assistance in management succession. Morgenthaler transitioned a family owned business to a PE-owned business, which provided Avtron’s management team with the framework to accelerate growth initiatives while reducing costs and improving operational efficiency. At the time of the recapitalization, creative transaction structuring facilitated the potential future divestiture of each business unit individually on a tax-efficient basis.
With Morgenthaler’s oversight, Avtron made two successful add-on acquisitions. Avtron Loadbank, the power generation test equipment business unit, was sold in March 2012 to Emerson Electric and Avtron Industrial Automation, the encoders and drive systems business unit, was sold to Nidec in September 2012. Both companies plan to grow their respective Avtron businesses in Independence. Jones Day’s Cleveland office represented Morgenthaler on the initial acquisition and both sale processes. KeyBanc and JP Morgan ChaseCleveland provided financing to Avtron during the course of ownership.
Reason says: M&A is the right growth strategy.
Instinct says: buying smart is the right path to growth. At Grant Thornton we specialize in helping dynamic organizations execute transactions successfully. We bring a real, competitive advantage of a broad perspective, senior staff attention and short decision-making chains that our clients truly value. To help unlock your potential, visit GrantThornton.com/Deals. Grant Thornton refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd.
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GETS THE DEAL DONE.
Will your purchase agreement stop you from recovering losses? EBITDA had been overstated by $1 million. ou have just purYou think you must chased XYZ Comhave a good claim pany for a puragainst the seller to rechase price equal cover your losses, since to five times EBITDA the purchase agreement (Earnings Before Interest, contains representations Taxes, Depreciation and that: MICHAEL J. Amortization). You ■ XYZ is in compliMEANEY discover that XYZ is not ance with all laws, and McDonald handicap compliant, and ■ The financial stateHopkins LLC the required remedial ments were accurately work will shut down XYZ prepared in accordance for a week, resulting in lost profits. with generally accepted accountYou also discover that XYZ’s ing principles.
By MICHAEL J. MEANEY
Y Contact Mark Kiskorna at 216-222-8506 or mark.kiskorna@pnc.com to find out how PNC can get you the capital you need. PNC and ACHIEVEMENT are registered marks of The PNC Financial Services Group, Inc. (“PNC”). PNC Business Credit is the asset-based lending division of PNC Bank, National Association, a wholly owned subsidiary of PNC. In Canada, PNC provides asset-based lending through PNC Bank Canada Branch. In the U.K., loans are provided by PNC Financial Services UK Ltd., which is an indirectly wholly owned subsidiary of PNC Bank, National Association. Lending products and services require credit approval. *A portion of the financing provided by Steel Cit y Capital Funding, a division of PNC Bank N.A. ©2012 The PNC Financial Services Group, Inc. All rights reserved. CIB PDF 1212-046-125205
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Then you read in the back of the purchase agreement that the “losses” that you are able to recover do not include “consequential damages, lost profits or diminution in value.” Such disclaimers are not unusual. According to a recent study, 55% of private company deals contained a disclaimer of the right to recover “consequential damages” and 17% of deals contained a disclaimer of the right to recover “diminution in value.” The term “consequential damages” does not have a precise legal definition but is commonly understood to mean those damages that do not ordinarily result from a breach of the contract and thus were not reasonably foreseeable. A court might conclude that the profits lost during the week XYZ is shut down for construction were reasonably foreseeable and therefore, would not be considered “consequential damages.” However, depending upon how the term is interpreted, the profits lost as a result of the plant shutdown may or may not be considered “consequential damages,” and therefore, might not be recoverable. Moreover, if the contract contained an exclusion from recovery of “lost profits,” the buyer would be out of luck. A buyer would likely be very surprised that a purchase agreement would prevent recovery of such clearly provable losses that directly resulted from the seller’s breach.
Turning to the $1 million overstatement of EBITDA, the buyer may assume that he can recover $5 million in damages – an amount equal to the product of the EBITDA overstatement ($1 million) times the EBITDA multiple (5) used to value the deal. Although this may seem to be the best way of measuring buyer’s loss, such recovery may be prevented by an exclusion for “diminution in value” damages. Thus, the buyer may be deprived of any effective remedy for breach of the most important representation in the entire purchase agreement – the accuracy of the financial statements. The definition of “losses” is typically found deep in the fine print of the purchase agreement. These terms should be carefully reviewed to make sure they do not defeat the reasonable expectations of the buyer. ■
Michael J. Meaney is co-chair, Mergers and Acquisitions Practice, at McDonald Hopkins LLC. Contact him at 216-348-5411 or mmeaney@ mcdonaldhopkins.com.
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80/20 rule applies in deals, too
chase price was agreed upon? How are accounts receivable and inventory to be valued? What happens to obsolete or damaged inventory or past due or uncollectible receivables? Detail on payment terms other than cash. If a seller note is “subordinated,� what does that mean? When can buyer’s lender stop seller from receiving note payments? Is the buyer credit worthy? Is there any security for payment? Rights of offset. Can the buyer stop seller note payments if it “believes� seller has breached the agreement, or should the buyer be required to get the approval of a third party? If a party can simply withhold payment to make itself whole there is the potential for unfair leverage in a dispute. In that endless indemnity provision, go right to the “basket.� The dollar threshold for making a claim and whether the basket is a true “deductible� typiSTEVE ELLIS cally have financial consequence Tucker Ellis LLP far more often than how long representations survive or the “cap� on total claims.
Focus on provisions with financial impact By STEVE ELLIS and JENNY BERLIN
T
he “80/20� rule appears in business all the time. Twenty percent of your customers produce 80% of your profit, 80% of your complaints, etc. You get the idea. We believe something close to the same ratio applies to most acquisition agreements, at least in terms of where clients might best focus their attention. Your business lawyer needs to be an expert on 100% of the deal documents, and every provision has to be analyzed; but under the 80/20 rule, a client should initially focus on the key provisions that, in most instances, are likely to have the most meaningful financial consequence.
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Focus on the real money issues and let your lawyer advise you on the rest. Every deal has unique facts and risk allocation issues, all of which are important, but they also typiJENNY BERLIN cally have a fairly standard set of Tucker Ellis LLP alternative solutions that any good deal lawyer is well equipped to Liabilities assumed. Paying the sellhandle. We suggest that you focus on the 20% er’s bills (e.g., accounts payable and that is likely to make the most difference. ■accrued expenses) is the same as paying cash. It all counts as purchase price. Steve Ellis is a partner with Tucker Ellis LLP. Jenny Adjustment for changes in working Berlin is counsel with Tucker Ellis LLP. Contact Ellis capital. What happens if the amount at 216-696-2435 or stephen.ellis@tuckerellis.com. of working capital at closing is less than Contact Berlin at 216-696-5482 or the amount that existed when the purjennifer.berlin@tuckerellis.com.
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Primary care revolution leads to market consolidation By SEAN DORSEY
T
he passing of the Patient Protection and Affordable Care Act of 2010 (PPACA), commonly known as “Obamacare,� is accelerating healthcare provider consolidation, particularly with respect to primary care physicians. The reasons for this acceleration are complex, yet vital in understanding the expected wave of M&A activity. An outcome of the PPACA has been the formation of new delivery models, including Accountable Care Organizations (ACOs). These new models of care, in conjunction with the shift from inpatient settings toward outpatient care, are underscoring the role of primary care physicians as the clinical center of care. The economic value of primary care physicians, therefore, is increasing. A typical primary care physician provides approximately $1 million of downstream referral revenue for hospitals and controls just over $12 million of healthcare expenditures for every 2,000 patients. At the same time, primary care practices are experiencing dramatic cost pressures, because smaller independently owned practices are often unable to keep pace with increased regulation and challenging reimbursement trends. According to Accenture, 12 years ago 57% of all physicians owned their own practices. Today, independent physicians account for less than 39% of the total. As a result, acquiring primary care practices has become a critical strategic objective for hospitals and health systems. Potential buyers recognize that a well-
SEAN DORSEY League Park Advisors
aligned primary care network will provide significant cost advantages across the continuum of care, as reimbursement models evolve from historical fee-for-service schemes to bundled payment models. Hospitals lacking a strong primary care foundation will be challenged to compete in the current environment of evolving risk sharing. Increasingly, physician groups and hospitals are seeking the expertise of dedicated health care investment bankers to help navigate the acquisition process. These transactions require a unique understanding of the complexities associated with Medicare and Medicaid reimbursement, fair market valuation requirements and a rapidly evolving regulatory environment. With the re-election of President Obama, health care reform is here to stay. The new economic realities of the health care marketplace will drive a sustained period of ongoing provider consolidation. â–
Sean Dorsey is founder and CEO of League Park Advisors. Contact him at 216-455-9990 or email sdorsey@leaguepark.com.
Announcing a merger between FRQÄ&#x;GHQFH DQG YDOXH M & A is one of the quickest paths to growth. But it’s not always the surest. That’s why at PwC, we help you understand the risks in your transactions, so \RX FDQ EH FRQÄ&#x;GHQW WKDW \RX DUH PDNLQJ LQIRUPHG VWUDWHJLF GHFLVLRQV )URP your deal negotiations, to capturing synergies during integration, we help FOLHQWV JDLQ YDOXH $QG XOWLPDWHO\ GHOLYHU WKLV YDOXH WR VWDNHKROGHUV /LNH ZHĹ‚YH GRQH IRU WKH PDMRULW\ RI WKH WRS JOREDO SULYDWH HTXLW\ DQG )RUWXQH FRPSDQLHV /HYHUDJH WKH H[SHULHQFH RI RXU JOREDO QHWZRUN RI Ä&#x;UPV Learn how at pwc.com/us/deals
Š 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member ďŹ rms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Crain’s Cleveland Business Custom Publishing
Physician groups and hospitals are seeking the expertise of ... health care investment bankers to help navigate the acquisition process.
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Advice for first-time buyers Understand the complexities of completing a deal their family and what they hope to enjoy in retirement. enry Ford famously said, Successful transactions, there“Whether you think fore, must meet the personal you can or can’t, you’re goals of sellers while protecting right.� When it the financial goals of comes to buying a busibuyers. ness, the ability to effecBuyers also tend to tively run a business is a underestimate how long different skill set than it will take to successfully what is required to comclose a transaction. Not plete an acquisition. As only does it take a signifia result, many successful cant amount of time to companies and/or execufind the appropriate tives underestimate target company, but the LLOYD BELL the complexities amount of time required Meaden & involved in closing a to woo and then wed will Moore LTD transaction. probably take longer than By far the largest hurdle that buyers anticipate, for a number buyers need to understand is that of reasons. sellers don’t have to be rational. If outside financing will be Buyers can develop all sorts of required, buyers may find that financial models projecting cerbanks are a little more measured tain rates of return on various in their approach then they had capital structures, but sellers been a few years ago. If real estate rarely care. Their internal rate of is involved in the deal, the cast of return is not calculated on a characters now includes engispreadsheet, but rather by what neers and appraisers who may they’ve been able to provide for not share in the sense of urgency.
By LLOYD BELL
H
Finally, while legal and accounting advisers of buyers will be quick to respond, advisers for sellers, who will likely be losing a client as a result of the transaction, may find compelling reasons why a deal just isn’t right. While the closing of acquisitions will likely veer from original plans, buyers must remember to stick to the program as closely as possible. If specific steps drag on, it’s better to close later than to take short-cuts on due diligence. If the economics change either because of performance issues by sellers or the capital being made available, buyers must stop and make sure that they are working to close a deal that still makes sense, not just working to close a deal. â–
Lloyd Bell is the director of the corporate finance practice at Meaden & Moore. Contact him at 216-241-3272 or email lbell@meadenmoore.com.
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Addressing conflicts through an earn-out contingent consideration multiple of the target company’s historical EBITDA (earnings before hen acquirers and interest, taxes, depreciation and sellers don’t agree on amortization) of $10 million. The the value of the tarseller, however, believes that the get company, the gap acquirer’s price significantly unis almost always based on dervalues the company, the parties’ differing exbecause the seller is cerpectations with respect to tain it will land a major the future earnings — customer that will insellers being more opticrease its EBITDA by mistic than acquirers. $3 million. The acquirer is One way to bridge the not willing to pay for an gap is through a continuncertain future revenue gent consideration mechstream that it may have MICHAEL TUCCI little control over. The anism, the most popular Mansour, Gavin seller, on the other hand, being the “earn-out.� Gerlack & With an earn-out, the wants to enjoy the upside Manos Co. LPA amount of some portion on the resources it exof the purchase price is pended in securing the contingent on the future earnings customer. This disparity can be of the company or the achievealigned through an earn-out, ment of certain milestones and which would allow for the purbecomes payable at a specified fuchase price to be increased to reture date. flect the new revenue if and For example, say the acquirer when it happens. This eliminates has priced the target by using a the acquirer’s risk if the target By MICHAEL TUCCI
W
Wherever your journey may lead, take along someone who can provide a true sense of direction. In transactions, the goal is to maximize value and minimize risk. Choosing the right professionals to perform quality of earnings/ due diligence is crucial to the success of your acquisition. Led by Mark B. Bober, CPA/ABV, CFF, CVA, BMF’s Transaction Services Group is a dedicated team of professionals that supports private equity groups nationwide.
AKRON | CLEVELAND
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Crain’s Cleveland Business Custom Publishing
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JANUARY 28 - FEBRUARY 3, 2013
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Controlling the uncontrollable By TOM BECHTEL
M
aking an acquisition or selling a company is as much a game of timing as it is anything else, and having the right fit at the wrong time is particularly frustrating. Generally, poor timing boils down to one or more of the following constraints: ■ Funding Advanced Notice: While the credit freeze has started to thaw, it is difficult to rush a transaction through. Proper due diligence by the buyer and the bank or equity source is critical, especially when maximizing the use of leverage in an acquisition.
isn’t really what they are ■ Seller Preparation: looking for to achieve Private companies can be specific strategic objeccaught off guard by due tives. From the seller’s diligence. Without outperspective, there is too side pressure, statements much anticipated growth may be prepared on anto sell now. other accounting method What to do when not in accordance with faced with the right deal GAAP, interim reports can TOM BECHTEL at the wrong time? be irregular and certain Cohen & Co. ■ Be patient: Utilize activities may be driven quality advisers and give the othprimarily by tax benefits. Such er side time to prepare for due practices are fine for a private diligence. company but can lead to deals ■ Find solutions: If a seller being delayed or halted due to wants to keep milking the “cash the lack of understanding of recow” for a few more years, offer sults from the buyer’s perspective. insight as to the potential down■ Strategic Priorities: From the side implications, particularly if buyer’s perspective, the deal just
customer isn’t landed and allows the seller to realize the upside if it is. Earn-outs, however, have risks. A business litigator I know once told me, “I’ve never met an earnout I didn’t like.” They are often contested and end up in court for resolution, which greatly helped his revenue. To avoid problems at payout time, the parties should carefully craft an earn-out provision up front in the purchase agreement keeping the following in mind:
1
Earn-outs work best when the seller stays involved with the target company after the sale.
2
Keep the financial structure simple. For example, a flat percentage of earnings or revenue is easier to calculate and less likely to lead to disputes than complicated formulas.
3
Make milestones and metrics as objective as possible. For example, gross earnings are a more objective metric than net earnings, because net earnings provide the opportunity to fight over how expenses and write-offs are calculated and applied.
4
For a seller, it is important that it has control over the contingencies that affect the goals, such as making sure the acquirer has and is willing to commit sufficient resources. On the other hand, the acquirer needs to protect its flexibility to change its overall business objectives.
5
Keep the earn-out period as short as possible. Longer periods provide more time for disputes as well as diluting the value of the target company as it becomes more integrated into the acquirer’s business, making payout calculations more difficult. In short, earn-outs can provide an effective way for acquirers and sellers to bridge valuation gaps provided that they are well crafted and carefully documented up front. ■
Michael R. Tucci is an attorney with Mansour, Gavin Gerlack & Manos Co., LPA and counsels his clients on business and intellectual property matters. Contact him at 216-523-1500. More information is available at www.mggmlpa.com.
Crain’s Cleveland Business Custom Publishing
the key owner does not have a solid succession plan. ■ Be flexible: Not every buyer or seller is going to fit with all the desired criteria. If the ideal isn’t there when wanted, don’t ignore strategic priorities and take whatever is available. The more prepared you are as a seller and the more qualified opportunities you have in your pipeline as a buyer, the better positioned you are to hedge against the timing issue that may hinder a great potential opportunity. ■
Tom Bechtel is a CPA and director of transaction services at Cohen & Co. Contact him at tbechtel@cohencpa.com.
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Tax considerations for carve-out financial statements the carved-out business. Identifying these assets upfront facilitates s companies focus on core allocating the deferred tax-related strategies to sustain future items associated with the assets to growth, many are finding be bifurcated. Further, careful examthe divestiture ination of the legal entity component of transacstructure helps identify tions has grown in size the particular jurisdicand complexity. Synthetions where the carve-out sizing information relatbusiness will operate, proed to tax provisions is ofviding guidance as to the ten one of the most appropriate statutory tax complex aspects of rates and compliance preparing carve-out fiwith applicable tax laws. GIOVANNI F. nancial statements in Calculating and reportconjunction with a diing deferred tax assets DI CENSO vestiture. Among the spe- Deloitte Tax LLP associated with the comcific tax areas to consider pany’s attributes, such as are the legal entity structure and denet operating losses and various termination of tax attributes. credits, poses distinct challenges Accounting data used in tax rewhen preparing carve-out stateturns are prepared on a legal-entiments. A company should start by ty basis. Consequently, determintracking the attributes and related ing which legal entities comprise deferred items associated with the the business segments or divisions legal entities that comprise the to be carved out will help detercarve-out statements. These attribmine whether relevant tax inforutes may be adjusted for any acmation exists for these entities counting push-down adjustments and how to extract needed data. that are recorded as part of the Sometimes only a part of a legal carve-out process. entity’s net assets are included in Further carve-out adjustments
By GIOVANNI F. DI CENSO
A
may be needed to show how the company would look if operating on a stand-alone basis. If the tax attributes recorded in the carve-out financial statements are materially different from those actually assigned to legal entities that comprise the carve-out group, it may be necessary to add comments in the tax footnote to explain the discrepancies. Finally, the company should determine the likelihood that the carved-out operations will realize deferred tax assets in the future and assess the need for an appropriate valuation allowance. For divestitures requiring carveout financial statements, companies should seek the upfront involvement of tax professionals to address the key tax matters that may ultimately increase the likelihood of a successful transaction. ■
Giovanni F. Di Censo is a principal in M&A Transaction Services at Deloitte Tax LLP. Contact him at 216-589-5150 or email gdicenso@deloitte.com.
WEATHERING
A STORM? WE’LL GET YOU BACK TO BUSINESS.
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Four principles can help guide a successful divestiture
B
uying or selling a company is a complex process, fraught with risk and uncertainty. That’s why buyers have historically used due diligence to help reveal hidden risks or opportunities that will help them negotiate a better price. The frenzied markets of the past put the seller at an advantage, because heavy competition for businesses hampered the buyer’s due diligence process. Now, in a tougher, post-Great Recession deal market, the smaller pool of likely buyers and increased demands from banks heighten the need for extensive buyer due diligence and lengthen closing time frames. Now more than ever, the seller shoulders the burden of being prepared. You must know what the buyer will need to know or risk deal failure, missed value targets or stumbling along a protracted timeline. While sellers may think they know their divestiture target’s operations inside and out, they are usually too close to the business to look at it from a buyer’s perspective, making it difficult to clearly understand its value and viability on a stand-alone basis. This is particularly true when the target is part of a division or a product line, especially if the business has been ignored or is underperforming. Failure to see the target through the buyer’s lens increases the odds that the buyer’s diligence findings will derail the transac-
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tion, weakening the seller’s hand at the negotiating table and destroying value while employees, customers and stakeholders jump ship and head for safer ground. A robust divestiture preparation process can help sellers successfully exit their businesses in a shorter time frame, avoid sale price erosion at the negotiating table, minimize distractions to the core business, and ultimately derive the desired value from the sale. In a divestiture setting, one way to avoid value erosion is to design and implement a process that supports rapid deal completion. To accomplish this, most successful sellers in today’s market use a thorough process that follows the four guiding principles of successful divestitures:
1
Plan for all aspects of the divestiture process
■ Establish scope, goals and objectives of the transaction ■ Develop a divestiture project plan ■ Determine what’s left behind
2
Present financial information tailored for the deal
■ Evaluate information requirements and articulate a “bridge” ■ Describe the business in a clear and cohesive manner ■ Address the potential need for carve-out audited financial statements See DIVESTITURE Page S11
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JANUARY 28 - FEBRUARY 3, 2013
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M&A fees: How much will this trophy cost me? Proper game management can keep costs under control By CHRISTOPHER REUSCHER and SARAH BAKER
“Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work.” — Vince Lombardi
I
f closing a transaction is akin to winning the Super Bowl, then all of the players need to work as a team to keep legal fees under the proverbial salary cap.
HALFTIME: due diligence An essential part of a transaction for a buyer, due diligence also presents the seller with an opportunity to keep legal fees in check. The level of the client’s preparation for, and participation in, the diligence process has a direct correlation to the amount of time and fees saved during, for example, the preparation of the schedules to the purchase agreement.
SECOND HALF: the definitive agreement The other side cannot be fully
driven toward the ultimate goal. Withholding information and re-trading on issues is costly and erodes trust between the parties. Stay focused and keep attitudes in check.
CHRISTOPHER REUSCHER Roetzel & Andress
SARAH BAKER Roetzel & Andress
controlled; however, understanding your opponent’s tendencies and motivations avoids “reactive” and inefficient negotiating. Furthermore, fair play keeps the players
VICTORY
TWO-MINUTE WARNING: agreement to closing
With any luck, the teams have avoided overtime for post-closing issues. While both sides emerge successful, the real winner will be the team that followed the game plan that was put in place early in the process. Celebrate with a trip to Disneyland, and get ready for next season. ■
The agreement is signed, but what conditions must be fulfilled prior to closing? Again, preparation is key to keeping costs at or below budget. Have a closing agenda prepared and a twominute drill in place for any last-minute obstacles.
Christopher Reuscher is a partner at Roetzel & Andress. Contact him at 330-762-7994 or email creuscher@ralaw.com. Sarah Baker is an associate at the firm. Contact her at 330-762-7985 or email sbaker@ralaw.com.
PRESEASON: engaging counsel The first step in managing legal fees is to engage experienced counsel prior to drafting the letter of intent. The likelihood of a successful transaction is exponentially higher and a seller’s leverage typically strongest if counsel is involved at this juncture.
FIRST HALF: communication and fee structures Candid communication is crucial to developing a game plan focused on client objectives, resources and expectations. All players should consider alternative fee structures such as fixed fees per deliverable, capped fees, flat fees per period (i.e. monthly or quarterly), and/or discounted hourly rates with a performance-based holdback. Legal fees generally escalate later in the game unless the team has previously implemented a strategy to manage such costs.
Divestiture continued from Page S10
3
Prepare, prepare, prepare
■ Identify operational issues/opportunities and anticipate questions/requests ■ Plan for key terms in the purchase agreement ■ Validate forecast assumptions and bridge to historical results ■ Provide stand-alone cost estimates
4
Position for the exit and execute ■ Managing the process ■ Drafting of transition service agreements ■ Tax structuring ■ Maintaining a competitive process A thorough preparation process is crucial to a successful divestiture in today’s market. Such process arms a seller with the critical information needed to present the business most effectively, address deal issues early on, answer challenging questions and boost value for the assets in play. ■
Brian Kelly is the PwC Cleveland Deals partner. Contact him at 216-875-3121 or email brian.kelly@us.pwc.com.
Crain’s Cleveland Business Custom Publishing
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Sophisticated buyers on the hunt By ANDREW K. PETRYK
Financial performance
B
Buyers seek stable and predictable revenue and cash flow — a performance profile that indicates a company has outperformed its competition. Outperformance typically means a resilient top line — a higher rate of growth in strong markets or a slower rate of decline in weak markets — and a strong EBITDA margin. Depending on the industry, the EBITDA margin threshold for many buyers of manufacturing companies is 15% or higher. Companies with an accelerating trend in margin performance receive significant interest.
ƐǁĂƌĚΛďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ
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SS&G is pleased to welcome
ROSS VOZAR. Ross joins the transaction advisory services team as an associate director focusing on advising private equity and corporate clients with acquisition and divestiture activity, including ■ ■ ■ ■ ■
Flight to quality continuing into the New Year
due diligence integration planning and implementation synergy identification and capture valuation divestiture planning
eauty is in the eye of the beholder, and sophisticated buyers know quality when they see it. High quality companies command the attention of buyers and lenders and stir up a feeding frenzy when they come to market, driving attractive deal terms and premium valuations. High quality companies possess four common characteristics — seasoned, forward-thinking management teams; a culture of innovation; strong financial performance and visible and quantifiable growth opportunities:
Leadership
ANDREW K. PETRYK
Buyers are looking for Buyers want companies strong leadership at the Brown Gibbons that can substantiate prohelm and a deep bench of Lang & Co. LLC jections with quantifiable senior executives with a growth opportunities. global perspective. Quality manNew product launches, new cusagement teams have demonstrattomers under contract, detailed ed the ability to navigate through backlogs and completed cost redifferent business and economic duction initiatives are some of cycles and to identify, motivate, the tangible improvements buyand retain top talent. They have ers look for to support financial invested in the necessary inforprojections. The more “real” fumation systems to measure and ture growth looks and feels to buymonitor operating performance. ers, the more aggressive they are They are committed to the future in the bidding process. growth of business.
Culture of Innovation
SS&G TAS is growing to meet the increasing needs of clients and the marketplace. To learn more, please contact Scott McRill at 440-248-8787 or visit www.SSandG.com/TAS.
www.SSandG.com
Visible and quantifiable growth
Globalization has made attaining and maintaining a marketleading position increasingly challenging. The ability to grow market share through the introduction of new products and services, market expansion and customer diversification is essential. High quality companies routinely refresh product and service offerings to remain relevant and competitive. Innovation leaders strive to have 25% or more of annual revenues from products and services that are less than 3 years old.
Crain’s Cleveland Business Custom Publishing
A finite number of high quality companies are in the market today, so buyers are paying up to win auctions. Strategic acquirers have stockpiles of cash at the ready, private equity firms have billions in dry powder to deploy, and lenders are supporting both groups with aggressive debt packages. This confluence of available capital will drive deal activity and values well into 2013 and beyond for high quality companies. ■
Andrew K. Petryk is managing director and principal of Brown Gibbons Lang & Co. LLC. Contact him at 216-920-6613 or apetryk@bglco.com.
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Sell-side due diligence Requirements of becoming more common purchase accounting fore going to market. Every company has its strengths, weaknesses, hether it’s the single risks and opportunities. When a owner of a family busiseller identifies and confronts the ness preparing for reissues ahead of time, it can better tirement or a large cormanage the discussion around poration pursuing strategic these topics, present them to the alternatives through the divestibuyers in a light that is most favorture of a business unit, the sale of a BRIAN LEONARD able to the company and focus the business is a complex transaction negotiations on the entity’s Grant Thornton filled with uncertainty. While acstrengths and opportunities. LLP quirers have traditionally engaged The sell-side due diligence an army of professional service providers process can also help assemble to perform due diligence, identify risks and financial information that is complete and strengthen their negotiating position, soaccurate. Financial information that is phisticated sellers are increasingly engagtransparent and reconciles to the underlying ing these advisers to perform sell-side due financial records lends credibility to mandiligence prior to opening up the business agement, minimizes surprises during buyfor sale. side diligence and provides the seller Sell-side due diligence involves the seller with a dress rehearsal prior to its interactaking an objective look at the quality and tions with the advisers of the potential sustainability of its earnings, determining buyer. This effort can expedite the sales the reasonableness of its forecasts, underprocess by streamlining the buyer’s due standing its historical working capital rediligence, thereby protecting shareholder quirements and identifying potential tax value. exposures by standing in the shoes of Sell-side due diligence is just one facet of potential suitors. While nobody knows the a transaction readiness strategy that many business better than the business owner, sophisticated sellers effectively employ. By many sellers may be too close to the busiidentifying and getting ahead of the issues ness to identify risk areas that may comearly in the process, sellers can proactively promise valuation or certainty to close. Sellmanage the discussions and drive efficiency, ers are increasingly looking outside in certainty and value throughout the transperforming this critical assessment. action. ■ Sell-side due diligence procedures assist a seller in understanding financial and tax Brian Leonard is director, Transaction Advisory exposures and opportunities, and proacServices, with Grant Thornton LLP. Contact him at tively addressing these identified issues be216-858-3539 or brian.leonard@us.gt.com. By BRIAN LEONARD
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By PAUL WOZNICKI
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property, plant, and equipment are identified as part of a business combination, they are measured as of the transaction date at fair value in accordance with the principles of ASC 820 — in essence, the value that would be received in an armslength transaction.
n the U.S., whenever a company experiences a business combination or event whereby the acquirer obtains effective control of another business, the acquirer is subject to generally accepted accounting principles (GAAP) that require the allocation of the purchase price under Intangible asset valuations: The the requirements of purchase accounting identification and subsequent valuation of ASC 805 (formerly SFAS 141r). intangible assets can be significantIn simplest terms, ASC 805 rely more complex and require the quires all consideration transferred use of a wide range of valuation (i.e. “purchase price”) to be meamethods. When valuing intangible sured at the acquisition date at fair assets, the acquirer must consider value. This includes any and all assets asset characteristics such as separatransferred, liabilities assumed (inbility and/or contractual or legal cluding contingent liability considright considerations. Typical intanerations), and if applicable, any equity gible assets with finite lives might PAUL WOZNICKI include trademarks, brand names, interests issued by the acquirer. SS&G non-compete agreements, cusPurchase price allocation: tomer lists, and patents. Although a fairly complex process in pracThe application of purchase accounting tice, the allocation of purchase price in its with all its nuisance and ultimate determimost basic form generally involves three steps: nation of value of purchased assets is a Identifying and assigning a fair value highly sophisticated process that requires a to all tangible assets acquired sound understanding of accounting princiIdentifying and assigning a fair value ples. Companies often need the assistance to all identifiable intangible assets of professional accountants experienced in with finite lives valuation services to properly identify and Determining the residual positive or determine acquired-asset values. ■ negative “goodwill” associated with the transaction Paul Woznicki, CPA, is a director in the Transaction Advisory Services department Tangible asset valuations: Once tanof SS&G. Contact him at 330-668-9696 or gible assets such as working capital or email PWoznicki@SSandG.com.
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What is your corporate M.P.G.? Indicators show which firms get better mileage By MICHAEL F. PAPARELLA
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orporate M.P.G., as defined here, is different from what might first come to mind. It is not a reference to the average miles per gallon of your corporate fleet. Instead it is a high level indication of the quality of your company as perceived by the marketplace. In Corporate M.P.G., M denotes management team, P indicates past performance, and G repre-
sents growth potential. Most investors and lenders look to these attributes when assessing quality companies. Quality of the MICHAEL F. management PAPARELLA team is most Candlewood important. In Partners LLC the ideal situation, each member of the management team is a strong performer and each highly important position among the management roster is occupied. The highly important slots include the CEO, CFO, COO and head of sales and marketing. The quality of these performers
Most investors and lenders look to (the M.P.G.) attributes when assessing quality companies. can be assessed in the quality of P and G, and it is rare that P and G will be high without a strong management team. Past performance is the most often cited attribute when assessing an investment. It is natural to infer that past performance indicates future results. However, we all know that is not true. Nonetheless, understanding the company’s past business plans and goals and assessing the management team’s See M.P.G. Page S16
Carefully prepare for selling family held businesses By ALBERT D. MELCHIORRE
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he sale of a business is a once-in-a-lifetime endeavor for most family held business owners. I would like to offer some advice to the owners of family held businesses about having a successful merger and acquisition (M&A) sales process. To begin, it is important that you are prepared and have your house in order. This preparation
starts first with the business. There are areas to focus on that will result in a smoother process and help maximize the value of the business. These include improving operational efficiencies, complying with environmental laws and regulations, having accurately prepared monthly and yearly financials (review or audit),
ALBERT D. MELCHIORRE MelCap Partners LLC
ensuring the right management personnel are in the right positions, and if retiring after the sale, identifying your successor. The M&A process will be a distraction to your business as the process can take between 6 to 12 months from the time your investment banker is hired. It is important
that you manage your business through this process in order to avoid negative surprises. You want to make sure the business is performing at optimal capacity throughout the process. Once you have your house in order, and before you begin the process, assemble a strong M&A deal team. This will include an experienced M&A attorney, accountant, investment banker and investment adviser. Based on
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the input of this team, it is important to determine whether your valuation goals and objectives can be met given the current state of the M&A market. You will also need to make sure you have thoroughly thought out what you would like your role to be post-closing. The following are important questions to think through carefully: Are you looking to retire immediately after closing? Do you have your successor in place? Would you like to roll over a small portion of your proceeds to participate in the future growth
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M&A outcome depends on company quality By KEVIN WHITE
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hroughout 2012 and into 2013, Western Reserve Partners has seen “A Tale of Two M&A Markets.” For companies with good market positions, solid margins, strong management teams and steady performance through the recent downturn, it has been the best of times, with strong buyer interest and high multiples paid. For companies with elements of weakness, such as succession issues, high capital intensity, customer concentration or exposure to recession-sensitive end markets, the M&A market has been dramatically different, with far less buyer interest and relatively low prices paid.
Buyers remain concerned Strategic and financial buyers about the strength and have both been very durability of the current active. For the best comrecovery. Without confipanies, financial buyers dence in a rising ecohave shown a willingness nomic tide to lift all to pay prices normally ships, buyers are engagseen only from strategics. ing in rigorous due diliIn instances where strategence. Target companies’ gic buyers are confident results are being monithat they have found the KEVIN WHITE tored very carefully durright fit, they are willing Western Reserve ing the course of the deal to outbid the financial Partners process to maintain asbuyers by paying the surance that the business is seller for a portion of the expected performing to plan. Those that synergies. But when the fit isn’t don’t are being hit hard, with quite right, they are quite conserdeals being re-cut or called off vative, choosing instead to due to relatively modest misses. maintain their current large cash
balances. Financial sponsors have also become more active sellers of businesses over the past year, with the healthy M&A environment, relatively strong portfolio company financial performance and impending tax changes making this a good time to sell. Nonetheless, a significant portion of those sell-sides have been to other financial sponsors, implying ongoing caution on the part of corporate acquirers. While expected changes in the tax environment helped spur a significant portion of 2012’s M&A activity, tax remains funda-
of the business in order to get a “second bite of the apple?” Finally, try to keep an open mind. You do need to keep your eyes focused on the end game of achieving your goals and objectives and need to treat each interested buyer as if they are “the one.” With that being said, make sure you perform your own due diligence on the buyer to ensure it is a good fit. ■
Albert D. Melchiorre is president and founder of MelCap Partners, LLC, a middle market investment banking firm. Contact him at 330-239-1990 or al@melcap.co.
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mentally a secondary driver. Other drivers, such as owner retirement and the need to realize returns for private equity investors, continue to bring new supply to the market regardless of the tax environment. Western Reserve expects 2013 to be no different in this regard. Based on current pitch activity and new deal generation, we are optimistic that 2013 will be another solid — if not strong — year in the M&A market. ■
Kevin White is a director with Western Reserve Partners. Contact him at 216-589-9536 or email kwhite@ wesrespartners.com.
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Benefits of combining asset-based lending and syndicated financing for M&A
M.P.G. continued from Page S14
By LAURIE MULLER-GIRARD and AMY CARLSON
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he combination of historically low interest rates and waning enthusiasm for waiting out the sluggish economy could mean increased merger and acquisition activity in 2013. Prospective buyers, with asset-rich balance sheets, may wish to consider financing strategies that combine an asset-based working capital revolver with longer term debt via the syndicated term loan or high-yield bond market. Asset-based loans (ABL) are offered on a revolving basis and are collateralized by a company’s assets, including accounts receivable and inventory. A syndicated loan is typically structured and priced by a lead arranger or agent who then sells portions of the credit to other lenders or investors under terms negotiated by the agent. Today’s more diverse investor base often requires that a loan be structured to meet the needs of the market. Syndicating asset-based deals requires a particular set of skills — a combination of expertise in both asset valuation and syndication. Borrowers should look for lenders who understand their industry and business strategy and offer integrated asset-based lending,
LAURIE MULLERGIRARD KeyBank Business Capital
AMY K. CARLSON KeyBanc Capital Markets
debt capital market offerings and sector expertise. In some cases, a borrower could rely on ABL only. Larger transactions may require a different approach. For example, a wellknown retail company considering expansion may benefit by using an ABL collateralized by its receivables and inventory as well as the brand name’s appraised value. The ABL facility offers low pricing and flexibility. If the business requires more debt financing than is available through a standard ABL, it may need to layer in another form of debt such as subordinated or mezzanine debt, institutional term loans or high-yield bonds. Financing through subordinated or mezzanine debt could fill a hole in the capital structure and is less expensive than equity. An institutional term loan with a second
lien on working capital assets and a first lien on property and equipment could also bridge the gap. This financing has variable rates and can be pre-paid, sometimes with minimal cost. If the business generates strong excess cash flow, this option enables the business owner to reduce debt quickly. A high-yield bond offering may be the best option for a borrower that needs more than $150 million in additional financing. The offering could be unsecured or have the previously described second lien structure. High-yield bonds are fixed rate, offer long tenors and no amoritization; however, they require public debt ratings and can be expensive to prepay. Regardless of the final financing solution, combining ABL and syndicated term loans or high yield bonds gives borrowers additional flexibility to make deals in both the highs and lows of the economic cycle. â–
This article is designed to provide general information only. Before entering into any financing arrangement, please consult your own competent professional financial, tax and legal advisors. KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (KeyBank N.A.) are separate but affiliated companies. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives. Banking products and services are offered by KeyBank N.A. Member FDIC and Equal Housing Lender. Credit products are subject to credit approval.
Laurie Muller-Girard is national director of KeyBank Business Capital. Contact her at 216-689-7941 or laurie.mullergirard@keybank.com. Amy K. Carlson is head of Debt Capital Markets, KeyBanc Capital Markets, Inc. Contact her at 216-689-4227 or acarlson@key.com.
ability to perform over a 3- to 10year period can give some comfort that the performance was not a random occurrence and should, with reasonable expectation, continue into the future. The growth prospects provide the “sizzle.â€? It seems that most middle market companies lack a well articulated, implementable and measurable 3-year growth plan. Investors and lenders take comfort in, and will generally attach value to, a sound, well thought out plan that can serve as the roadmap to get from current revenue and profitability to projected revenue and profitability. Ideally, this plan should allow for revenue and profits to grow at 10% per year or more. Whatever the projected growth rate, it must be supportable to be believable. In the best case, the M will have the P to support the G. When this comes together, investors and lenders get excited about the opportunities that lie ahead of such a well-managed business. Sellers and borrowers get excited because the “marketâ€? is eager to invest alongside the team and their vision. Ultimately, companies with good past performance, offering a good “plug-and-playâ€? growth strategy, and managed by a high performing team (i.e. high M.P.G.) are in high demand in good economic times and bad. â–
Michael F. Paparella is managing director for Candlewood Partners, LLC. Contact him at 216-472-6640 or email mfp@candlewoodpartners.com.
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Our attorneys work with deal makers to design and implement WUDQVDFWLRQ VWUXFWXUHV WD[ HIÂżFLHQFLHV ULVN PDQDJHPHQW measures and negotiating strategies. We bring together tax, antitrust, environmental, international, real estate, employee EHQHÂżWV HPSOR\PHQW H[HFXWLYH FRPSHQVDWLRQ LQWHOOHFWXDO property, technology and litigation lawyers to provide the necessary breadth and depth of representation.
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Noncorrelated investments: narwhal or unicorn? drive financial markets. With noncorrelated investments, the oth the narwhal and the risks for which investors are unicorn are fantastical compensated are dissimilar to elsecreatures — one real and where in their portfolios. Examone mythical. In the case ples of noncorrelated investments of noncorrelated investments, include reinsurance, water rights, one must ask the question, “Is it film rights, pharmaceutical copossible to find that rare investdevelopment and intellectual ment with returns independent property. There are other options, of the factors that move but the markets for many publicly traded debt, of them are too immature equity and real estate or the risks too difficult to markets?” The answer is quantify. yes … and no. There are numerous Most publicly traded reasons to seek noncorreinvestments are in some lated investments, even way dependent on ecoif, like fantastical creanomic conditions. Equity tures, they are hard to returns are contingent on LINDA M. find. These investments a business’s prospects can be highly beneficial OLEJKO and profitability, and real Glenmede to portfolios since they estate values depend on provide a great deal of such factors as employment levels diversification for the dollar. An and the buildup of available inacademic using the risk/return ventory. From time to time, some profile of these investments in investments are negatively correa portfolio optimization program lated with economic conditions. may wish to take an extra In a recessionary environment, helping. for instance, an investment with Noncorrelated investments a fixed payment, such as Treasury have earned a place in sophistibonds, may increase in value as cated investment portfolios, but the values of equity securities as in the cases of the fantastical decline. This inverse correlation, narwhal and unicorn, careful however, may not persist as marstudy is required to separate the ket conditions change – for examreal from the mythological. ■ ple, if the economy improves. Linda M. Olejko is a managing director at When flipping a coin and calling Glenmede. Contact her at 216-514-7876 heads or tails, the result is obvior email Linda.olejko@glenmede.com. ously unrelated to the factors that
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Lending alternative: How companies can use assets to finance strategic growth By DOUG WINGET
F
or many companies, obtaining credit through conventional cash flow lending arrangements can be difficult. They may be having operational problems, undergoing rapid growth, dealing with an acquisition or their borrowing needs might reflect their cyclical or seasonal industries. For those companies, assetbased lending, also known as ABL, provides an alternative to the traditional lending model. Asset-based lenders specialize in providing secured financing to customers with limited access to capital. Asset-based lending is senior secured lending that allows borrowers to leverage their receivables, inventory, equipment DOUG WINGET and real estate. FirstMerit Bank Advances are based upon eli- Business Credit gible collateral, with formulas against receivables, inventory, equipment and real estate. The working capital line of credit is financed against eligible receivables and inventory. Typically, ABL has fewer covenants than a cash flow structure and more availability from the assets. It also may not need a personal guarantee from the owner. Companies that have sufficient receivables and inventory can leverage their working capital and receive higher advance rates. They can use this for working capital financing, seasonal working capital borrowing needs, leveraged recaps, mergers and acquisition financing and turnaround financing. If the company is looking for more availability from its working capital, that profile fits ABL,
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Doug Winget is president of FirstMerit Bank Business Credit. Contact him at 330-3847448 or email doug.winget@firstmerit.com.
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2013 looks promising for leveraged buyouts Equity overhang, deal creativity should widen deal pipeline
companies. Limited partners have become far more scrutinizing of the cohesion of the private equity fund team, the operational abilities of at least some of that team versus financial capabilities, and have dissected the reasons for success behind large cash-on-cash returns By JIM HILL in certain sale transactions. With the re-election of Presiooking ahead to what 2013 dent Obama, the dialogue of taxing will bring, there are a the carried interest as ordinary number of trends that will income versus capital gains has impact the private equity once again become a hot topic. industry and leveraged buyouts Despite these challenges, there (LBO) in particular. First, the is a good deal of encouraging challenges: news: There is a $200 billion equity â– LBO funds in 2012 overhang in private equity raised 24% more funds as worldwide that must new funds than in 2011, get spent in next 12 despite a downturn in months or be returned deal activity. to investors. General partâ– Many pension plans ners of funds will not and endowments have receive their 2% asset largely abandoned venmanagement fee on ture capital investing due capital that is returned to the dismal returns of JIM HILL since it is not committed. the top 100 venture Benesch In 2007, private equity funds over the last consisted of 35% of total dollar decade. This has allowed private volume of transactions in the U.S. equity funds to gain a larger alloIn 2012, it consisted of approxication of asset employment. mately 15% of total dollar volume â– Private equity has become of transactions. more creative in generating deal Worldwide, the level of transacflow through proprietary relationtional activity in 2012 was 50% ships, regional investment bankers what it was in 2007. (almost brokers) and utilizing buy There was a dearth of transacside investment bankers. Many tions in the U.S. in 2012 — down funds now have dedicated “busi15% in transactional dollar volness development partnersâ€? who ume from 2011. The rush to the participate in the carried interest exits to avoid higher capital gains and are key to deal flow. rates did not really happen. The â– Despite the current lack of primary reason was uncertainty classic auction deal flow, private of earnings and potential sellers’ equity firms are anticipating 2013 performance during the sales will become a more seller-friendly process. environment as the fiscal cliff, There was also hope on the part while somewhat resolved, will not of some sellers that earnings create huge automatic cutbacks in would be higher in 2013, which government spending. Approxicaused them to hold off. With mately 67% of private equity sparse inventory, cash on stratefirms’ U.S. portfolio companies gics’ balance sheets and private have been owned for more than equity overhang, multiples for 6½ years, with the average fund high performing sellers were having a 10-year life. Obviously, staggering — even higher than in delayed exits mean there have 2007 for comparably performing to be more exits in 2013 to get
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limited partners ready to invest in their next fund. â– Few private equity funds still call themselves “agnosticâ€? as to industry choices with funds specializing in certain industries and having advisers who are heavily networked in those industries. The most popular sectors today are energy services (albeit, it is somewhat slipping), business services (asset light), niche manufacturing requiring little capital expenditures annually, health care services and devices, consumer products, business-to-business distribution and logistics. â– Leverage remains quite available for buyouts with equity residing on deals over $10 million of EBITDA between 33% and 43%, and rates remain very low. This tends to drive up multiples for pricing purposes but also allows private equity firms to be in the hunt against strategic acquirers. Given the low rates of returns on both public securities investment in the past several years and in many alternative private asset investments, many pension plans and endowments are now allocating a greater percentage of their assets to the private equity world. â–
Jim Hill is executive chairman of Benesch, chair of the firm’s Private Equity Group and an active and practicing member of its Corporate & Securities Practice Group. Contact him at 216-363-4444 or email jhill@ beneschlaw.com.
ACCESS BEGINS WITH A CAPITAL “G�. At Glenmede, we believe the best way to serve our clients is to give them direct access to our experts and best thinking — with no barriers or bureaucracy. Our low client-to-staff ratio means you’ll always have our full attention.
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Shrinking world expands global opportunities for private equity Conflict minerals rule impacts M&A Consider implications during acquisition due diligence determine whether and to the extent it is covn Aug. 22, 2012, ered by the rule. And rethe SEC issued member, you will need its long-awaited to consider all activities Conflict Minerals and revenue sources of the Rule. The rule does not target, not just those reprohibit the use of conlating to U.S. operations. flict minerals in products, DYNDA A. ■ What is the target’s but it does require public product? Consider any THOMAS disclosure of how conflict Squire Sanders business activity that inminerals are used by the troduces a product into LLP reporting company. More the stream of commerce. specifically, the rule requires any For example, do not simply conreporting company to determine clude that the target is generally if it has conflict minerals that are in a service industry but consider necessary to the functionality or any commercial activity, no matproduction of a product it manuter how small, and determine factures or contracts to be manuwhether a “product” is involved. factured. If it does, it must file a ■ What is the financial model specialized report with the SEC. impact of the rule? Consider the A company would be wise to impact of your own conflict take the conflict minerals rule minerals policy on the target’s into account when considering materials costs, procurement and an acquisition. The following are sourcing and include those conseveral key questions a company clusions in your financial model. should ask about any target: ■ How might the acquiring company’s ■ Is the target covered by the rule? conflict minerals policy change? Undertake a detailed review of the Customer requirements and sharebusiness activities of the target, holders’ reactions to conflict its affiliates and its subsidiaries to minerals disclosures could lead to
By DYNDA A. THOMAS
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changes in policies and procurement activities. Consider any consequences of these changes in your financial planning and modeling. The good news is that if a company that was not previously required to file any conflict minerals disclosure reports is acquired by a reporting company, the acquiring company is given a short grace period before it is required to undertake and complete conflict minerals diligence and disclosure about the acquired company. Visit the conflict minerals page on the Squire Sanders website: www.squiresanders.com/ conflict_minerals/ and the firm’s conflict minerals blog at www.conflictmineralslaw.com to learn more about due diligence and to view sample representations and warranties. We also invite you to experience our interactive flowchart tool to help you in your conflict minerals analysis. ■
Dynda A. Thomas is a partner with Squire Sanders (US) LLP. Contact her at 216-479-8583 or email dynda.thomas@squiresanders.com.
beneficial to both the private equity industry and economies or years now, we’ve heard around the world. As private about the globalization of equity matures, firms have world economies become savvier about and certainly felt capturing opportunities plenty of effects from it. It wherever they may be, may come as a surprise to then growing them hear that the private equity using global resources industry has largely lagged and connections. on that trend, but that has For Riverside, globalbeen changing rapidly in ization means more recent years. than investing and runWhen the Riverside Co. ning offices on four conSTEWART KOHL launched a European fund Riverside Co. tinents. It means using in the 1990s, we were one teams staffed with locals of only a handful of firms working to source deals and operate comin Europe. Regulations and the panies in various regions while immaturity of the industry in applying talent and know-how to Europe meant that few firms did open new markets and maximize private equity deals there, but value for each company in our that changed quickly. portfolio. We’ve seen the same shift in The effects of these efforts on the Asia-Pacific region, where prithe small companies in which vate equity was virtually nonexisRiverside typically invests can tent in many countries just a be profound. Riverside owns a handful of years ago. Now, we’re small company in Georgia that seeing dramatically increased acmanufactures products that make tivity overall and some of our animal feed safer. Riverside best opportunities as a firm. has used its Hong Kong-based These trends are healthy and Asian Strategy office to help that
By STEWART KOHL
F
Private equity survey reveals best investment practices By MARK BRANDT
Creating Value.
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ecently, McGladrey teamed with PitchBook to conduct a survey of seniorlevel executives who lead private equity firms focused on the middle market. More than 95%
MARK BRANDT McGladrey
the 109 private equity firms surveyed reported that the management team was a primary driver of both successful and unsuccessful portfolio investments. One of the reasons management is so important is the intimate
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We expect globalization to be a valuable tool in opening markets.
company navigate the complex regulations and relationships of China, allowing the company to sell its products in the fastestgrowing livestock feed market in the world. Meanwhile, Riverside’s teams in Europe have helped navigate regulatory hurdles there, helping maintain access to another huge market. This is just one example among thousands of small and large steps that private equity firms are taking as the industry becomes truly global. Ultimately, it’s about finding the best opportunities for growth and using every tool possible — everywhere possible — to accelerate that growth in a sustainable manner. The financial world has been “shrinking” for decades. As private equity catches up, we expect globalization to be a valuable tool in opening markets and helping companies thrive for years to come. ■
Stewart Kohl is co-CEO of The Riverside Co., a global private equity firm focused on acquiring growing enterprises valued at up to $200 million. Contact him at 216-344-1040 or skohl@ riversidecompany.com.
role these executives play in formulating the performance improvement plan and developing the overall strategy at portfolio companies. Understanding external influences, implementing performance improvement strategies and establishing detailed progress tracking for each portfolio investment will be essential to generating strong investment returns and maximizing profitability:
External factors Influencing deal making While private equity firms would prefer to have control over all aspects of their businesses, taxes provide a high level of uncertainty. Firms are now concentrating their attention on tax-efficient structures that provide future benefits through the use of a step-up in tax basis, the deductibility of interest expense and similar strategies. Only 17% of firms say the looming threat of a hike in the tax rate for carried interest will affect how they invest and operate their portfolio.
Creating performance improvement Performance improvement plans have long been a standard for most private equity firms when making new portfolio investments. More than half of the firms surveyed reported the utilization of plans laying out clear short- and long-term game plans. Interestingly, the management
JANUARY 28 - FEBRUARY 3, 2013
How to judge a PE firm Making firms better a common industry goal
the challenge of working with good managers to help their companies grow. The professionals in our firm are gratified that we could help the managers of QSR, a Twinsburg-based manufacturer of silicon products, grow their busiBy CHIP CHAIKIN ness both in the medical industry and in China by more than four hanks to the recent electimes. tion, for the first time in We are proud that we could my professional career help the managers of PSSI, a when asked, Twinsburg-based cleaning “What do you do for a services provider, grow living?” I can answer revenues by 150%. “private equity,” using We are energized by the same number of syllathe fact that we have bles as a dermatologist, helped the managers of trial attorney or offensive AWP, a Kent-based traffic line coach. No longer safety company, double do private equity their business. We are far professionals require a CHIP CHAIKIN from alone — one of 30-minute treatise on Blue Point Cleveland’s jewels is the Adam Smith and BarbarCapital Partners size and professionalism ians at the Gate to of its private equity explain what we do. industry, which is recognized The flip side of that notoriety is nationally. that now the conversation often At its best, private equity can goes directly to questions about provide company managers with job creation or tax rates. growth capital and a knowledgeWhile these are certainly imporable, active partner. Whether or tant questions, they have overnot we are truly playing the latter whelmed the most salient quesrole is how we should be judged. tion about our industry, the one that gets at the heart of whether we succeed at our most basic undertaking: Do we help make better companies? The days of relying on leverage or buying undervalued assets for success in private equity are in the past. For most in the industry, that is fine. We come to work for
T
One of Cleveland’s jewels is the size and professionalism of its private equity industry, which is recognized nationally. If we are, we help create stronger companies that serve customers better, provide attractive platforms for employees, and, yes, create strong returns for investors. If we are not, then someone else will. Capital is highly liquid and relentless in its search for a productive home. Fortunately, the most productive home is often a fast-growing business, with all of the benefits that brings to employees, customers and cities. So the next time you see a private equity professional at a party, ask if he or she helps build better businesses. It is a far more enjoyable topic than our tax rates. ■
Chip Chaikin is a partner at Blue Point Capital Partners. Contact him at 216-535-4706 or email cchaikin@bluepointcapital.com.
Management determines the success or failure of portfolio investments. team takes on the primary responsibility for designing the performance improvement plan in roughly three out of every five cases. When the management team does not take the reins, a fund-level executive or member of the deal-making team typically takes control, underscoring the high premium placed on these plans and the intimate company and industry knowledge they require. There is an array of challenges during the implement of improvement plans, primarily centered on the establishment of internal systems and operating metrics.
Implementing performance improvement plans Most firms place a high priority on establishing robust financial reporting systems and requiring much more detailed data, with daily, weekly and monthly operating statistics. IT systems were regularly found to be insufficient as well.
To download the complete survey report, go to www.mcgladrey. com/peg. If you are interested in participating in the 2013 private equity survey, please contact Mark Brandt at Mark.Brandt@mcgladrey.com or 216-522-1124.
Crain’s Cleveland Business Custom Publishing
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Power comes from being understood.
SM
When you trust the advice you’re getting, you know your next move is the right move. That’s what you can expect from McGladrey—a partner with the in-depth experience to help private equity firms and strategic buyers optimize their portfolios. And one that can bring your organization global capabilities with a local touch. That’s the power of being understood. To learn more, contact Mark Brandt at 216.522.1124 or visit www.mcgladrey.com.
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Transaction insurance demand surges Policies can help risk-averse deal makers overcome obstacles insuring off the remaining tail liabilities for all of the portfolio eal makers are increascompanies in a particular fund, ingly turning to transacenabling an earlier distribution or tional insurance prodredeployment of fund proceeds. ucts as risk mitigation Several other factors are contools in mergers and acquisitions. tributing to the growth in deIn the first six months of 2012, mand for transaction insurance. the total policy limits for transacIn general, deal makers are more tional insurance policies purrisk averse today than they were chased increased by 35% over the prior to the global financial crisis. same period in 2011, as In addition, the terms of reported by Marsh. the insurance products While successful prithemselves have imvate equity buyers have proved significantly since been using representathey were first introduced tions and warranties to the market. The coverinsurance to distinguish age has improved, there their bids in auctions for are fewer standard exclumany years, a growing sions, the pricing has STEVEN C. LEE percentage of policies come down, and the placed worldwide in 2012 Transactional underwriting process has were for corporate buyers. Risk Advisors been expedited. Corporate acquirers are Technology and a typically more cautious than their higher level of sophistication are private equity counterparts on enabling the insurers to complete the amount of warranty protectheir underwriting and be in a tion they require in a transaction position to issue a policy within and often lose out on a deal bethe time frame of the overall deal cause of this aversion to risk. negotiations. This process is comThrough the use of transaction monly completed in two to three insurance, corporate buyers are weeks. Finally, a history of suchaving more success in winning cessful claims under these policies sought-after assets, especially has eliminated the early skeptioverseas targets, while at the cism expressed by some parties. same time satisfying their board’s While representations and requirements for risk mitigation warranties insurance is most comin the deal. monly used, contingent liability The surge in popularity is also insurance, tax liability insurance being fueled by sellers who are and litigation buyout insurance increasingly building representaare increasingly being used to tions and warranties insurance overcome specific deal obstacles into the M&A process from the the parties are unable to resolve beginning in order to minimize through traditional contractual their post-closing exposure, while indemnification. ■ maximizing purchase price. Steven C. Lee, Esq., is a principal with Strategic private equity sponTransactional Risk Advisors. Contact sors are using transaction insurhim at 216-905-3350 or email ance policies to maximize the efslee@transactionalrisk.com. ficiency of capital structures, and By STEVEN C. LEE
© 2012 McGladrey LLP. All Rights Reserved.
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Northern Ohio TMA President John Lane presenting the 2012 Lifetime Achievement Award winner Larry Goddard, Managing Director, of SS&G Parkland Consulting, LLC. We thank Larry for his leadership and the many contributions that he has made both in the turnaround industry and in our community.
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Asset-based lending option can work in private equity By MARK KISKORNA
A
sset Based Lending (ABL), often referred to as Commercial Credit or Business Credit, has been a financing option for decades. Over the last 10 years, however, ABL has become an increasingly important financing strategy for middle market and large companies across a wide range of industries. ABL structures can accommodate major cyclical or seasonal swings, commodity dependent industries, growth capital and companies in the midst of a turnaround or restructuring. ABL provides creative and flexi-
Creative credit structures offer financing flexibility ble credit structures, monitoring and reporting with fewer financial requirements, it is less covenants, and in some sensitive to the ebbs and instances the ability to flows of a company’s have springing financial income statement. ABL covenants based on availstructures can be emability. In some situaployed in both stable and tions, ABL lenders can volatile markets (and ABL lend beyond the asset units often do not transformulas and have higher MARK KISKORNA fer troubled deals to a PNC Business credit holds, which can workout group). Credit eliminate or reduce the Over the last few years, need for syndication. M&A-focused strategic Finally, because ABL lending and financial buyers have befocuses heavily on collateral and come comfortable choosing an has more stringent and detailed ABL structure knowing that these
structures support more aggressive purchase price multiples. Almost half of the PNC Business Credit deals sourced in 2012 were from private equity groups. Corporate deal makers also recognize the versatility of ABL in addressing gaps in a transaction’s capital structure or in combining with junior capital. For example, PNC Business Credit, through its access to junior lender Steel City Capital Funding, both divisions of PNC Bank, National Association, can provide a seamless one stop, cash flow solution.
TOP DEAL MAKERS The winners of the 17th Annual ACG Cleveland Deal Maker Awards will be recognized on Thursday, January 31, 2013, at the Marriott at Key Center.
RPM INTERNATIONAL INC. RPM closed nine acquisitions during the last 18 months, including five outside the U.S., adding more than $400 million to annual revenues.
BLUE POINT CAPITAL PARTNERS Blue Point Capital Partners recently completed four platform acquisitions, three add-ons, and a significant plant expansion. It also made three divestitures that returned more than $300 million with an average in excess of four times cost.
STERIS CORPORATION Over the last 24 months, Steris has engaged in more than $425 million of M&A activity, most notably its acquisition of US Endoscopy.
US ENDOSCOPY INC. Privately held US Endoscopy, founded in 1991, sold its business to Steris in a $270 million all-cash transaction last year.
Crain’s Cleveland Business Custom Publishing
Corporate deal makers also recognize the versatility of ABL in addressing gaps in a transaction’s capital structure or in combining with junior capital. If your current capital structure isn’t providing the flexibility you need to manage and grow your business, it may be time to look into ABL. ■
Mark Kiskorna is senior vice president & regional manager-Midwest Region, PNC Business Credit. Contact him at 216-222-8506 or visit pnc.com/abl.
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JANUARY 28 - FEBRUARY 3, 2013
LARGEST COMMERCIAL PROPERTY SALES 2012
(1)
RANKED BY PRICE Building Address Rank City, Zip
Property type
Transaction price ($)
Square feet or # of Price per sq. ft. or # units of units
Date
Buyer
Seller
1
Southpark Center 500 Southpark Center Strongsville, 44136
Retail
236,070,000
1,657,382
$158
6/15/2012
Starwood Capital Group
Westfield Group
2
The Plazas at Great Northern 25975 Great Northern Shopping Center North Olmsted, 44070
Retail
82,147,839
627,060
$131
6/20/2012
Blackstone JV DDR
Macquarie Group JV Elbit Imaging Ltd.
3
Westgate Shopping Center 3211 Westgate Mall Cleveland, 44126
Retail
73,315,000
474,000
$155
3/06/2012
Inland Real Estate C orp.
Pearlmark Real Estate Partners JV Blackstone
4
The Province 609 S. Lincoln St. Alliance, 44601
Apartment
45,000,000
246
$182,927
8/13/2012
EdR
Edwards Cos.
5
The Bingham Building 1278 W. Ninth St. Cleveland, 44113
Apartment
39,000,000
340
$114,706
3/16/2012
Morgan Management
Resource Real Estate
6
Belden Park Crossings 5514 Dressler Road Canton, 44720
Retail
31,275,800
593,610
$53
6/20/2012
Blackstone JV DDR
Macquarie Group JV Elbit Imaging Ltd.
7
Columbus Park 6033 Bear Creek Drive Cleveland, 44146
Apartment
24,000,000
625
$38,400
1/03/2012
Apollo Property Mgmt JV Kushner Cos.
5977 Bear Creek Road LLC
8
Sumner on Ridgewood 970 Sumner Parkway Akron, 44321
Senior housing
21,996,740
189
$116,385
11/13/2012
Concordia Lutheran Ministries Sumner on Ridgewood Inc.
9
St. Mary of the Woods 35755 Detroit Road Avon, 44011
Senior housing
16,683,367
159
$104,927
5/22/2012
Orion Properties Eleven LLC
Franciscan Sisters Chicago
Apartment
16,000,000
408
$39,216
8/14/2012
First Communities
NA
Hotel
15,500,000
119
$130,252
7/31/2012
NA
Inland Real Estate Group
Apartment
15,470,000
190
$81,421
5/02/2012
Morgan Management
Goldberg Cos. JV Wolf RE Management
10
Ellacott Parkway Apartments 21357 Ellacott Parkway Cleveland, 44128
11
Hilton Garden Inn Akron Canton 5251 Landmark Blvd. Canton, 44720
12
DeVille Apartments 23305 Chagrin Blvd. Beachwood, 44122
13
Home Depot 4873 Portage Road NW Canton, 44720
Retail
14,400,000
111,806
$129
12/28/2012
NA
HD Portage Ltd.
13
Parmatown Shopping Center 7899 W. Ridgewood Drive Cleveland, 44129
Retail
14,400,000
861,000
$17
10/16/2012
Phillips Edison & Co.
Forest City
15
Wadsworth Crossings 1065-1183 Williams Reserve Blvd. Cleveland, 44281
Retail
12,226,234
474,811
$30
7/27/2012
Blackstone
Regency Centers
16
former Western Electric Co. building 32000 E. Aurora Road Solon, 44139
Industrial
12,000,000
330,000
$36
6/04/2012
Aurora Development Center LLC
Keystone Ruby LLC
17
Lake Cable Village 4784 South Blvd. NW Canton, 44718
Apartment
11,750,000
586
$20,051
8/17/2012
Brown, Gibbons, Lang & Co.
Freddie Mac
18
Shaker Towne Center 16611 Chagrin Blvd. Shaker Heights, 44120
Retail
11,700,000
123,197
$95
12/21/2012
Katz Properties
Equity Investment Group
19
Arbor Court 6484-6643 Maplewood Drive Cleveland, 44124
Apartment
11,500,000
300
$38,333
4/01/2012
Burton Carol Management
Goldberg Cos. JV Wolf Real Estate Management
20
Marymount Surgery Center 5555 Transportation Blvd. Garfield Heights, 44125
Other
10,900,000
50,000
$218
8/31/2012
Cleveland Clinic Foundation
Snider-Canata Co.
21
Courtyard Cleveland Independence 5051 W. Creek Road Independence, 44131
Hotel
10,303,150
154
$66,904
6/18/2012
CrossHarbor Capital Partners LLC JV JP Morgan
Och-Ziff Capital Management Group LLC
22
Brook Park Plaza 14650 Snow Road Brook Park, 44142
Retail
10,120,000
157,459
$64
10/23/2012
Phillips Edison & Co.
Albrecht Inc.
23
Courtyard Cleveland Hopkins Airport 7345 Engle Road Cleveland, 44130
Hotel
9,522,974
154
$61,837
6/18/2012
CrossHarbor Capital Partners LLC JV JP Morgan
Och-Ziff Capital Management Group LLC
24
St. Ives 4437 E. 49th St. Cleveland, 44125
Industrial
8,821,545
231,505
$38
11/29/2012
Brennan Investment Group JV Global Securities House
AIC Ventures
25
Canfield Plaza 405-525 E. Main St. Canfield, 44406
Retail
8,810,000
100,958
$87
8/30/2012
Benchmark Management Corp.
Inland Real Estate Group
26
Courtyard by Marriott Akron Stow 4047 Bridgewater Parkway Stow, 44224
Hotel
8,650,000
101
$85,644
7/24/2012
Schulte Hospitality Group
LLFJAO LLC
27
Statler Arms 1127 Euclid Ave. Cleveland, 44115
Apartment
8,587,440
295
$32,344
5/23/2012
CalSTRS JV GI Partners
Lehman Brothers Holdings Inc.
28
Embassy Suites Cleveland-Beachwood 3775 Park East Drive Beachwood, 44122
Hotel
8,145,000
216
$37,708
9/28/2012
Noble Investment Group
LNR Property Corp.
29
Medical Mutual of Ohio 23700 Commerce Park Road Beachwood, 44122
Office
8,025,000
51,000
$157
6/15/2012
Beck MM Holdings LLC
BentleyForbes
30
Green Giant Eagle 1700 Corporate Woods Parkway Uniontown, 44685
Retail
7,091,000
65,000
$109
4/19/2012
Echo Development
KeyCorp
Crain's Cleveland Business does not independently verify the information and there is no guarantee these listings are complete or accurate. We welcome all responses to our lists and will include omitted information or clarifications in coming issues. Individual lists and The Book of Lists are available to purchase at www.crainscleveland.com. (1) Source: Real Capital Analytics Inc. is an independent research firm focused exclusively on capital investment markets for commercial real estate. The firm publishes a series of "Capital Trends" reports and offers an online service that provides real-time, information on property transactions. Visit www.rcanalytics.com. Additional information from Alec Pacella, senior vice president, NAI Daus.
RESEARCHED BY Deborah W. Hillyer
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Garden: Blockbuster events are key parts of strategic plan continued from PAGE 3
“The whole idea is making these things go from what was a visual show of plant displays to an experience — an immersive and celebratory experience where you can have fun no matter what your age is,” said Natalie Ronayne, the garden’s executive director since 2007. “There are multiple ways to interact with our setting here, and that is a huge piece of this earned revenue puzzle,” she said. Mrs. Ronayne and her team last year hatched a business plan for the garden, which included a renewed focus on its rental business, a bevy of immersive events, a shift in its marketing and nearly $20 million in renovations and upgrades. The new plan comes in the aftermath of an overreaching expansion project, souring attendance and an endowment cut nearly in half thanks to a creditor looking to protect itself. “The needle wasn’t moving,” Mrs. Ronayne said. “We weren’t going backward. We just weren’t going forward. We were just treading water.”
Root of a problem In 2003, the garden invested $70 million — $20 million more than it raised for the project — to transform the institution from a sleepy garden center that many believed catered to older women with time on their hands into a leisure-time destination for all. From a physical standpoint, the overhaul was striking, as the garden’s footprint quadrupled to 160,000 square feet and a stunning glass enclosure was erected to house exhibits mirroring the damp rainforests of Costa Rica and the prickly desert of Madagascar. The grandiose project, however, wasn’t the success the board or its then-director, Brian Holley, had envisioned, as visitors failed to flock to the garden in the hordes they had expected. And once the crippling recession hit, attendance
“Membership is a statement that you want a relationship with us. You want to come back more than once.” – Natalie Ronayne, executive director, Cleveland Botanical Garden numbers continued to underwhelm. Complicating matters, Allied Irish Bank, which had provided a $20 million letter of credit to bridge financial overreach for expansion, demanded $10 million in payments ahead of schedule to limit its exposure amid the mounting global financial crisis. “The world changing in 2009 the way it did, they demanded payment of $10 million at a time when our endowment had taken a big hit from market losses,” Mrs. Ronayne said. “That is what I would call the perfect storm.” Amid downsizing its operation through layoffs and other cuts, the garden developed a strategic plan in 2009 focused on enhancing the guest experience, strengthening its outreach efforts in the community and ensuring the long-term financial stability of the institution. The plan developed last year looks to fine-tune those efforts with specific strategies for driving more revenue into the organization. “We built this place to earn more revenue — at the gate, rentals, café, all of that stuff,” she added. “We have to use that to our advantage.”
Mark your calendar A key piece of the garden’s plan for growth is the continued production of blockbuster events such as “Glow,” an immersive holiday display that debuted last winter and transformed the garden into a winter wonderland with 100,000 lights, evergreen trees and even carolers. The garden is plotting an event similar in size this spring with a fall-
themed event on the drawing board for 2014. Mrs. Ronayne said such blockbuster events are good times to bring in new members. More than 1,000 people became members during the “Glow” event, pushing membership to its all-time high. “Membership is a statement that you want a relationship with us,” she said. “You want to come back more than once. We can communicate with you, and that’s the lifeblood of most organizations that I know.” While always a destination for weddings and other special events, until now the garden never had pursued that revenue stream aggressively. People typically had approached the garden, not vice versa. The garden recently refreshed its marketing materials and website to reflect its growing events business and even hired a staffer to handle the inquiries. The garden also shifted its marketing efforts with photography on its collateral — for instance, showcasing people enjoying the garden with friends rather than showing a rare plant. “It had always been about a sort of passive experience looking at
pretty gardens,” said Peter Vertes, the garden’s director of marketing. “Our brand repositioning was not a sea change, but just a little shift.”
A capital concern While it would seem as if the garden has done its share of construction in the last decade, the organization plans $20 million in further upgrades should the money present itself through fundraising efforts. The organization isn’t in fullfledged campaign mode, like its cultural counterparts in University Circle, but it’s actively seeking donors to finance a slew of projects. Two of the garden’s top priorities are an indoor children’s garden — an extension of the popular seasonal outdoor attraction — and the “Sunken Garden,” which could help generate more revenue as an additional place to host private ceremonies and events. “We are not going to do any of those until we have all the funding for it,” said Malou Monago, the garden’s chief development officer. “That means things can change throughout the process. This is a collaboration between everyone who enjoys and works at the garden.”
Mrs. Ronayne admits fundraising isn’t going to be an easy task. Ideally, she’d like to see the garden’s endowment climb to $30 million from $10 million. Part of the difficultly in raising money for the endowment is the organization doesn’t carry the cache of worldrenowned institutions such as the Cleveland Orchestra or the Cleveland Museum of Art. In addition, the garden’s stumbles in recent years might deter some potential donors. “The garden story has been a little bit shadowed over by these failed projections and the financial mess,” Mrs. Ronayne said. “You don’t want to get a story out there you can’t control.” Still, one way to get over that hump is to show the community you have a plan. “If you really believe in the leadership of an institution’s management, you should be willing to invest in that person,” said Nancy Osgood, a local consultant who works with nonprofits and teaches at Case Western Reserve University. “If donors see that there’s sound management in place and sound decisions being made, they’re much more likely to make a gift.” ■
FROM OUR TEAM TO THE GEIS COMPANIES TEAM
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complex, the company indisputably entered the development big leagues in light of the size and scope of the $200 million redevelopment effort planned for the long-idle site at East Ninth Street and Euclid Avenue. However, longtime Cleveland developer John Ferchill said a huge difference exists between Geis and other developers that have entered the
downtown market over the years. “A lot of people come downtown because they have been ignored in the suburbs,” said Mr. Ferchill, CEO of the Ferchill Group. “They don’t need the job for their reputation. They already have it.” Mr. Ferchill described Fred Geis as a friend, very technically savvy and someone who, every time, “asks the right questions and does the right
thing.” Mr. Ferchill said he discussed working with Geis on the county deal, but made an interesting discovery: They did not need him. They had their own financing sources. “I said, ‘Go for it baby. Don’t let me hold you back.’ What they are trying to do is best for the town, but has challenges unlike any they’ve had before,” Mr. Ferchill said. “They know how to figure it out,
though, like I’ve said a million times.”
‘Baby steps’ While Geis has been known for big industrial developments — multiple hundred-acre industrial parks and football-field size warehouses and factories — it also has grown by “expanding and diversifying into other real estate over time,” said Robert Redmond, a managing director in the Cleveland office of the Mohr Partners real estate brokerage. “I’d refer to it as baby steps,” Mr. Redmond said. In that vein, Mr. Redmond noted how the brothers teamed with Beachwood developer Donald King to build in the southeastern suburbs so-called flex-industrial buildings with increasing amounts of office space. They also developed with Mr. King in 2001 the Essex Place Building in Independence — the last multitenant building constructed in the Rockside Road office market. But in the case of redeveloping the Ameritrust complex, Geis has taken on a project with greater visibility — and, potentially, greater risk — than anything it has built before. Part of Geis’ plan involves knocking down a couple old buildings at the complex and constructing in their place an eight-story county headquarters. It also has proposed more than 200 upscale apartments in the long-vacant, 28-story Ameritrust office tower, restoration of the old bank’s rotunda for retail or public use, and conversion of the adjoining Swetland Building, 1010 Euclid Ave., into apartments and/or office space. If it comes off as planned, the project would put the Geis brothers into the residential development market. It’s a move that would build on Fred Geis’ recent role as one of three investors in the conversion of the Avenue Tower in downtown Cleveland to rental units from failed condominiums. It also would put a downtown office building in their portfolio with the new county headquarters, a 220,000-square-foot structure they will lease to the county for 25 years at a price of $6.7 million a year, then sell to the county for $1.
Stamping their ticket According to Mr. Redmond of Mohr Partners, a resurrection of the Ameritrust complex could establish Geis’ credentials for doing big-ticket, mixed-use projects in other cities. Although various real estate insiders privately have noted Geis Cos. has not built anything taller than four stories in the past, Mr. Redmond said the critique lacks
Contact: Phone: Fax: E-mail:
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Skulls in a sport coat Last fall, Fred Geis laughed at finding himself in his 50s working hard to get startup companies to lease small offices for $600 a month at the Agora while brother Gregory concentrated on farm-size suburban deals. At the same time, Fred Geis clearly relished rejuvenating the old building and said working in the city has put a spring in his step and given new energy to his efforts. “Pioneering is in the Geis DNA,” he said. Fred Geis did not return two phone calls for this story by Crain’s deadline last Thursday, Jan. 24. Gregory Geis said in an email the brothers declined to be interviewed for this story. Asked why, he said, “Just who we are.” Contracts with the county are not yet signed. And in a builder’s world, nothing matters until the development takes shape. The aggressive schedule calls for construction to start within a year while two would be the norm. They may not be talkative publicly right now, but the brothers are typically garrulous and are not wallflowers. Gregory Geis displayed his aggressive side at a meeting a few years ago of NAIOP, the National Association of Industrial and Office Properties trade group. During cocktails, he showed off the interior of his sport coat — a field of skulls decorating the black silk lining. “These,” he said, “are the skulls of my competitors.” ■
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merit because of the way the brothers have built their business. “They got to this point by learning a tremendous amount about what it takes to adapt their expertise,” he said. “They know how to hire people who have experience they need. If they need taller cranes, they get them and know who can do it.” It also isn’t as though Geis is untested in office or urban development. Geis and serial partner James Doyle have created a three-building office park, Hemingway at Richmond, that boasts the headquarters of the high-profile Marcus Thomas LLC marketing firm. Geis also has made a go of converting old industrial buildings in Cleveland’s Midtown neighborhood to contemporary use. Its latest project has contractors putting sprinkler systems and drywall into the office building at the famed Agora Theater, 5000 Euclid Ave., in a joint venture with the MidTown Inc. nonprofit to create a business incubator there.
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THEINSIDER
THEWEEK JANUARY 21 – 27 The big story: Diebold Inc. said Thomas W. Swidarski stepped down as president and CEO and from its board of directors, effective immediately. In comments unusual in their candor, Henry D.G. Wallace, a former Ford Motor Co. executive who only days before was elected chairman of Diebold’s board, said, “Given the company’s ongoing performance and pace with which it is delivering tangible value, it is in our stakeholders’ best interests to make a change in leadership at this time.” Diebold, which makes automated teller machines, bank security equipment and electronic voting machines, said a search process for a new CEO is under way.
End of an era: Cuyahoga Community College president Jerry Sue Thornton — a stalwart in Northeast Ohio civic affairs for the last two decades — announced she would retire from her post on June 30. Dr. Thornton has held the job since 1992 and has presided over Tri-C during a period of substantial growth. Under her watch, its enrollment climbed from 23,000 students on three campuses to 32,000 on four. The university’s board of trustees will tap an executive search firm to conduct a national search for Dr. Thornton’s replacement.
Unhappy investors: A group of investors in specialty chemicals maker Ferro Corp. of Mayfield Heights plans to nominate three directors for election to the company’s board. The group calls itself the Shareholder Committee for the Future of Ferro and is led by FrontFour Capital Group LLC of Stamford, Conn., and Quinpario Partners LLC of New York. It said it is nominating the three candidates because it is concerned about Ferro’s “historic and current underperformance.”
REPORTERS’ NOTEBOOK BEHIND THE NEWS WITH CRAIN’S WRITERS
An outside-in look at local CEOs ■ Want an inside look at companies in Northeast Ohio? Check out Glassdoor.com, where people anonymously rate their employers and list their pros and cons. As part of a Page One story about the sometimes unsavory things Glassdoor visitors say about local companies, we ran a list of those that received the highest and lowest ratings. But site visitors also rate each company’s head executive. Using the 100 Largest Northeast Ohio Employers list published in 2012 by Crain’s, here are all 15 top executives who received at least 20 votes, ranked by their approval rating on Glassdoor. 1. Barbara Snyder, Case Western Reserve University: 93%, 45 votes 2. James Hambrick, Lubrizol Corp.: 92%, 24 votes 3. Alexander Cutler, Eaton Corp.: 91%, 102 votes 4. A.J. Hyland, Hyland Software Inc.: 87%, 47 votes 5. Tie — Donald Washkewicz, Parker Hannifin Corp.: 83%, 63 votes; Luis Proenza, University of Akron: 83%, 24 votes 7. Christopher Connor, Sherwin-Williams Co.: 81%, 288 votes 8. Tie — Delos “Toby” Cosgrove, Cleveland Clinic: 79%, 92 votes; Beth Mooney, KeyCorp: 79%, 57 votes 10. James Griffith, Timken Co.: 75%, 44 votes 11. Glenn Renwick, Progressive Corp.: 72%, 218 votes
■ A planned $9.45 million investment in Middlefield Banc Corp. by a private equity investor isn’t happening — at least not under the initial agreement. Bank Opportunity Fund LLC, an affiliate of Hovde Private Equity Advisors LLC in Washington, D.C., was to buy 24.99% of the company’s common stock and had divulged plans potentially to triple Middlefield’s size over the next half decade through internal growth and acquisition. But, in a Jan. 18 filing with the Securities and Exchange Commission, Middlefield executives revealed that the final sale of shares did not take place before the Jan. 14 deadline, which will not be extended. Two other stages of the share purchase were completed, though, through which Eric D. Hovde, chief investment officer of Bank Opportunity Fund’s investment adviser, acquired 9.9% ownership of the company’s stock in April 2012. He will continue to have the right to designate a director nominee for
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company that processes purchases made with gift and loyalty cards, raised $3.2 million from several investors, according to a document filed with the Securities and Exchange Commission. The company is particularly interested in getting more stores to adopt a product called PayCloud, which allows a customer to make purchases with a smart phone as if it were a gift card or a loyalty card.
Better safe than sorry
The road back: Ben Venue Laboratories Inc.
On the case: The Ohio Supreme Court agreed to hear an appeal of a lawsuit that is attempting to block the privatization of the state’s economic development efforts. The case is ProgressOhio.org Inc. v. JobsOhio. The Supreme Court case stems from litigation filed in Franklin County Common Pleas Court by the left-leaning ProgressOhio, a Columbus think tank. ProgressOhio argued that shifting the state’s development function to a nonprofit was unconstitutional, and it sought to block the nonprofit JobsOhio from using public money to fund its operation. Skeleton crew: Parker Hannifin Corp. will market its new exoskeleton device under the name Indego. Parker recently announced an exclusive licensing agreement with Vanderbilt University for its exoskeleton technology, which allows individuals with severe spinal cord injury to walk and enhances rehabilitation for people who have suffered a stroke.
When a deal still isn’t a deal
Excerpts from recent blog entries on CrainsCleveland.com.
A fresh spark: SparkBase Inc., a Cleveland
entered into a consent decree with the U.S. Food & Drug Administration that dictates what the Bedford company must do before it can go back to producing many of the drugs it made before it ran into problems with regulators. The 47-page decree states that Ben Venue must hire an independent expert to conduct a thorough evaluation of its manufacturing and quality control processes and certify that the company meets current Good Manufacturing Practices requirements.
12. Richard Kramer, Goodyear Tire & Rubber Co.: 71%, 51 votes 13. Thomas Swidarski, Diebold Inc. (stepped down last Thursday, Jan. 24): 67%, 61 votes 14. Anthony Alexander, FirstEnergy Corp.: 61%, 31 votes 15. Zev Weiss, American Greetings Corp.: 40%, 57 votes The average rating for all head executives on Glassdoor is 68%. — Chuck Soder
THE COMPANY: Brennan Industries Inc., Solon THE OCCASION: Its 60th anniversary
The manufacturer of hydraulic fittings and adapters was founded in 1953 by Michael Brennan, who saw an opportunity in the hydraulics business as it was blossoming in the post-World War II period. Brennan, now in its third generation of family ownership, offers more than 30,000 standard and special hydraulic fittings and adapters in sizes ranging from 1/8 to 2-1/2 inches. Most products are available in carbon steel, stainless steel and brass. Its products are stocked at distribution centers in Atlanta, Cleveland, Dallas, Los Angeles, Seattle, Toronto and Shanghai. “While we pause to honor the past and the friends we’ve made over the years, we are also looking ahead and embracing new technologies,” said David M. Carr, president of Brennan Industries, in a statement. “Brennan is committed to serving our customers through innovations, product development and continuous quality in our service and all of our products.” For information, visit BrennanInc.com.
Send information about significant corporate anniversaries to managing editor Scott Suttell at ssuttell@crain.com.
■ The recent killing of 23 workers in an attack on a natural gas plant in Algeria prompted Bloomberg to examine how companies — including Parker Hannifin Corp. — approach security at facilities in the world’s trouble spots. The Algerian incident is prompting businesses operating in North Africa and other politically volatile regions to enact safety programs to protect employees, said Tim Husted of Carlson Wagonlit Travel. Companies are “very aware” of the militant attacks and are carrying out contingency plans, which may include relocation of non-essential personnel, he told Bloomberg. Global corporations increasingly “rely on their own intelligence networks to anticipate and respond to events that threaten workers’ safety or damage their business,” according to the story. One strategy to boost security is, Washkewicz when possible, to avoid sending executives to dangerous places. That’s the basic security measure taken at Parker Hannifin, which makes motion and control equipment. Bloomberg reported that CEO Don Washkewicz “canceled a trip to the Middle East after the attack on the U.S. consulate in Benghazi in September that left the U.S. ambassador to Libya and three other embassy staff dead.” He also will not travel to Colombia. Parker, which has 311 manufacturing locations in 48 countries, provides security guards for executives traveling to places such as Brazil and Mexico. “You never can be 100% safe, but we try to be as safe as possible,” Mr. Washkewicz told Bloomberg.
election to Middlefield’s board of directors, according to the most recent filing. Middlefield Banc executives had aimed to close the stock sale, entered into on Aug. 15, 2011, by the end of 2011, but the stock purchase agreement was amended — and the sale delayed — six times. Bank executives declined comment. A phone message left for Mr. Hovde was not returned. — Michelle Park
Happy feet? Not so much with this deal ■ Sam Zell, the Chicago-based real estate investor known as “the grave dancer,” is unlikely to break into any moves over the recent sale of the Courtyard by Marriott in Willoughby for $7.15 million. Mr. Zell’s Equity Group Investments Inc. made little on the sale because the CY Willoughby Holdings LLC investor group it led paid $6.7 million in June 2011 for the 90room hotel at 35103 Maplegrove Road. The investor group had paid less than half the $15 million the prior owner, Moody National Cos. of Houston, did for the property. It’s the kind of deep-discount purchase of a distressed property that made Mr. Zell a fortune. But Lake County land records show the gain was minimal on this particular deal. The Courtyard’s new owner, Lightstone Value Plus Real Estate Investment Trust of New York, noted that $1.5 million recently had been invested into upgrades at the hotel. Lightstone said it bought the hotel with two other Marriott-flagged hotels in West Des Moines, Iowa, for a total of $21 million. — Stan Bullard
Get to know me ■ The country’s megabanks are seeing their profits squeezed, The Wall Street Journal reported, but a “regionally diverse group of smaller lenders has been thriving with a mix of simpler businesses and sharper focus on local customers.” Troubles at the largest lenders “have helped push some customers to major regional players,” including PNC Financial Services and Fifth Third Bancorp, both of which are big in Northeast Ohio. Glenn Gable, who runs Freeway Lanes Bowling Group, a chain of bowling alleys in the Cleveland area, told The Journal that he tried to get loans from larger banks but was turned away. “They weren’t interested in lending to someone in the bowling industry,” he said. Instead, the newspaper reported, Mr. Gable turned to Fifth Third, which gave him a $7 million credit line. “A regional bank doesn’t just write you off,” he said. “They spend time getting to know you and your business and looking at your track record.”
Keep trying ■ You will not swell with civic pride when you look at the 2012 Milken Institute BestPerforming Cities Index, which ranks U.S. metropolitan areas by how well they are creating and sustaining jobs and economic growth. Components include job, wage-andsalary, and technology growth. In most years, the institute said, “these give a good indication of the underlying structural performance of regional economics.” The rankings look at 200 cities. Canton is northern Ohio’s best performer, and it’s at No. 149. Youngstown is at No. 158, followed by Akron (No. 172), Cleveland (No. 177) and Toledo (No. 180). Columbus is tops in Ohio, at No. 53. Cincinnati is No. 89, and Dayton is No. 117.
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