Globe Specialty Metals has been in the news recently because of its proposed merger with Grupo FerroAtlantica, but the company charted its present successful course when Alan Kestenbaum, the founder and executive chairman, decided to focus on its core.
Focus is a watchword for Kastenbaum and one he says manufacturers should pay heed to.
“It is important for people to constantly evaluate their business and make tough decisions to refocus the company on its core competencies,” he maintains.
Kestenbaum did just that when he bought Globe Metallurgical Inc., a manufacturer of silicon alloys and specialty ferroalloys, in 2006 for about $1 million. A former metals trader, Kestenbaum had raised a war chest of $200 million to acquire companies in the metals industry. Globe fit a picture familiar to him as an investor – a solid business which had tried to expand into noncore areas, taken on too much debt in order to do so and sunk into bankruptcy. Due to its debt problems, it was a company, he said, that was “beaten and battered.” But he liked the business at Globe’s center –silicon alloys that were widely used and had considerable growth potential in the solar and aluminum markets.
One of the first moves Kestenbaum made in acquiring the company was to tighten up its financial practices. He said some customers had been abusing payment terms on a specialty silicon alloy that was sold into Tier II automotive suppliers, who were demanding lower prices every year and stretching out payments from 30 days to 90. He decided he had nothing to lose and told his sales team to implement an immediate 15% price increase and 30-day terms.
One company executive pushed back, calling Kestenbaum and telling him if that if he didn’t repeal the price increase, he would call Ford Motor Co. and tell them Globe was the cause for shutting Ford production down. Kestenbaum told him to go ahead and call Ford, but he would tell the auto giant the reason for their problem was that the caller didn’t know how to pay his bills. The caller slammed his phone down.
“He then wired us $1.5 million,” Kestenbaum recalled. “That was a critical turning point. It reinforced my belief that the company really did have a reason for existence.” Within the year, EBITDA in the company turned positive and confidence in the workforce soared.
While Globe requires prompt payment, says Kestenbaum, the same philosophy extends to its suppliers.
“I insist on paying our suppliers on time. We want to be deemed the best credit out there. You’d be amazed how you save money by doing that,” says Kestenbaum. “It’s the price that you get because they know this is the best guy to do business with.”
He has also stressed being responsive to customer needs. When Kestenbaum first acquired Globe, he made sure everyone in the sales force was issued a Blackberry. If a customer had a question about pricing or some other issue, the salesman could get an immediate answer.
Kestenbaum also makes it a point to listen when he gets a call about a potential business deal.
“I give everybody a few minutes to listen to them,” he said. “Of my 10-12 deals, three of them came in from people with Yahoo! email accounts and things like that that ordinarily people wouldn’t take. But by not having any arrogance and being open and taking the time to listen for a minutes to someone that might have a good idea, you’d be amazed at the business opportunities out there. While other people are waiting for the pitch books to come in from banks, we get a call from some guy’s cousin whose business is struggling and is looking for someone to take them on.”
During the next decade, Kestenbaum aggressively acquired a series of companies, expanding GSM’s production footprint and its markets, but he also pared some of its global ventures, selling businesses in the United Kingdom and Norway. By the end of its fiscal 2014, Globe had net sales of $752.8 million and sales volume of 277,991 metric tons.
In making acquisitions, Kestenbaum says he follows two main principles. First, identify businesses which fit in the strategic portfolio, which is centered on silicon and silicon alloys. These would either be identical businesses or companies that increase vertical integration and lower costs.
Kestenbaum admits such a disciplined approach to acquisitions can be frustrating at times.
“You can go through periods of time when you don’t see anything that quite fits,” he said, adding that “Sometimes doing nothing is the best thing to do.”
Second, Kestenbaum cautions against investing in major new facilities.
“I would say in north of 80% of cases, facilities that get built end up in bankruptcy, either because of operational issues or they are in a business competing with companies like us that have very low entry costs and very low debt levels,” he says.
Such expensive expansions result in companies that are overleveraged, and have significant amortization and interest payments. That puts them in a poor posture for competing with companies such as Globe that have low cost structures.
Companies in the materials business are dealing with a cyclical business, he warned, where debt in down portions of the cycle can become “suffocating.”
Kestenbaum said his company takes just the opposite approach. It remains very liquid, even at the expense of investors complaining there is too much cash, so that the company can rapidly respond to opportunities.
“When you go through the dozen or so acquisitions I have done, they have all been done at incredibly low cost, way below the replacement costs,” he explained. “It would cost 18 times more than what we paid to go and build what we have here. Our enterprise value is 15 times what we have invested. We have done this in 10 years.
While Kestenbaum is not keen on building new facilities, he does invest in the production and control processes in his company. Globe has highly automated processes designed to make it a low-cost producer in a business that uses high volumes of raw materials. He noted that the company uses six tons of raw materials for every ton it produces. In fact, Globe uses more than 2 million tons of raw materials annually.
Of Globe’s two core products – silicon and silicon alloys – silicon is growing fastest, Kestenbaum noted, now making up about 40% of the company’s sales. To produce it, quartz is mixed with a very pure carbon source and smelted into a product that is more than 99% pure silicon. This product is then used for silicones, which are used in foods, cosmetics, automotive, medical and other products. The market is very diversified – no more than 5% of the product is used in any one field.
Global is experiencing rapid growth in the solar market, where silicon is used in solar panels. Kestenbaum said the market is being driven by the drop in solar panel prices, which makes it more competitive with conventional energy sources, and advances in battery technology such as Elon Musk’s recent announcement of the Powerwall product to store electricity produced by solar systems. He recalled that 10 years ago, about 30,000 tons of silicon had gone into the solar market. Now, he said, the figure is 500,000 tons.
“Solar was a tiny business just 6 to 7 years ago, but it has been growing at 20+% a year,” he said.
Another 40% of the company’s output is used for aluminum, principally in the automotive market. Aluminum alloy wheels, for example, are made from a mixture of about 90% aluminum and 10% silicon. Globe is benefiting not only from the recovery in the auto industry but also the lightweighting drive by carmakers to improve fuel economy.
Globe also produces silicon alloys for the steel business and a specialty product for ductile iron.
Kastenbaum says he feels good about the macroeconomic picture, with the U.S. emerging from a deep recession and Europe beginning to do the same. If there is a dark cloud in this sunny picture, he said, it would be the strengthening U.S. dollar. That is one reason he is bullish about the company’s merger with Grupo FerroAtlantica, a former rival producer of silicon metal, silicon alloys and ferroalloys based in Madrid, Spain, that was announced on February 23.
“We have now broadened our manufacturing base so we can be much more balanced on a currency basis,” he said.
Kastenbaum says FerroAtlantica also provides a good fit in that it has modest leverage as well.
“It gives us a good, strong balance sheet and tremendous flexibility to build the company from there,” he asserted.
The combined company is expected to have revenue of $2.3 billion and reportedly will be the world’s largest producer of silicon metals. The company would have 26 production facilities and eight mining sites, and a total of 4,700 employees.
Driving Performance with Shared Success
With a number of acquisitions under his belt, we asked Kestenbaum what he has done to establish a common culture in the company.
“It’s really very simple. It’s compensating people for success. A person wants to go to work in the morning, know he is being treated well, know he has a chance to grow professionally and financially,” he says. “The CEO here, Jeff Bradley, tells a story, ‘I want these plant managers’ wives throwing them out of the house and back to the factory.’ That’s when you know someone is being compensated properly. You make everybody focused on how they can improve the company, which is how they can improve themselves.”
Kestenbaum said it is a fallacy that acquisitions need to be followed by widespread changes in the workforce. When he purchased Globe, he recalls, “Instead of replacing everybody below, we found a lot of people who were really interested to learn and wanted to find a new and better way. We educated the sales people and the accounting department on the disciplines that needed to come into the company.”
Most of the things that go poorly in manufacturing are not the fault of the worker. They are managerial mistakes made way up in the organization.
Kestenbaum was critical of those who blame U.S. workers, who he calls the “easiest targets,” for manufacturing’s ills.
“Most of the things that go poorly in manufacturing are not the fault of the worker,” he said. “They are managerial mistakes made way up in the organization.”
In fact, Kestenbaum said Globe has had a “tremendous” relationship with its unions, particularly the United Steelworkers. He called USW President Leo Gerard a “progressive thinker who gets it. For his people to work, companies have to survive. The dynamic is how do we make this business better together.”
“They help us and we help them. There is a way to manufacture in this country where more than just senior management make money and you can reward people for performance,” he said.
Kestenbaum said manufacturing still is attractive because of the wages it pays. He related the story of having the CEO of a large power company tour a Globe facility. He was in the control room when a worker wearing a protective mask came in. When the CEO asked him how much he made, the employee responded that he made about $70,000 a year and had a high school education. The CEO’s response: “Wow.”
For those who want to work at Facebook or Google, says Kestenbaum, they should pursue that dream. But he said there are many millennials in the heartland who won’t be able to take those jobs.
“They should have a better choice than some company paying them minimum wage,” said Kestenbaum.
It’s not just those on the factory floor, Kestenbaum pointed out, who can find manufacturing a profitable choice.
“I hope what I have been able to show is that executives, people who have more career choices coming out of school, can make a lot of money in this industry too. People will work where they can make a good livelihood.”