A Cool Clear Vision

With the acquisition of WICOR Industries, a unit of Wisconsin Energy Corp., and the pending sale of its tool business to Black & Decker for $775 million, CEO Randy Hogan has committed the future of Pentair to its enclosures and water businesses. Hogan believes the move gives the $2.7 billion company more freedom to control its destiny as well as the highest potential for growth and returns to shareholders. IW talked to Hogan about the acquisition and future of the St. Paul, Minn.-based company.IW: What is your strategy for integrating WICOR into Pentair? Hogan: One of the first things we did was a cultural assessment of both our water business and their water business to find out what the differences were. We found out some interesting things. They have probably a stronger customer orientation than we do. We have much stronger disciplines around productivity and production and cost than they do. We're combining the businesses in such a way that we leverage both sides. [Of] the two main opportunities for us, No. 1 is supply management. We're all buying an awful lot. We have some real opportunities to do some joint purchasing and consolidation of parts that we think is going to be enormously beneficial. The second is cross-selling. They have a very strong position in the pool and spa business in the Northeast and Midwest; we're very strong in the Sun Belt. Their product line is not as lengthy as ours, so we can fill out their product line and take it right through our channels. The one thing we've done well with acquisitions [is that] we try not to approach them with the arrogance that we know how to do everything. There's stuff we can learn. If you look around the company, there are a lot of folks in leadership positions that came with acquisitions. IW: By becoming less diversified and more focused on water, does that make the company more vulnerable to market fluctuations? Hogan: In our own studies, moderately diversified companies outperform both diversified and focused companies when you look at stock prices over the past 22 years. I believe that it's a strength to be [moderately diversified]. It's a strength because of what you can promise people of ambition, and the stability it can give to employees, and also the stability of returns it can give to shareholders. The one nice thing about water is it's diverse in and of itself. We move to the tune of the pool business (which has nice demographics), to food services (which is good), residential construction (which has been good) and commercial construction (which has been lousy). If you look at our water business through this recent downturn, which absolutely hammered a lot of businesses, including our enclosures business, our water business flattened out on the top line. Our margins went down a little bit because we continued to sustain some investments in new products and markets, like China and India. We kept those investments there even though we weren't growing the top line. Even in a pretty bad industrial downturn, it didn't hurt our water business that much. We think water is a more stable business. IW: The front cover of Pentair's most recent annual report emphasizes organic growth, yet the big news at Pentair is this WICOR acquisition. Can you explain the connection? Hogan: We have an ambition to grow at 6% to 8% and then double that with acquisitions. We've proven that we're pretty good at acquisitions. What I want our team to focus on is developing the same kind of capabilities to grow organically that we have through acquisitions. It's eight to 10 times more valuable to have organic growth than acquired growth from a shareholder perspective. Why? When you buy something, you're paying the current owner for some of the future prospects. If you can build a business, after investment the benefits all accrue to your shareholders. That said, organic growth is a harder slog.