Taking Control

Dec. 21, 2004
How Gideon Argov has refocused Kollmorgen on global growth.

A tank commander in the Israeli army at age 18, Gideon Argov is no stranger to do-or-die situations. Now, as chairman, president, and CEO of Kollmorgen Corp., he's still pulling off some impressive maneuvers. If ever a company needed rescuing, it was Waltham, Mass.-based Kollmorgen. When Argov arrived there in 1991, the corporation was still smarting from a failed takeover attempt begun between 1987 and 1989 by Vernitron Corp., Deer Park, N.Y. Although the company was roughly one-third the size of Kollmorgen, it intended to load up on junk-bond debt, purchase the company, and sell its assets for profit. During the late 1980s, Kollmorgen was hardly in a position to resist the overture. The company--which got its start as a manufacturer of electro-optical equipment such as submarine periscopes and later made remote-viewing devices for the U.S. military's Manhattan Project--was foundering because of the prior management's decisions to diversify into about a dozen businesses, such as manufacturing PC boards and color-printing equipment. After a bitter proxy fight, Kollmorgen agreed to be purchased. And before long, Argov says, "There were people walking around saying things like, 'I'd like to measure my new office here'" and predicting which employees would be fired. Luckily for Kollmorgen, Vernitron's financing abruptly disappeared. But Kollmorgen's problems did not--most notably, the end of the Cold War contributed to the corporation's losing $35 million in defense-industry contracts the year Argov assumed command. Since then, however, Kollmorgen has made a tactical shift from a disjointed holding company whose divisions sometimes competed against each other to an aggressive player in the $6-billion-and-growing worldwide market for high-performance electronic motion control. This equipment is used in such fields as factory automation, semiconductor processing, and document handling. Along the way, Kollmorgen has sold a half-dozen noncore businesses, acquired other companies to shore up its marketplace gaps, and introduced more new products in the last two years than it did during the previous 10. As a result, Kollmorgen has regained control of its destiny while emerging as a model for companies interested in succeeding in a business climate where trade barriers are falling nearly as fast as the value of some Asian currencies. Although the company remains relatively small in comparison with motion-control giants such as Siemens AG, Munich, the percentage of Kollmorgen's sales that come from international markets has risen from 17% in 1990 to 40% in 1997. And the corporation expects that figure to continue rising. Founded in 1916 and named for the holder of the first U.S. periscope patent, Kollmorgen always has sold products internationally. "But what we did was to put together a combined motion-control business, all of whose products are available throughout our areas," Argov states. And while he's loathe to take sole credit for Kollmorgen's growth in markets that today include France, Germany, and the Far East, Argov is clearly the right man to lead the company into the world marketplace. The son of a globe-hopping Israeli diplomat, he has lived in locales as far-flung as Mexico, Nigeria, and Ghana. Thanks to these experiences, Argov claims that he now speaks "three and a half" languages--English, Spanish, Hebrew, and a smattering of French. The tongue in which Argov appears most fluent, though, is that of cross-cultural commerce. "I don't just look at the idea of being a global company as something we have to do because we have no choice," he explains. "I look at it as something that's interesting and worthwhile" for its own sake. For evidence of Argov's international aptitude, look no further than Kollmorgen's dealings with Fritz A. Seidel Elektro-Automatik GmbH, a Dusseldorf, Germany-based company it purchased last July after a year-long courtship. From the outset, the logic behind such a pairing was fairly straightforward. Kollmorgen sought a larger European presence for its industrial/commercial-products division, which currently accounts for about 60% of its sales (aerospace/defense sales comprise the rest). Seidel Elektro-Automatik was a 50-year-old family-owned business that despite having solid products and a strong sales and marketing base needed to join forces with a multinational organization in order to survive amid increasing consolidation. Despite this motivation, Reiner Seidel, the German company's CEO (and now CEO of Kollmorgen Seidel), admits he was somewhat standoffish at first because he had already spent three years talking to five other suitors. "But none of them brought any synergies" or a cohesive European strategy, he states. To convince Seidel that their firm wasn't like these companies, Kollmorgen executives spent six months building a relationship with him before attempting any serious negotiations. During this period, Argov says, "We had to go back two or three times and have lengthy discussions about business philosophy and the competition, and about our goals and his goals." But Argov asserts that by the time the deal was concluded, "We knew his company and him so well, and he knew us so well, that the integration after the merger was a trivial matter" rather than a source of headaches. Kollmorgen Seidel is now the hub of Kollmorgen's industrial/commercial activities in central Europe, with exclusive access to Kollmorgen's high-performance motors to complement its product mix. At the same time, the Seidel organization will supply the rest of Kollmorgen with European-style high-voltage drives, a product area in which Argov says that company is preeminent. No less synergistic is Kollmorgen's March 1997 acquisition of Servotronix, based near Tel Aviv, a company that has helped Kollmorgen beef up its control-software offerings. "One of the trends in the electronic part of the motion-control industry is a move toward digital [technology] and software-programmable products," Argov states. "That means software becomes a much more important part of the skill mix." But because Kollmorgen lacked in-house expertise in this area, it was faced with a decision: hire engineers in an attempt to build its own products or select a partner to provide these capabilities. Because management believed that the former approach would take too long and yield uncertain results, Servotronix was selected after a worldwide search. Kollmorgen's first step was to secure a 10% stake in the company, with which it had had no previous dealings, at a cost of several hundred thousand dollars. "It was a relatively small investment for us to make," Argov reveals. "But it showed them that we were very serious about working with them over the long term." Soon the companies formed an innovative design team made up of American motion-technology engineers and Servotronix software experts. In 1996 this cooperation yielded the Servostar line of digital servo drives. "That was a major breakthrough for us and a lot of work," Argov says. Much of this effort centered around cultural adjustments. Most importantly, Kollmorgen's conservative approach to design emphasized checks and balances at all phases. In contrast, the Servotronix corporate climate was built more along the lines of shooting from the hip. In Israeli commerce, Argov explains, "there's the attitude that 'We can deal with it. Don't worry. We know what we are doing.' And many times, they did. Other times, they only thought they knew what they were doing." In spite of occasional missteps, the cross-pollination of styles allowed Kollmorgen's first Servostar products to be developed in one year instead of the usual two. In future product generations, this period is expected to dwindle to nine or even six months. The other side of the Kollmorgen turnaround has been the divestiture of operations that didn't fit into the company's plans. The most dramatic example in this area was Kollmorgen's exit from supplying instruments used for color management in the digital-imaging and desktop-publishing markets. Although there was nothing wrong with Kollmorgen's Macbeth color-instruments operation, "it was not an area they wanted to focus on," says Irwin Silverberg, senior managing director with Burnham Securities Inc., New York. Rather than an outright private sale of the business unit, Argov wagered that his company's returns would be increased by combining this business with the color-control-systems division of Zurich-based Gretag AG. This transaction, completed in January 1997, resulted in the formation of GretagMacbeth Holding AG. In June Kollmorgen sold its 48% interest in that company as part of a public offering of GretagMacbeth shares on the Swiss stock exchange, a deal that netted Kollmorgen $41 million in post-tax proceeds. The move, says Silverberg, was "nothing short of brilliant" in that this money enabled Kollmorgen not only to spruce up its balance sheet, but also to finance its 1997 acquisitions. Perhaps equally important to Kollmorgen's resurgence is a trend toward outsourcing that is most evident in the company's Artus division, which is based in France and serves primarily the aerospace and defense markets. "They are involved in making integrated systems as well as motors," Argov states, "which means that they have to put together complex technologies including software, power electronics, mechanical systems, and motors into very compact packages." These are used as actuators in aircraft, aerospace, or defense applications. In these areas, he continues, "we were faced with the need to maintain a high level of technology but also to reduce our costs" to compete with rival suppliers. In response, he says that at Artus, "we've outsourced much of the metal-bending part of the business, the machining, and sourcing of components. And what we do more of in-house over there is design products," as well as assembling, integrating, and supporting them. "That really is much more of what Kollmorgen is going to be like heading into the future," he says. On the other hand, Kollmorgen has been known to go to great lengths to keep manufacturing functions in-house when it makes sense. "One of the ways that we also lowered costs at Artus is that we opened a manufacturing facility in Vietnam last year," Argov says. Located in Bien Hoa, just outside Ho Chi Minh City, it provides the Artus operation with mass-production capabilities (in quantities starting at 200 units) for small motors and sensors at cost levels that Argov estimates are lower than those of European suppliers by 50% and sometimes more. Granted, not all of Kollmorgen's attempts to use nontraditional component sources have gone smoothly. A case in point occurred during the start-up of Kollmorgen Tandon India, a production facility the company built in Bombay three years ago. "We thought that we could get all our parts from India for our high-volume business there and really found that was a mistake," because local suppliers couldn't meet Kollmorgen's specifications, explains Mark Petty, president of Kollmorgen's industrial/commercial division, who is based in Radford, Va. Although Kollmorgen Tandon took a year longer to ramp up to full capacity than expected, the wait was worth it. Thanks to this plant, Kollmorgen is competing in markets where it couldn't before. Kollmorgen Tandon has been able to produce brushless motors (traditionally used in industrial equipment but now becoming more popular for applications such as computer drives and peripherals) at a cost between $20 and $100 apiece. "The only way to manage this start-up was to break the rules and say, 'We've got to go and set up shop in Bombay or a place far away from home,'" Argov says, "because if not, we're just going to be trading dollars for dollars." Of course, taking strategic gambles is nothing new to a former soldier. Business is less physically risky, but whether it's on the battlefield or in the boardroom, Argov believes there's a quality that can make people commit to what he calls a "crazy" objective such as the turnaround of Kollmorgen rather than hiding out until difficulties pass. "That requires leadership," Argov says, a quality that is rare in any environment. To help his company capitalize on this commodity, he says, "the biggest part of my job--more important than talking to Wall Street, looking at acquisitions, or anything else I do--is nurturing and developing the leaders in our company," a task that he feels can be accomplished only through example. "Those leaders are the people who will then develop other leaders," he says. "And that's how strategy gets accomplished as opposed to just staying on a piece of paper." Another key to Argov's success is his keen appetite for details. In this area, the CEO's co-workers agree that his approach is much more hands-on than that of any of his predecessors during the last quarter century. For example, Argov "made it a point during the first years he was here to learn all of the businesses, and he spent quite a bit of time in each of the facilities to understand the people and what the businesses were all about," says Dan Desmond, president of the aerospace/defense group. "Then I think he was able to step back and think about strategic integration," such as when he started reorganizing the company around the commercial/industrial and aerospace/defense markets and closing redundant functions. By the same token, "it doesn't matter where Gideon is-- anywhere around the world or in another time zone--there are not too many days that I don't get a phone call from him so that we stay in touch," adds Kollmorgen's Petty. "That's pretty unique for a fairly decentralized company." The 1,750-person organization operates with just 11 people at its headquarters. (Petty also worked with Argov at High Voltage Engineering Corp., a Boston-based company where Argov previously served as CEO.) Fortunately for his subordinates, Argov's penchant for maintaining contact stops short of micromanagement. Petty says that although Argov is the most knowledgeable person at Kollmorgen with respect to the strategic implications of its technologies, "he's not an individual who gets heavily involved in the day-to-day operations" of an individual business area. As a result, Petty adds, "I don't feel that I have to contact Gideon every time I want to do something." Even if the decision involves the construction of a $2 million North American customer-service facility, a current project that Petty plans to complete in April, he says, "Gideon expects me to go ahead and make it happen." Argov elaborates, "We don't have an autocratic style around here. I don't come in with brilliant ideas every morning and figure out what to do." Rather, he says half-jokingly, "I surround myself with people who are smarter than I am." However, this practice in itself is no guarantee of success. "The Chinese have a saying that you can't just be sleeping in the same bed," he notes. "You have to be sleeping in the same bed, having the same dreams. Then you can rest easy." To ensure that this happens at Kollmorgen, Argov meets regularly with 15 top-level staffers from various business units who comprise the company's worldwide operating team. "If you've got the people in that group who then collectively are in charge of all the business units," Argov says, "things happen really naturally and almost automatically" to drive the common objectives of Kollmorgen rather than any personal ones. This is not to say, though, that the aligning of the company's managerial goals occurs without friction. "We have very open, honest discussions in that group about our strategic direction, how we should do things, what's good about our company, and what we need to improve." Some of the more heated conversations in the latter area center around how aggressively Kollmorgen is setting its goals. "Those are tough discussions, because everybody feels their teams are always working hard and doing what they need to be doing," Argov says. "At the same time, we need constantly to be raising the bar as far as our corporate performance and our objectives. So those discussions tend to be brutally honest." Other debates among Kollmorgen's senior management have resulted from Argov's practice of taking an extreme position and hoping he is challenged. "I don't like argument for argument's sake," he says. "But I do like a healthy debate about important issues." Few are likely to argue these days with the results that Kollmorgen has achieved under Argov's leadership. He did "a marvelous job" during the first three years of his tenure, says Burnham Securities' Silverberg. "And it was Herculean" in that during this period Argov negotiated the company's path through everything from the Vernitron aftermath to a decline in military purchasing while cutting the company's expenses as a percentage of revenue in every measurable department. Before Argov's arrival, Kollmorgen depended excessively on technology without paying sufficient attention to such economic realities as the need to be the low-cost provider in its markets. Accordingly, Silverberg states that along with "an incredibly terrible balance sheet, Gideon inherited some awfully good technology in a lot of places" and has succeeded in bringing other technologies and expertise to it during the last two years. "So now the company's headed in the right direction," Silverberg says, with 1996 sales of $230 million. Likewise, Kollmorgen had by mid-1997 slashed its ratio of long-term debt to total capital from 75% to 50%. And its earnings for the first three quarters of 1997 exceeded 1996's performance by 19%. Nevertheless, some limitations remain. Most obviously, Silverberg says, "Still having something in excess of 20% of your revenues that are related to the defense area acts as drag on your overall corporate growth." (Prior to 1991, this figure was nearly 50%.) With this market continuing to decline, Silverberg states, Argov could be "the second coming of Albert Einstein," but he wouldn't be able to grow that part of the business without pursuing acquisitions, which is an avenue in which Kollmorgen has no interest. Growth in Kollmorgen's industrial/commercial product areas is expected to help the company further reduce its dependence on this market. As the company reaches milestones toward this goal, though, expect few high-fives to be exchanged by Kollmorgen staffers. As Petty observes, "I think Gideon breeds a culture within the business of being self-critical all the time. The people I work with--and maybe this comes from him--are the type that might complete a record year, but our conversation at the next meeting would involve celebrating for maybe one minute, then talking about how tough the next quarter is going to be."

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