At first glance, Utah-based Setpoint appeared to have nothing that an acquirer normally seeks. Nothing except an organizational culture so distinct and powerful that someone wanted to buy Setpoint just to get it.
In creating Setpoint, the founders had a pretty good idea of the sort of company culture they wanted to build. It didn't occur to them that what they came up with would become one of the company's most valuable assets
Steve Peterson says he had no particular agenda when he dropped by Setpoint for a visit late in the summer of 2000. He certainly wasn't thinking about a merger.
The truth is, he had his hands full with his own company, Petersen Inc., which his father had started 40 years before in a garage behind his house. Since then the business had grown to more than $35 million in sales, with some 300 employees making everything from tunnel-boring machines to aerospace components, and was poised to grow by another 60% in the coming year without any additional acquisitions. It was a prospect that both excited Petersen and gave him periodic bouts of anxiety, and he expected the growth spurt to consume most of his time and energy for the foreseeable future.
How Setpoint might fit into the picture, he had no idea. As far as he could tell, it was just another custom-manufacturing company, with 30 employees and a little more than $6 million in sales. Thanks in part to a roller-coaster contract, it had landed on the Inc 500 list in 1999, but most of its revenues came from designing and building factory-automation equipment -- a highly competitive business that Petersen wasn't particularly interested in getting into.
Nevertheless, the Setpoint guys had invited him over, and he was curious to see what they were up to. He'd heard about some of the things they were doing with project management and open-book accounting. Maybe he could pick up a few pointers. With that in mind, he decided to bring along his chief financial officer, Ted Johnstun.
Setpoint's CEO, Joe Knight, met them in the lobby and took them on a tour of the facility. At some point they wound up in the shop, a spacious, well-lit room with whitewashed walls and bright metal halide lamps hanging from the ceiling. About 10 employees were working on half a dozen machines strewed across the shiny concrete floor. Petersen says he was standing there surveying the scene, when he happened to notice a large whiteboard off to one side, on a wall next to a canteen area in a corner of the shop. Scribbled across the board were about 20 rows and 10 columns of numbers forming a table of some sort, with a few dollar signs sprinkled here and there.
"What's that?" he asked.
"That's our board," Knight said. "It's how we track our projects and figure out whether or not we're making money."
"How do you do that?" Petersen asked.
Knight took Petersen and Johnstun over to the board and began explaining what the numbers were and where they came from. The visitors listened intently, occasionally asking questions.
Then Knight stopped. "You know," he said, "you really shouldn't take my word for it. You should get these guys to tell you about it." He called out to one of the technicians, a stocky young man with a baby face and a baseball cap turned backward on his head. The young man stopped what he was doing and ambled over. Knight introduced him to the guests.
"Would you mind explaining this board to us?" Petersen asked.
"Sure," the young man said and proceeded to walk them through it. He talked about calculating the GP -- gross profit -- that he and his colleagues had earned the previous week on each project. He pointed out the column showing each project's GP per hour and explained the importance of keeping that number in mind. He said he also watched the ratio of overall GP to OE -- operating expenses -- since that's how you knew if the company was making money. He added that he liked to see it running at about 2.0.
"I was just amazed," Petersen recalls. "He knew that board inside and out. He knew every number on it. He knew exactly where the company was and where they had to focus their attention. There was no hesitation. He had great confidence in what was up there.
"I could see that the board was a cherished possession, and I was so impressed, not that Joe Knight understood it, but that the people on the shop floor had it down like that. It was their scoreboard. It was the way they could tell if they were winning or losing. I talked to several of them, and I just couldn't get over the positive attitude they had and their understanding of business.
"I knew right then that Setpoint had what we needed, and somehow we had to get it."
Shortly thereafter, Petersen began negotiating with the owners of Setpoint to acquire their business, their services, their management system, and their culture.
Mergers are always tricky propositions, and the negotiations between Petersen Inc. and Setpoint have not yet produced one. A deal seemed imminent in April, but then Petersen brought in a new CEO, who felt he needed time to get his bearings before taking on an acquisition. Nevertheless, the principals on both sides say that some sort of merger is likely within the next year. Whether or not that comes to pass, however, it's significant that Petersen would even contemplate such an acquisition. Why? Because Setpoint has none of the attributes that acquirers normally look for.
Experienced businesspeople will tell you that companies are bought for a limited number of reasons -- five, to be exact. "In almost every acquisition the buyer is looking for market share, earnings, cash flow, strategic advantage, or some kind of synergy, either alone or in combination," says Sam Kaplan, president of Central Chase Associates LLC in New York City, who has bought and sold upwards of 50 businesses in his career, either on his own or with partners.
Setpoint has little to offer Petersen in terms of those five criteria. Yes, it's possible to identify some potential areas of synergy, but none that would justify an acquisition. Indeed, from one perspective, you could question whether or not Setpoint has any market value at all. The roller-coaster arm of the business is essentially a start-up, meaning that its long-term viability is still in doubt. As for the factory-automation business, more than 70% of its sales come from one customer, Autoliv Inc., a $4.1-billion multinational corporation based in Stockholm, Sweden, and the world's largest maker of automobile-safety products. Should Autoliv ever decide, say, to close down its Utah plants or to change its policies with regard to suppliers, Setpoint could be out of business overnight. Few acquirers would consider buying a company with that degree of vulnerability.
