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June 12, 2007 

 Q&A: Madison Capital Partners CEO Larry W. Gies Jr. on International Private Equity 6/11/2007
The mission of Going Global, which appears on MidwestBusiness.com on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė Under the leadership of Larry W. Gies Jr., Madison Capital Partners has acquired 20 companies. Most have significant overseas operations and are based in Europe.

Madison Capital Partners has further expanded the geographic reach of these enterprises. Gies has guided many operational restructurings that have focused on new product introduction, lean manufacturing initiatives, cash-flow generation, the specific competencies of the particular business and customer-centric solutions.

Of the 20 companies purchased, 16 have been sold, one has been recapitalized with a significant return to investors and three are still in the build stage. Of the 17 investments with liquidity events, equity investors in Madison Capital Partners have seen an internal rate of return of 90 percent and 5.9 times return on capital invested.

Prior to forming Madison Capital Partners, Gies assisted investor Michael Heisley of Heico Acquisitions in numerous investments. On behalf of the German government, he also marketed the investment potential of a German high-tech region to U.S. corporations and investors. Gies began his career at Deloitte & Touche.

He earned his M.B.A. from Northwestern Universityís Kellogg Graduate School of Management with concentrations in strategic management and marketing. Gies received his bachelorís of science degree in accounting from the University of Illinois. He is a CPA.

Gies serves on the board of directors of all the Madison Capital Partners companies. He serves as the president of The Gies Foundation. Madison Capital Partners should not be confused with Madison Dearborn Partners.

Madison Capital Partners provides management capital and strategic resources to underperforming businesses. In part one of a three-part Q&A, Gies sat down with Michael Muth to discuss international private equity.

Michael Muth: How do you define a defensible market niche?
Larry W. Gies Jr.: The key to a defensible niche is you have the ability to chart your course on pricing, design, etc. proactively rather than reactively. The top three automotive companies are very reactive today. We want to get involved with businesses that have defensible niches even if theyíre doing poorly now.

It could mean they have a patent or a competency unlike any other company. To have a truly defensible market niche, a company must be the best in the market at one of the following: low-cost producer, best service or best technology.

MM commentary: You have to know your industry very well to recognize a defensible niche and have the ability to turn a company around within it.

MM: Where are the synergies between many disparate portfolio companies?
LG: There arenít necessarily any synergies and we keep them completely separate. If there are synergies, we encourage them to communicate. We do have conferences and meetings where they can get together to talk about their businesses. Clearly we encourage that.

However, we want them to be self-sufficient, standalone businesses. Theyíre responsible for their own profits and losses. There have been a few instances where it did make sense to put them together and we did. The CEOs have to say they want that. We donít want to force something that doesnít make sense.

MM commentary: Thereís an element of singularity here. After the business is acquired, it needs to be sold as a standalone business. This discourages its sale as part of a synergized portfolio.

MM: How is creating and harvesting value changed by expanding internationally?
LG: Itís very difficult to supply your customers unless youíre global. Theyíre asking for global sourcing. They want you to be close to them. Weíre building plants all over the world. They donít want just parts. They want system solutions. There is nothing proprietary about what we do. Itís simple.

We give ownership stakes to the management teams. We invest heavily ourselves. We spend a lot of time with these companies. Two of our executives are with the company in Munich full time. They see us working alongside them. This is important. A lot of work must be done.

We allow them the freedom to choose the right strategy and give them the incentive to choose the right strategy through personal ownership. We make the mistakes with them and fix them together. Itís pretty powerful.

MM commentary: Expanding internationally creates opportunity by following your customers. This creates opportunities that may not exist domestically.

MM: What role does technology play?
LG: It gets back to a defensible niche. If we see there hasnít been much change in an industry, we like that. It gives us time to fix the business. Maybe we can bring the new technology or strategy to the business.

If itís an industry thatís moving quickly, thereís a risk. If thereís also a lot of technology thatís changing quickly and we canít get our arms around it, that is too much risk and we wonít get involved. We also donít get involved in industries in which we donít have firsthand knowledge.

MM commentary: Some technologists are so enamored with their technology that they donít focus on the business. Madison Capital Partners doesnít seem to suffer from infatuation with technology. However, it leaves itself open to being overtaken in some cases by unanticipated technologies.

MM: How do you find buyers and sellers for your companies outside the U.S.?
LG: The world is flat. Any good investment bank that you hire will hit all the natural industry buyers, strategic buyers and private equity firms worldwide. Theyíre known. Itís a pretty small world.

MM commentary: In his industries, many of the players are established. Itís easy to find them. In rapidly changing industries, I suspect it would be much more difficult.

MM: How long do you typically own a company?
LG: We own a company for as long as we can continue to add real value.

MM commentary: Madison Capitol Partners is different from other private equity firms in that they acquire companies serially, work on them and then resell them. Others often take a portfolio approach and are only buyers or sellers instead of turnaround artists.

MM: All board members come from the Midwest. Howís their world view?
LG: Weíve all run manufacturing companies as a CEO or CFO. One of our former board members ran Dell China.

Weíve built plants in Singapore. One took Scottsman international. Weíre not globetrotters. Weíre Midwestern guys. We donít try to run it our way. Weíre straightforward with others. We give foreign managers the freedom to run a company their way. We stand alongside them every day.

MM commentary: Thatís a new twist on Midwest internationalists: that our straightforwardness is an advantage compared to the more ďsophisticatedĒ east and west coasters. I like that.

MM: How can you close any sizeable transaction in less than 30 days?
LG: If you know the company and its industry, you donít need to spend 120 days with lawyers.

MM commentary: Itís still pretty amazing to me that any significant deal can be closed from start to finish in that short a time period.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at muth@midwestbusiness.com.
Click here for Muthís full biography.

Previous Columns in 2007:
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Foreign Deal Making (5/15/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market M&A (5/8/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market Firms (4/24/2007)
Q&A: George Filley of NAVTEQ in Chicago on Data Localization, Reach (3/27/2007)
Q&A: George Filley of NAVTEQ in Chicago on Partners, Personal Privacy (3/20/2007)
Q&A: George Filley of NAVTEQ in Chicago on Digital Mapping (3/7/2007)
Click for 2006 column archive.
Click for 2005 column archive.
Click for 2004 column archive.

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