HRCP Investment:
Dexter Magnetic Technologies

Dexter Magnetic Technologies ("Dexter" or the "Company") of Elk Grove Village, IL is a global source for the design, fabrication and assembly of highly engineered magnetic systems for industrial, medical, defense, aerospace and telecommunication customers.  A distribution business combined with a technical assembly and component business provided for diversity and stability to the revenues and profitability of the business.  European market access was achieved through a UK sales, engineering and distribution facility.

Sourcing, Transaction and Opportunity

This corporate divestiture from Henkel AG was completed through a Rothschild auction one year after HRCP had targeted and contacted Dexter to inquire about acquiring this non-core subsidiary.  HRCP was the strongly preferred buyer of choice by management.  Additionally, complex corporate obligations were successfully negotiated by HRCP which helped win the auction. 

The opportunity to create value in the investment existed in two areas.  First, in the transformation of management culture and incentive structures that HRCP always promotes in corporate divestitures, and second in the support of management's new strategy to transform the business from a supplier of commodity magnet and simple assemblies to a high value-add solutions provider for technically demanding industrial customers in a wide range of industrial applications.

Value Creation

Culture Change.  Dexter historically was managed to the objectives of its parent chemical company.  HRCP created extensive equity ownership in the organization and set Dexter-specific performance and compensation goals. A board consisting of two HRCP representatives, three Executive Affiliates and the two key managers drove changes in open communication, goal setting, accountability, strategic planning and organizational structure.  HRCP created board committees to further emphasize the planning, reporting, communication and incentive systems that promote positive corporate culture.

Lean Operations.  HRCP introduced Lean concepts to Dexter in order to reduce cycle times to customers, improve quality, reduce warranty expenses and better manage working capital; all of which resulted in increased market share and opening to new markets.  Lean operations supported the strategic shift to higher value-added services and greater technical engineering capabilities that enabled Dexter to become a more important resource to its technically demanding customers and lessened the Chinese competitive threat.

Cash Flow.  HRCP emphasized Lean programs and cash flow.  Working capital was reduced by 50% and three U.S. facilities were reduced to two, achieving significant efficiencies, improved margins and producing high cash conversion ratios.

HRCP Contribution

Introduced Lean concepts through HRCP resources
Implemented strategic redirection –commodity distribution to custom assembly
Revamped compensation programs
Oversaw facilities consolidation and monetization of valuable California real estate
Supported China office opening for sourcing and sales
Initiated contingency planning post 9-11-2001
Supported new lab facilities
Initiated Houston office opening to support growing oil and gas business
Implemented comprehensive customer surveys

Investment Results

After managing through the severe recession 2001 and 2002, HRCP concentrated on maximizing cash flow while implementing strategic changes to the business.  All mezzanine debt was repaid and then senior debt was reduced to the level where the company was in position to pay a large dividend to shareholders.  HRCP ultimately retained National City Bank in Cleveland to auction the business.  Dexter was sold to a private equity buyer in July 2007.  Most value creation in this investment came through strong cash flow generation over the six years of ownership.  Multiple expansion was driven by the improvements made to the organization, strategy and customer base of the business.  Dexter's strategic shift away from commodity products to higher value add products created a smaller but much higher margin business.  

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