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Monday, Jan 30, 2023

Acquisitions Forged Metals Business

Local manufacturers know metal processing companies Bralco Metals of La Mirada, United Alloys Aircraft Metals of Pico Rivera and Earle M. Jorgensen Co. of Lynwood – but they probably don’t know those companies’ owner. It’s Reliance Steel & Aluminum Co., and that’s just the way Reliance’s leaders want it.

The downtown L.A. company’s behind-the-scenes ownership of 300 metal services centers, and the bevy of acquisitions it has made over the past few decades, have helped Reliance become the largest metals processor and distributor in the country.

That’s the legacy of Chief Executive Dave Hannah, who will step down this month after 34 years with Reliance, a period during which the company’s sales grew from $180 million to $10.5 billion.

Hannah, 63, was the author of the company’s growth strategy and helped to buy dozens of companies since he joined Reliance as chief financial officer in 1981. He and his team’s conservative valuations of potential acquisitions, willingness to walk away from deals and reputation for sound management have brought Reliance not only a steady supply of willing sellers but also approval from trade groups, shareholders and the markets.

The company’s market cap has swelled from $137 million shortly after its 1994 initial public offering to more than $4.8 billion today. It’s a success story that can’t be argued, said analyst Phil Gibbs, who has followed the company for years as a vice president of equity research at Cleveland’s KeyBanc Capital Markets Inc.

“They’re honestly the envy of the industry in terms of just having a deep bench and strong management and a lot of strong subsidiaries that are in very high margins and growing pieces of the economy,” Gibbs said.

Gibbs and other analysts are confident that Reliance’s success and growth should continue despite Hannah’s departure from the top spot, which he’s held since 1999. That’s because Hannah will stay on as chairman until July 2016, and because his replacement, Chief Operating Officer Gregg Mollins, and other top executives who will remain have worked with Hannah for years. They include Chief Financial Officer Karla Lewis, as well as James Hoffman and William Sales, who will each become an executive vice president of operations at the end of the month.

“I think he left a really strong team,” said Aldo Mazzaferro, an analyst following the metals, mining and steel industry for Macquarie Capital USA Inc. in New York. “Dave and Karla work like one person. I have no concerns about the transition.”

Age of acquisitions

Just as it did in 1981 when it hired Hannah, Reliance operates metal services centers. They buy metal in bulk from steelmakers and the like, and then bend, cut and shape that metal to the specifications of customers, such as small manufacturers.

Hannah joined Reliance as its first chief financial officer after working as the firm’s outside auditor. His hiring was an indication that Reliance was planning to make acquisitions and needed an auditor’s eye to do the due diligence on deals.

In those early years, his role was just that. He secured the financing, handled the documentation and made sure deals went off without a hitch.

The metals centers Reliance acquired early on were often distressed, but by the mid-1990s, larger and more successful centers started becoming available as aging owners wanted to cash out. That opened the door for Reliance, giving the company chances to buy better, more financially stable businesses.

The increase in the number of acquisition targets prompted Reliance to go public in 1994, Hannah said, giving it a way to raise capital for additional acquisitions instead of relying on debt.

“We couldn’t just do it all with debt, because in cyclical debt, if you have too much debt at the wrong time, it could kill you,” Hannah said. “So we said we needed some equity capital if we wanted to do this acquisition stuff.”

A year after the IPO, Hannah became president, then took over as chief executive in 1999. In the 16 years since, Reliance has acquired 59 companies; it now has 300 locations in 39 states and 12 countries.

Reliance isn’t the only metal services company that has grown mostly through acquisitions. Analyst Mazzaferro said that’s a strategy that makes sense, in part because the market stays less crowded when you buy a firm instead of trying to build one to compete. But Reliance has set itself apart from other acquirers by buying the best firms in their respective markets.

Strategic builder

As an operator of metal services centers, Reliance grows by offering more types of metals and more types of processing services to more customers. As it acquired companies, Hannah said Reliance looked for firms that added capabilities to Reliance’s stable, and that helped diversify the firm’s locations and kinds of customers served.

“We look at their products because one of the things that’s really differentiated us over the years is the diversification of our products,” he said. “There’s no other service center out there that has as many different products spread across as many different types of metals – 100,000 products sold to 125,000-plus customers.”

Financial valuations of companies have been his territory and can be the most difficult part of negotiations, he said, because he bases his price on a company’s normal income, while a seller might base the price on highest income.

That’s a discipline that goes back to Hannah’s days as an auditor at Ernst & Young, Mazzaferro said.

“He understands valuations and knows how to apply it to these acquisitions and understands how to run these businesses,” he said. “He wants to know your cash and measures operating income divided by those assets on your income sheet. It takes a financial guy to figure that out.”

But it’s not all income statements and balance sheets for Hannah. Before making any deal, he and his team visit a target company and study how owner and employees interact. They let instinct and experience lead, even in deals that have every other factor going for it.

“Does the owner know (employees’) names? Do the employees turn their backs when the owner walks by? Or do they walk over and say hello?” he said. “All of that tells us something.”

A bad feeling, he said, will stop a deal cold.

Once an acquisition is complete, Reliance takes a hands-off approach, other than to infuse capital when necessary. The acquired company’s name, management and staff all stay the same, as Reliance wants to hold on to customer relationships.

“Those customers are used to dealing with whomever that company is and they don’t know who Reliance is,” Hannah said. “But they know that if they pick up the phone and call their sales person, they’re going to get the same person, with hopefully much more resources than they had when they were independent.”

Though Hannah is stepping down, don’t expect Reliance to stop buying anytime soon. The company is the largest metal services firm in the country but has only about a 6 percent share of the market, meaning there are thousands of companies available, Hannah said.

“This has been a great business – it’s not exotic, but these guys could really sell anything,” analyst Gibbs said. “It’s just sticking to the strategy and doing it over and over and over again, and that’s why they’ll maintain their position as largest service center for forever.”

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