TC’s World Magnetics acquires NY, CA companies

TRAVERSE CITY – While State of Michigan officials racked their brains on how to attract jobs and build up business activity, World Magnetics went ahead and pursued the same goals the old-fashioned way: The firm recently bought two small manufacturing companies – one in New York and the other in California – and merged them into its operations in Traverse City.

World Magnetics is a manufacturer of magnetic heads and pressure switches – an unlikely product combination rooted in its history as an offshoot of Fairchild Industries, a onetime manufacturing giant, and Burroughs Corp. (later Unisys), a maker of business machines and computers.

But the Traverse City firm didn't stray far into the exotic with its purchases of Henry G. Dietz Co. of Long Island City, N.Y., and Value Engineered Products (VEP) of Newbury Park, Calif. Like World Magnetics, each company also manufactured pressure switches – low-energy devices likely to find new uses and grow in demand thanks to "green technology" now on the drawing board. In many applications, pressure switches can take the place of electric devices altogether.

World Magnetics sealed the deal for Dietz in mid-2009 and completed the VEP transaction this year, says World Magnetics President Jim Lievense.

Why buy companies in the midst of a recession? One goal was simply to drive revenues upward, says Lievense. As the recession deepened in 2009, he didn't pin his hopes on boosting sales with extra advertising or by pressuring distributors.

"What we did was we literally bought sales," said Lievense, who has been owner of World Magnetics for about 10 years. "And we were able to bring jobs to Michigan."

Lievense puts World Magnetics' revenues at $3.5 to $4 million. But the company fell to a $2.8 million level annually, following the financial meltdown of 2008 and had little hope of driving sales back up with its existing business. The company was forced to lay off eight from a workforce of 25 people. But the purchase of Dietz in July 2009 added $400,000 a year in business, and the VEP acquisitio two months ago added another $400,000, bringing World Magnetics' annual revenue up to $3.6 million. The additional income brought in by the aquired companies enabled World Magnetics to justify a larger staff.

"We were able to bring back the World Magnetics people who were laid off and hire additional employees," Lievense said.

Other factors also made the deal a sweet one: For starters, the founders of both the Dietz and VEP companies had passed away, and neither the owners nor the employees were interested in continuing the businesses.

Second: The companies had a solid and substantial client list but competitors are far and few between. "Big international companies like Komatsu, General Electric and Bombardier were buying product from these companies, but suddenly they had no way to get it," Lievense says. "Frankly, [these switches] aren't made by anyone else."

The Product

World Magnetics' magnetic heads and pressure switches have a wide range of uses. Like similar switches, its pressure devices activate when air or liquid pressure reaches a pre-set level. They are used in scores of fields, ranging from medicine, automotive and construction, all the way to the aerospace and computer industries.

"Any time anyone wants to pick up a change in a vacuum or in pressure, they buy these switches," he said.

The Traverse City firm's magnetic heads have long had a home in ATM machines, security access systems, and in check processing, where they are used to read the magnetic codes on checks, among many other uses. But all the diversification didn't stop the financial meltdown from affecting World Magnetics performance last year.

"2009 was a brutal year for almost any business, and there were very few that did not get beat up very badly," Lievense says.

Nevertheless, additional Dietz and VEP products complement World Magnetics' switch portfolio and offer

the opportunities for growth. "We broadened our product line, and we are a better company because of it," he said. "There are a ton of synergies."

The Dietz pressure switches tend to be larger than World Magnetics' original projects. But they draw on similar engineering know-how.

The switches, still being marketed under the Dietz name, have applications in the heavy equipment and the mining industries, for example. "And VEP manufactures switches that are primarily manufactured in the private aircraft field," Lievense says.

The Lesson

World Magnetics approach could prove helpful to other businesses. The purchases helped it with the biggest problem that companies face in a recession: How to increase sales.

In a recession, revenue problems are normally bigger worries than capital shortages and health care costs, Lievense notes, citing a recent Michigan Manufacturers Association study. He says that a revenue decline "can take a company that's profitable and make it unprofitable overnight."

Lievense's experience also suggests a lesson for Michigan's redevelopment. While start-ups are often touted as a prescription for Michigan's ailing economy, expansions of existing businesses actually have a better record at adding jobs to an economy, according to Scott Shane, the Case Western Reserve business professor who wrote the book, "The Illusions of Entrepreneurship."

"Indeed, having more firm formation might actually slow economic growth," he wrote. One reason is that people are usually more productive in existing firms than in tiny start-ups.

Given those findings, all Michigan needs to do is figure out how to help a few thousand companies like World Magnetics expand and prosper. BN