Letter to Henry Rowan at Inductotherm
May 10, 1978
Inductotherm Industries, Incorporated
As you probably are aware, there has been more on my mind in the last two months than new building construction for 65 Indel Avenue and the exact terms of the next lease for Cheston Company. To the best of my ability I will try to outline what we should accomplish.
When Cragmet merged with Cheston, it did so with the hope that we could utilize engineering talents to break into the market for induction heating. The minority used the logic that the space program was dead and that we would have nothing to do, and the only available product line remaining in the corporation was induction heating. We have spent a great deal of effort and have established ourselves as a reliable vendor but have not made profits in the induction heating line.
The Cheston Company is at a disadvantage in the competitive marketplace due to the fact that it does not design and build its own induction power supplies, which is really the heart of the profitability of the business. Common sense tells me that we would not be successful in developing a solid state power supply in the face of existing development at IPE and Inductotherm. In other words, if we had to build a power supply from scratch, we could probably generate the necessary enthusiasm to do so, but I believe that the licenses route will not be successful, which will keep us in a disadvantaged position with competitors. As a point, we have only made profits on induction heating where we have been able to sell 180 cycle and manufactured them ourselves without paying royalties to Inductotherm. The only trouble with this is that the 180, Triline, has a limited future, since it will be replaced by solid state.
We have now reached a crossroad in the history of Cheston Company. Our position is one of low fixed assets, excess cash, good vacuum order bookings, good resistance heater order bookings, but a reduced backlog of induction heater orders. The current situation is right for change.
Under the present backlog of business, a large percentage of our G&A and selling costs are associated with induction heating; and in the short range, elimination of this product would be financially advantageous. However, individuals and situations would not tolerate the elimination of this product line, due to the fact that the present management and minority ownership view this market as its growth possibilities.
It is totally obvious to me that we should transfer heating applications to IPE and that the vacuum group should combine with Consarc. Every attempt in the past to even start to negotiate such a change of interests has failed. Present conditions, however, may allow all people to be satisfied and still accomplish what the management minority would like as well as that which Industries would like.
The key individual to be satisfied at this time is Dick Hill. While I have not had direct negotiations in this regard, it is obvious that his current tax picture, coupled with his future ambitions, make certain things possible that could not have been accomplished in the past. Dick Hill's abilities as a salesman are, if not the best, at least as good as anyone in the Industries group; and he has a vest-pocket operation for selling and servicing of resistance heaters. The resistance product, at the moment, is healthy, and we have authorized production of thirty (30) units into stock in anticipation of future markets. Dick Hill and the market of resistance heating are inseparable; and any plans with respect to mergers or transfers of induction heating must also include resistance heating. In addition, with Dick's tie to resistance heating, the marketplace of induction and resistance is also tied together.
If we sell the resistance and induction product lines to IPE, through either exchange of stock or cash payment, the mechanism exists from transfer of essential sales, service and engineering staff to IPE without fundamental disruption to the existing staff at 65 Indel Avenue. It will also allow Hill to gain an equity position in the marketplace which he serves so well. Dick's objections to this concept in the past have been that he would lose the "ideas and engineering inputs" of the Cragmet group in the specialty steel market. This may be overcome by the fact that I could split my time somewhat in the short range to assist IPE with specialty steel sales ideas while the staff at IPE became familiar with the larger heating jobs. To be brutally honest, if we transfer sales and service, we have very little remaining in engineering know-how that cannot be duplicated at IPE.
The basic problem in this concept lies between the personalities at IPE and Dick Hill. It would be my thought that Dick would not accept a secondary role at IPE unless there were either ownership advantages or a change in the financial payment that he has experienced over the past five years. Money talks--to make this concept work, we have to use it.
The staff at Cheston now, with the exception of two salesmen and four servicemen, with some minor revisions in the engineering and production departments, could be kept intact with only minor layoffs, provided IPE could make an agreement to buy the next thirty resistance heaters at some price which allows adequate margins for both. This would make complete economic sense, since it would allow an orderly transfer of this product and not put an immediate learning load on IPE. It would also give the group here adequate time to close other orders to increase their shop activity to a level to support overhead and/or to merge interests with Consarc, with the possibility of eliminating other overhead.
The merger between the remaining Cragmet group and Consarc could be accomplished in due time. This is not necessarily essential to the first step.
In the past, I have not entered into any of these negotiations for mergers with any enthusiasm, since there was no way that we could do it that made economic sense. I believe now, however, that there is a situation which will allow this to be profitable for everybody and I am in a position at the moment to be a skillful negotiator as well as an additional cash investor, if you agree with the above concept.
James F Metcalf