For some small manufacturers, the ambitious strategy of Gateway International Holdings Inc. could be their best bet in an era of consolidation and global competition.
The Anaheim company is buying up small businesses in a bid to create a manufacturing rollup possibly doing $100 million yearly in specialized production.
Gateway has bought five companies since September, including three deals in April.
What’s interesting about Gateway is its strategy. The company’s executives hope to turn it into a player in the production of specialized aerospace components, medical devices and auto parts. They plan to stay clear of commodity products, where factories in China dominate.
By fall, Gateway hopes to have culled together companies doing $70 million in business.
But the company has a long way to go. For the six months through March 31, Gateway had just $9 million sales. Its shares trade on the lowly Pink Sheets exchange.
Gateway’s rollup plan isn’t a lock. This is the company’s second try after doing a couple of bad buys, including one that ended up in litigation.
“The difficulty in buying fairly small companies is that each transaction involves a lot of intricate details like earn-ups and employee contracts,” said Brian Callahan, managing director of Santa Ana-based Markwood Capital Alliance, a mergers and acquisition firm that specializes in financing.
Larry Consalvi, Gateway’s chief executive, said he’s learned the tough lessons of the past and only is after solid buys now.
“It’s a tremendous feeling of accomplishment,of just not giving up,” he said.
Up to now, Consalvi has been using Gateway’s stock to buy small manufacturers. He’s looking to raise $5 million to $10 million to help get the company’s Securities and Exchange Commission filings in shape and its stock off Pink Sheets.
The goal is to move to the over-the-counter bulletin board exchange. By next year, the company hopes to be on a major exchange, Consalvi said.
“There is a tremendous growth within our company that people have seen,” Consalvi said. “They know it’s a Pink Sheet company that shouldn’t be a Pink Sheet company.”
Consalvi and partner Joseph Gledhill drew up plans for a rollup back in 2001 when Gateway was formed after the buy of a shell public company, Gourmet Gifts Inc. of Nevada.
The partners stumbled early on after they bought Bechler Cams Inc. and Nelson Engineering Inc. Bechler’s owners had a change of heart and didn’t want to see their financial results publicly reported in Gateway’s filings, according to Consalvi. That led a delay in Gateway’s SEC filings,and litigation.
The company settled the Bechler lawsuit by the end of 2003, Consalvi said. In 2004, Gateway started buying again with Santa Ana-based Eran Engineering Inc., a maker of aerospace parts. The buy doubled Gateway’s yearly revenue to $7 million.
Since the fall, Gateway also has bought:
All American CNC Sales Inc. of Anaheim, which makes computer numerical control machine tools.
Accurate Technology of Anaheim, which makes aerospace, defense and automotive parts.
Spacecraft Machine Products Inc. of Torrance, a maker of aerospace and defense parts.
Nu-Tech Industrial Sales Inc. of Brea, a seller of aerospace, auto and medical devices.
ESK Engineering Inc. of Santa Ana, a maker of aerospace, defense and medical parts.
The buys have been small, adding about $5 million or less each to Gateway’s yearly sales.
The company’s aim is to build mass at a time when smaller manufacturers are leaving the market as big players such as Boeing Co. cut the number of suppliers they work with.
Another possible gain for Gateway could be in lower prices on raw materials it buys for its companies.
“The advantage on the buyer side can be quite significant,” said James Dana, a professor in manufacturing at Northwestern University in Chicago. “A conglomerate of manufacturing faculties making medial products could probably have some common suppliers and that would help them get volume discounts.”
Gateway executives said they could combine their acquisitions into one large site,perhaps a 100,000-square-foot facility. Gateway likely would stay in Anaheim, according to Gledhill.
It’s a buyers market with a lot of willing takeover targets, Gateway’s executives said.
They said they require an acquisition be generating cash and have solid products and dependable customers. They also must understand they’ll become part of a publicly traded company, they said.
“There’s not a stone unturned,” Consalvi said.
