Looking at the Toro & Charles Machine Works Deal
Toro and Charles Machine Works Made Headlines in February with Their Announcement. What’s Next?
In a move that caught the trenchless industry by surprise, The Toro Co. announced on Feb. 15 that it had acquired the iconic Charles Machine Works (CMW) and its family of trenchless companies — featuring the pioneering Ditch Witch brand — for $700 million.
Like a whirlwind, a press conference a few days later at the American Rental Association (ARA) show had the leaders of both companies — Toro’s Rick Olson and Charles Machine Works’ Rick Johnson — at the podium, explaining the industry shake up that solidly positions the Toro Co. near the top of trenchless world.
In addition to the Ditch Witch brand, Toro also acquired the following trenchless brands under the CMW umbrella: HammerHead Trenchless, Radius HDD, Subsite Electronics, American Augers and MTI, as well as DMTXS in Beijing. CMW generated calendar year 2018 revenues of approximately $725 million. Toro and Ditch Witch have competitive products in the horizontal directional drilling (HDD) market, as well as in trenching and compact tool carrier categories.
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The acquisition was finalized on April 1.
While the news may have blindsided the industry and CMW employees, talks between the two construction giants began more than two years ago with an unsolicited, preliminary, non-binding offer from Toro.
“[CMW] was not for sale. The family had every intention of continuing ownership,” says CMW and Ditch Witch CEO Rick Johnson. “There was not a need nor a desire to sell the company. However, we were presented with a significant, viable offer from a very well-respected company. Although a gut-wrenching decision, it was one the [Malzahn] family felt they could not ignore.”
Once the deal is finalized, the Malzahn family will no longer be involved in CMW; Tiffany Sewell-Howard (granddaughter of founder Ed Malzahn) will resign as executive chair and the board of directors will be dissolved. “The Malzahn family’s focus will shift toward stewardship of the Malzahn Family Affiliated Fund and its mission to support Perry, Oklahoma, and ensure a strong community to support [Ed Malzahn’s] legacy and the future of Charles Machine Works,” Johnson said.
Johnson noted that there was “a significant amount of surprise” by the CMW employees at the announcement. “Although rumors come and go, there was an expectation that the Malzahn family would continue their ownership of Charles Machine Works,” he said. “The business case behind the decision is generally understood and accepted; however, change is difficult and the emotional toll is great. There will be an adjustment period for all of us.”
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For Toro’s part, the opportunity to advance further into the top echelon of the trenchless industry has been a goal for some time — and this acquisition certainly aids in the execution of that goal. In 2013, the company dipped its toes into the trenchless market with the acquisition of Astec’s HDD smaller rig line. Although the company developed two of its own compact and midsize rigs — its 22,000-lbs DD2226 and 40,000-lb DD4050 — it did not make much headway in gaining a trenchless leadership role in the industry. Now, not only has it added one of most recognizable HDD rig product fleets with Ditch Witch, but five other strong trenchless brands, as well as entrance in the trenchless rehab market with HammerHead Trenchless and Subsite.
“[That] acquisition provided us entry into the underground construction market and we have learned a great deal along the way,” says Toro Group vice president-construction businesses Rick Rodier. “We now better understand the dynamics of the market and have gained a better understanding of how The Toro Co. can support Charles Machine Works vision of being the underground authority.”
Both companies come with rich, longstanding histories. Headquartered in Bloomington, Minnesota, the Toro Co. was founded in 1914 and is a leading worldwide provider of turf and landscape maintenance equipment, rental and specialty construction equipment, snow and ice management equipment and irrigation and outdoor lighting solutions. Its dealer, distributor and retailer networks reach more than 125 countries.
Headquartered in Perry, Oklahoma, CMW designs, manufactures and sells a range of products including HDD equipment, walk-behind and ride-on trenchers, compact tool carriers, vacuum excavators, asset locators, pipe rehabilitation solutions and after-market tooling. The company’s roots date back to 1902 when it started as a blacksmith shop. Trenchless pioneer Ed Malzahn invented the service line trencher and launched an industry, becoming The Charles Machine Works Inc. and manufacturing a comprehensive line of underground construction equipment, worldwide. CMW began adding trenchless companies to its portfolio in 2010. Today, CMW has 170 Ditch Witch dealers selling in 110 countries.
In December 2015, Malzahn passed away at age 94. The company reins had already been turned over to Sewell-Howard in 2003. His death may have triggered The Toro Co. to initiate the conversation with CMW about selling, but it was not a factor in the board of directors’ and family’s decision to sell, Johnson said.
“Ed Malzahn had a strong appreciation for those who supported him in his journey: the Perry community, the employees of Charles Machine Works, the Ditch Witch dealer organization, and his family…in that order. Due to Ed’s priorities, the family strongly believes Ed would have accepted the offer from The Toro Company. By selling the company the family feels they are honoring Ed’s legacy,” Johnson said. “A large portion of proceeds from the sale of the company will go toward the Malzahn Family Affiliated Fund which benefits the community of Perry, Oklahoma. These dollars will be used for community development that will ensure Perry will thrive and support the growth of the Company into the future.”
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CMW is Perry, Oklahoma, and the thought of having its operations moved from the city that employs so many played a part in the negotiations. Johnson noted that there were a few non-negotiables discussed during the process, such as maintaining operations in Perry and ensuring employee members of the ESOP get the same payout as all other shareholders, as well as continuing to invest in CMW’s market-leading brands.
“We remain committed to the communities where Charles Machine Works employees live and work … We very much value the rich history and connection that Charles Machine Works has within the Perry community and plan to continue to build upon that strength,” Rodier said. “Operations will remain in Perry. In fact, the Perry location will become Toro’s largest manufacturing facility worldwide.”
At the ARA press conference, Olson said this: “Our intention is to manage the Ditch Witch brand and all the brands of both Charles Machine Works with the Toro brand. It will be a dual brand strategy. So, there is no intention of taking current models away or making a model that is currently orange red. That’s not to say sometime down the road … If there are opportunities to help one of the businesses grow or get into an area that that makes good business sense, we could explore that. But there’s certainly not our intention today.”
What is the short-term and long-term impact of this deal? Both companies have strong dealer networks strung out around the globe. For them, it will be business as usual, Rodier said. “One of the things that makes Charles Machine Works and its family of companies so successful is its strong dealer channel,” he said. “It was a key reason to why this acquisition was attractive to us. We cannot be successful without their distribution network and the strong customer relationships they’ve forged over the years of service and expertise. This is a channel of which we have great respect and will do everything we can to support their efforts and growth.”
As for redundancy of products, that will be decided once the deal formally closes and the companies get deeper into the integration process, Rodier said. The same goes for the leadership roles at CMW and Toro, he said, noting that Toro has not made a final determination on what the organizational integration will look like. “But we will look to organizationally utilize the deep level of experience the team has along with the channel and customer experience and relationships, as well. That said, we don’t expect that there will be significant organizational changes.”
Rodier noted Toro respects the enduring legacy of the Malzahn family and CMW’s contributions in the underground and trenching industries. “These companies/brands will continue on and be the cornerstones of the underground construction business,” he said. “In terms of the Charles Machine Works brand itself, we have made no determination of its future usage.”
“The Toro Co. is an excellent cultural fit for Charles Machine Works. They are a well-established, well-run, family-oriented company. They have an excellent track record of supporting their people and the communities where they operate,” Johnson said. “Please know that the decision to sell did not come easy. It’s been a gut-wrenching and tedious process, but one filled with careful consideration for the entire family of companies and all stakeholders. The financial decision is pretty straightforward. The emotional decision continues to be beyond difficult.”