Case Six: Jacoby Construction, Inc. – Building a Strong Family Firm on the Sound Foundation of Succession

Abstract

This case was developed by Mark Gardhouse and Alan Carsrud. The names and some of the persons in the case have been changed at the request of the firm. This case is an example of how succession properly handled can provide for the long-term viability of the firm as it transitions through various succession cycles.

Appendices

Appendix 1: Industry Trends

It is a well documented fact that the state of infrastructure across the developed world is at a point where significant investment is needed to simply maintain the safety and functioning of the assets. Power generation facilities, roads, waste water treatment plants, bridges, and piers are under both physical and capacity strains beyond their design expectations. Governments have started to recognize this and have begun to commit funding, over a period of years, to the necessary investments.

In addition to the repair and maintenance needed on the existing infrastructure, new public infrastructure is being built in both the developed and developing world at an astonishing pace. For example, India is planning on spending roughly US$320 billion per annum on basic infrastructure by 2012. They estimate this figure will need to grow by 8% annually just to sustain the current rate of development in the country. Parallel to public spending, private organizations have significantly increased spending on large infrastructure assets, particularly in the resource and energy sectors.

Each of these large projects typically contains some element of specialty foundation work that Jacoby Foundation Solution either manufactures equipment for or directs contracts for.

Canadian Federal Government Spending

The federal government has also targeted the need to reinvest in transportation infrastructure with the announced total spending of $16.5 billion on infrastructure initiatives from 2006 to 2010. The Government’s current infrastructure initiatives are noted below.

Canada’s new federal infrastructure initiatives in 2006 (CDN$ million)

	2006–2007	2007–2008	2008–2009	2009–2010	Total
Funding for infrastructure initiatives
Highways and border infrastructure fund	245	340	480	610	1,675
Canada’s Pacific Gateway initiative	19	72	92	56	239
Canada’s strategic infrastructure fund	–	181	429	570	1,180
Municipal rural infrastructure fund	200	332	450	550	1,532
Public transit capital trust	300	300	300	–	900
Existing infrastructure agreements	1,467	1,197	741	470	3,875
Funding for cities and communities
Increase to 100% of the GST/HST rebate	625	650	685	720	2,680
Gas tax revenue funding	600	800	1,000	2,000	4,400
Total contributions	3,456	3,872	4,177	4,976	16,481

Source: Canadian Construction Association

In the 2007 federal budget, the Finance Minister also announced the following additions to infrastructure programs:

• 1. The Gas Tax Fund, which provides a share of federal gas tax revenues to municipalities to pay for municipal infrastructure, has been extended to 2013–2014 from its previous expiry date.

• 2. A new “Building Canada Fund” was created, which will provide $8.8 billion over 7 years to fund core infrastructure projects such as highways, cultural or recreational facilities, or water/sewer projects.

• 3. A new national fund for gateway and border crossings was announced with investments of $2.1 billion over 7 years.

• 4. Starting in 2007–2008, each province and territory will receive $25 million a year for 7 years for infrastructure projects.

• 5. An additional $1.25 billion was set aside for public–private partnership projects (PPP), whereby the federal government will fund 25% of eligible PPP projects.

Ontario Provincial Government Spending

Currently, the province of Ontario and its major municipalities are facing an infrastructure renewal crisis. It is estimated that 59% of Ontario’s infrastructure is now more than 50 years old, and more than 70% of the useful life of public infrastructure has been used. The annual cost requirement for Ontario is estimated to be as high as $6–7 billion per year, up to a total for the province of $19 billion.

Private Sector Spending

Private investment is also participating in infrastructural development with pension funds undertaking a major shift in their investment policy towards infrastructure as an asset class necessary for the long-term pension requirements. Recent government initiatives and commitments have created a strong environment for private infrastructure investments and encouraged PPPs.

Public infrastructure assets are not the only ones in need of renewal. To support the expansion of the power generation industry (e.g., new nuclear plants) and the oil and gas sector (e.g., LNG gasification facilities, oil sands projects, etc.), there are a significant number of projects that will drive growth in this sector over the next decade.

Manufacturing Market

As the construction market in both Canada and the U.S. are expected to still be strong in the next 5 years, demand for construction equipment is expected to be high, keeping pace with the overall infrastructure spending. According to the Association of Equipment Manufacturers, overall construction equipment sales increased by 11.2% in US, 12.7% in Canada, and 10.9% worldwide in 2006. Through interviews with Jacoby’s largest customers, they feel the demand for specialty foundation equipment will continue to grow at a significant pace moving forward. The global demand for heavy construction equipment is forecast to grow by about 5% annually from 2006 to 2009, reaching a US$110 billion value.

Appendix 2: Competition

Construction

The competition in the construction business is relatively localized to southern Ontario. In general, Canada’s construction industry is fragmented, collectively dominated by a number of smaller operators. Although there are large players with nationwide coverage, smaller companies manage to survive in this competitive market due to the localized and specialized nature of their operations.

Currently, there are about 18 foundation construction companies in Ontario. Among them, Deep Foundations Contractors Inc. (“Deep Foundations”) and Anchor Shoring & Caissons Ltd. (“Anchor”) are the two main competitors to Jacoby. They are both private companies.

Deep Foundations has specialized in shoring for the Toronto condominium market. It is estimated to have some $35 million in annual sales. Anchor is a division of The Anchor Group, which was founded in 1968. It has over 35 years of construction experience in soil retention and engineered foundation systems. Anchor specializes in the design and installation of soil retention systems and caisson foundations.

Manufacturing

Jacoby is the largest manufacturer of foundation equipment in Canada. The Company’s competitors in the manufacturing business can be categorized geographically: European, Chinese, and North American competitors. European manufacturers (e.g. Delmag GmbH & Co.) produce high quality and high price hammers, while about four competitors in China are providing smaller hammers at lower prices. The prices of Chinese hammers are only two third of Jacoby’s, while European products are up to three times as expensive as Jacoby’s hammers. Although the quality of Chinese hammers is getting better, the marketplace perceives them to be of lower quality.

American Pile driving Equipment Inc., International Construction Equipment Inc., and Pileco, Inc. are three key players in the construction equipment manufacturing industry in North America.

American Piledriving Equipment Inc. (“APE”) produces, distributes, and rents a variety of pile driving equipment including vibratory hammers. They do not rely on distributors, but rather rent and sell directly to contractors. With in-house machining and fabrication facilities, APE sells itself as having the flexibility to respond to job situations quickly. APE imports diesel hammers to the United States that are based upon 1930s German design and have been manufactured in

Shanghai, China since 1997. APE’s strong financing backing has allowed it to increase market share as the low price leader and currently has 35–40% of the market.

International Construction Equipment Inc. (“ICE”) was traditionally a US-based manufacturer, but is increasingly importing equipment manufactured in China. The Company distributes pile driving, drilled shaft, and other deep foundation equipment, including diesel hammers. As the ICE diesel hammer is identical to the APE hammer, it had to match APE’s low pricing strategy to maintain market share. ICE currently has the largest rental fleet in the industry.

Pileco, Inc. has specialized in distributing German-made diesel pile-driving equipment for more than 50 years. Recently purchased by German equipment manufacturer, Bauer Aktiengesellschaft in October 2005, Pileco distributes Bauer drill rigs, but also imports diesel hammers from China, which are also identical to the above offerings.

Jacoby’s diesel hammer is differentiated from the above through higher technology, higher efficiency, and clean burning ability. Jacoby is also the only manufacturer that will customize its equipment to individual customer’s requirements. The Company’s primary constraint is the lack of available inventory.

Rental Business

The equipment rental market is growing dramatically and there are a large number of local equipment rentals, but only two main regional players: Sunbelt Rentals and Equipment Corporation of America.

Sunbelt Rentals, based in North Carolina, is the second largest equipment rental company in the US. It provides equipment rental solutions for the industrial, construction, and municipal markets, from a network of over 450 branches, including 100 outlets at Lowe’s stores. Sunbelt’s equipment fleet includes a range of general construction and industrial equipment and is further broadened by specialty businesses serving the pump, power, trench shoring, and scaffold markets. Sunbelt is a wholly owned subsidiary of Ashtead Group plc, a Toronto Stock Exchange traded company with a market capitalization of over US$1 billion. Sunbelt’s FY2006 revenues were US$819 million with an operating profit of US$176 million.

Equipment Corporation of America (“ECA”) is a distributor of new, used, and rental construction machinery for pile and foundation installation, hoisting and rigging, material handling, and other specialized, civil, mining, and marine construction projects. ECA is a third generation, privately owned, family business.

Both of the above companies offer Jacoby equipment for rent or sale.