Wooden Thinking

Were you as shocked as I was Saturday when Sparton announced CEO Cary Wood had resigned?

Since he took over as president of the company in 2008 (he was named chief executive months later), the 48-year-old Wood has been a shining star in the EMS sector. He reshaped and reinvigorated Sparton. In 2006, the company’s sales were just over $170 million and the company was in dire need of restructuring. By 2011 it had turned the corner, and today sales top $430 million, with consistent profits. He led the buyouts of Electronic Manufacturing Technology, Onyx EMS, and Hunter Technology, among others, firming up its presence in the medical and defense markets.

The reason(s) for Wood’s sudden departure are murky. Sparton isn’t talking, although it did praise (albeit somewhat tersely) his contributions. The rumor mill is speculating the move was prompted by an exchange on the firm’s quarterly conference call last Wednesday between Wood and some hedge fund managers who felt the company should be far more valuable for shareholders and even suggested a breakup would be in order. One went so far as to say his “16-year-old daughter and small pack of Norwich Terriers could probably get the stock up 50% to 100% before the end of the quarter.” (Cue to the 27:50 minute mark for the quoted assertion.)

Another frankly asked why a couple Sparton customers are considering moving production in-house.

To his credit, as the exasperated fund manager called for the board buy back stock or step aside, Wood kept his cool throughout. He noted that the board has evaluated all the alternatives about how to deploy its capital, put a pause on M&A and is moving to optimize SG&A and performance.

This exchange gets at one of the tensions inherent in being a public company today. The market is controlled by institutional and hedge fund investors, not private citizens. It’s a cliche, but the goals of a short-term investor are fundamentally different than those of a manufacturer, especially one that generates a big chunk of its revenue building other companies’ products. There’s a fundamental disconnect between needing to invest for long-term survival and trying to squeeze the last bit of blood from the body before moving on to the next victim. Yet coming up with the financing to fund expansion and acquisition without ceding near-total control of the company can be near impossible without going public.

Sparton has spent north of $150 million in EMS related acquisitions in the past eight years, including $55 million for Hunter Technology last year. It is exceedingly difficult to live in the $100 million to $300 million or so market in the EMS industry today.  Companies have to grow, and they typically have to come up with revenue streams beyond just soldering components.

Sparton is in better shape today than when Wood took over, and there’s no reason to think that will change in short order. But the industry needs to take pains to protect its good managers, because just building things well isn’t enough for long-term success these days, at least not for public companies.

Addendum: Here’s a link to a Crain’s Chicago Business article on Wood’s departure.