Where Did They Go Wrong?Bruce Hager
Back in 1988, Critical Industries Inc. was the right company at the right time. That was the year the $32.4 million distributor of asbestos-removal equipment hit the top of BUSINESS WEEK's annual list of the best small companies. Critical's sales and earnings had soared an annual average of 149.4% and 380.9%, respectively, over the previous three years. And with asbestos removal being mandated in thousands of the nation's schools, Critical looked like a sure winner.
Then Critical wound up on the critical list. The asbestos-removal industry softened, and the company struggled. Last year, the U. S. government accused Houston-based Critical of conspiring with another company to commit fraud by fixing prices on asbestos-removal equipment. Although Critical and its chief executive, Paul M. Burns, were acquitted of the charges this spring, the trial took its toll: Burns and two other founders resigned. And Critical, which lost $8.3 million on sales of $31.3 million in 1990, is now in new hands.
By their very nature, BUSINESS WEEK's Hot Growth elite can be an ephemeral lot. They burst on the scene like supernovas, burning brightly. Many, like Autodesk Inc., which held on to a No. 1 ranking for two years running, keep soaring until they outgrow the $150 million cap. But some others burn out (table).
Of the 100 companies that appeared on the Hot Growth list last year, only about a third have returned. Five companies outgrew the list. The rest just didn't make the grade. Staying on the list gets even harder as the years go by: Just one-tenth of Critical's 1988 class appear on this year's list. Some casualties: Bolar Pharmaceutical, Universal Medical Buildings, and V Band.
The classic tale involves a company that relies too heavily on one customer or industry. Take V Band Corp., which provided brokerage houses and investment banks with high-tech telephone systems. The company scored big with the bull market of the 1980s, when getting information first was at a premium.
But V Band's fortunes faded along with the Dow following the 1987 stock-market crash. Sales sank 66% over the last three years, to $18.6 million last year. Chairman Thomas E. Feil admits the industry's contraction was much greater than V Band anticipated. And despite the stock market's recent surge,
the financial-services industry continued to restructure, forcing V Band to endure two years of losses.
Other companies try to grow too quickly. PC-based computer games such as Chessmaster 2000 and Life and Death boosted Software Toolworks Inc. to the No. 2 spot on the 1989 list, with $11.8 million in sales and $2.1 million in earnings. But the company stumbled by acquiring Mindscape Inc. and moving into the bigger video-game market. Inventory stacked up, and Software recently announced that it expects to lose up to $20 million on a scant $9 million in revenue for its fourth quarter ended Mar. 31. "You have to grow the business prudently," says Robert E. Lloyd, Software's new president.
'ROLLER COASTERS.' Indeed, the biggest problem managers face is often how to handle hot growth itself. "Companies like this begin to believe the print they read and become legends in their own mind," says Frank M. DeLape, Critical's new chairman.
Down doesn't always mean out, however. After a two-year nosedive that ended with a $17.1 million loss in 1989, Durakon Industries Inc. reported a $3.7 million profit last year. Although still wobbly, the manufacturer of truck-bed liners in Lapeer, Mich., has a new strategy and new management for 1991. The new management at Critical Industries plans to reignite growth by diversifying into other environmental industries, such as water purification. At a small, fast-growing company, "you aren't doomed to failure," says David L. Birch, who now heads a small marketing company and taught about the fast-growth phenomenon while at Massachusetts Institute of Technology. "You're doomed to big ups and downs, a life of roller coasters." That's a notion that investors in small growth companies should keep in mind, too.