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Donley: Focus on Mission to Grow a Business

Posted: December 10, 2013

Former president and CEO of Tangent Rail Corp. shared lessons learned from business success and failure Nov. 21 during GE Week at Penn State
Bill Donley shares lessons from business success with students during Global Entrepreneurship Week

Bill Donley shares lessons from business success with students during Global Entrepreneurship Week

Never, ever lose focus on the core mission of your business, alumnus Bill Donley advised 79 students during his Nov. 21 talk as part of Global Entrepreneurship Week at Penn State. 

Donley, former president and CEO of Tangent Rail Corp., led a 2005 management buyout that created the railroad supply company and led it to become a more profitable, valuable company. The company’s sale five years after the management buyout represented a 98 percent gross internal rate of return.

Donley — 1978 Forest Science major and chairman of the Entrepreneurship & Innovation Program Advisory Board — told the crowd of students a tale of the same business with two dramatically different outcomes under two different executions of strategy. 

The story of RailWorks, the parent company of the division that would later become Tangent Rail, offered students a number of lessons on how a great business idea can get off track. 

Donley was a senior manager of RailWorks from 1999 to 2005. RailWorks’ troubles stood in stark contrast to the more effective strategy execution that led to the success of Tangent Rail. Donley, in his early 50s, retired in 2010.

Throughout his story, Donley’s message was clear: Keep the mission of the company simple. Make sure every employee knows the company’s mission and is working together toward that common goal. 

“[Tangent] never lost focus of what was important: customers, suppliers and employees,” said Donley. RailWorks was founded in 1998 with a simple strategy: Fourteen small rail services companies around the country decided to join forces to become a one-stop-shop, national player in the rail materials supply and services market. 

“When you start up your business from scratch and when you’re going to go down the street to ask Uncle Bob to give you the money to get it going, you need to be able to tell him what you’re going to do in a sentence and a half,” said Donley. 

RailWorks had a great mission. But it quickly drifted from that mission, said Donley. 

RailWorks successfully completed an initial public offering in August 1998, then began acquiring rail services companies in order to provide a breadth of rail products and services in a single phone call.

In hindsight, the organization’s priorities shifted to quickly acquiring new companies instead of working to integrate the initial 14 — plus the newly acquired companies. 

RailWorks was purchasing a company per month with only seven full-time people working in a corporate office in Baltimore, so there was scant attention paid to finding synergies, executing strategy, and getting all employees working together toward their one common goal, said Donley. 

As RailWorks purchased companies, it paid owners cash and “earnouts” which was a second, key problem, said Donley, because those terms offered them little incentive to collectively work together to create value. 

“If you don’t row the boat in the same direction, all you do is go in circles,” he said. “When you start a business, don’t think about when you’re going to sell it and the value of selling it. Think about when and how you’re going to run it and that will increase its value.” 

He joined RailWorks in early 1999 and ran its products and services division, selling products like railroad ties, based in Baltimore. Later, that division moved to Pittsburgh. 

By 2000, it was clear that the company was in trouble. Ten days before Sept. 11, 2001, RailWorks filed for bankruptcy. 

“You cannot imagine how quickly this all evolved,” said Donley. “We went from flying up the ski slope, hitting the top of the mountain and on the other side there wasn’t a ski slope. There was a cliff.” No one can work around the number one rule of business, said Donley. “It doesn’t matter if you’re trying to run Google or do public good or run a nonprofit, if you don’t generate cash, you will not exist.” 

Over the next five years, RailWorks would emerge from bankruptcy and successively hire five CEOs, looking for the right ingredient to make the business work. 

“There is no magic bullet in business,” said Donley, adding that the structure was flawed. By spring of 2005, with the revenue and profitability numbers still under-performing and the debt increasing, one of the lenders wanted to exit. 

The owners, needing to raise these funds, informed Donley they wanted to sell the wood-treating and cross-tie division, which was a consistent performer and part of his $215 million products and services division. 

Donley countered that RailWorks should let a group of managers from the products and services division buy it. Suddenly, he was both buyer and seller in a multi-million dollar transaction. 

His first priority, said Donley, as a RailWorks official was simply to properly represent RailWorks during a six-month process and road show to find a buyer. Doing things “the right way” is the third rule of business, said Donley. 

“If you can pass the red-faced test on what you’re doing, that’s half the battle.” When it was time to buy, Donley and the management group found a partner in PNC Equity, which then brought in Merrill Lynch as a financing partner, to buy the operations that included the #2 supplier of railroad ties and the #1 provider of tie disposal services. 

The managers bought the business with PNC Equity, creating Tangent Rail Corp. Donley walked students through the deal, explaining key parts like how valuation is calculated, the due diligence and full disclosure process and how to decide who would receive ownership stock in the deal, as stock is an incentive to make everyone work together. 

In the four-year period after the sale, Tangent Rail sold the grinding operation and raised revenues from $94 million to $178 million.  It also grew profitability, which grew the value of the business. 

In 2010, the owners sold Tangent Rail, becoming one of the most successful deals in PNC’s investment history. 

“One of the biggest mistakes any business person can make and people make it all the time, is that they start getting stuck in the weeds because of all the minutiae,” Donley cautioned students. “Don’t worry about every little detail when you’re thinking about your strategy. You’ll never get there.”