M-Tronics Case Summary

History of M-tronics

Madison Machinery Company
MMC was founded during the merger movement at the turn of the century, when four regional machinery companies merged to form a national industrial machinery-manufacturing corporation. Demand for heavy machinery at the time grew with the growth of industry across the country, and MMC prospered. In 1979, MMC was the largest company in the industry, and it offered the most complete product line. The high quality of its products attracted the top sales people, who saw themselves as consultants to their customers. Even though MMC was the leader in quality and breadth of its product line, it wasn’t the leader in R&D; it just copied its competitors’ innovations.

In the 70s Madison, MMC’s president recognized that associations with high technology, high growth industry could strengthen the company. It implemented this by using excess capital to invest in young companies developing high tech innovative products. One of these investments was the Datronics Company.

Datronics Company
Datronics was founded in 1969 as an engineering firm that subsisted on government research grants and contracts, a by-product of which were several types of equipment with industrial applications. Datronics concentrated its efforts on R&D and outsourced production and marketing. It’s president John Martell, acknowledged that this limited the company’s growth, but he still postponed becoming a full manufacturing and marketing company until the right product appeared.

Following MMC’s investment, Datronics developed the right product and it was clear that a huge capex would be needed. When Martell approached Madison for financing, MMC bought Datronics.

M-Tronics
After the acquisition, MMC became M-Tronics. The old MMC became the Machinery Division, headed by George McElroy, and Datronics became the Electronics Division, headed by Martell.
Martell retained full control of his organization’s operation and hired people for marketing and production. In five years the electronics division grew to a 700 person organization having $320 million in revenue and marketing offices throughout the US, Europe and Japan.

In 1984 Madison decided to step down and a committee consisting of three board members appointed Martell. This came as a surprise to many, since McElroy seemed to be next in line for the presidency. The Board’s mandate to Martell was to continue M-Tronics diversification into high-growth industries. Martell expected to follow both an acquisition mode and a start-up mode using excess funds from the Machinery Division to accomplish his goals.

Soon after this a group of employees let him know of their intention to leave the company to start a business to develop and market a new product. They hope that either M-tronics or Martell personally would invest in their idea. Martell liked the idea and saw it as an opportunity to continue M-Tronics diversification. He came up with a structure called to Entrepreneurial Subsidiary.

The Entrepreneurial Subsidiary
When a new product area was proposed to M-Tronics, a new subsidiary would be incorporated. The initiators of the idea would leave their old division or company and become officers and employees of the new subsidiary. The new subsidiary would issue stock in its name, $1 par value, 80% of which would be bought by M-tronics and 20% by the entrepreneurs involved. This initial capitalization, plus loans from M-Tronics, provided the funds for research and development of the new product up to its commercialization.
After the research and development goals were met, M-Tronics had the option to acquire the subsidiary through a one-for-one stock exchange. To protect the entrepreneurs, M-Tronics was required to vote on the merger if certain conditions were met, If M-Tronics chose not to merge, the subsidiary had a right to buy out M-Tronics interest. This scheme had a huge potential upside to the entrepreneurs, since at the time M-Tronics stock