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AFTER YEARS OF BUMBLING, EXOLON-ESK GETS FOCUSED

EXOLON-ESK Co. is showing its grit.

The City of Tonawanda abrasives manufacturer, which for much of the 1990s seemed more like a soap opera than a business, has left its troubled past behind and now is poised to double in size and become a major global player, company executives said last week.

Led by a new president and with its divided ownership structure about to be unified, Exolon executives said the company is preparing to push into new markets and start making more sophisticated -- and profitable -- abrasives products geared toward high technology customers.

"Traditionally, it's been Exolon, the abrasives company. We're not anymore," said Robert A. Rieger, who took over as the company's president last summer. "The future of Exolon is to move toward higher-margin, more high-tech products. We will be a global company headquartered in Buffalo."

That vision came into focus last week when Exolon announced that it has agreed to buy the European silicon carbide manufacturing business owned by its ESK partner. The deal will roughly double the company's sales to almost $150 million and divide its revenues almost equally between North America and Europe.

In addition, several of Exolon's major shareholders said they have agreed to buy the 50 percent stake that ESK's German parent company, Wacker Chemical Corp., owns in the firm, ending the split ownership structure that has been in place for nearly 15 years.

It was a bold move forward for a company that, for much of the early- and mid-1990s, was under constant fire from within and without.

Exolon, Rieger said, "survived in spite of itself."

The problems started to bubble over in October 1990, when Wacker offered to take control of the company by paying $19.40 for each share of common stock it did not already own. Within a few months, a dissident shareholder group had emerged to challenge the Wacker offer, sparking what would become a full-blown battle for control of the company.

In January 1992, the dissident group moved to oust four members of Exolon's 10-member board of directors and replace them with its own candidates. The two sides then agreed to settle a lawsuit filed by Wacker by allowing the leader of the dissident group, Theodore E. Dann Jr., to become chairman and dividing the company's board seats between the two sides.

That settlement, however, did not resolve the issue of who should own the company and it also allowed the tug-of-war to continue between Exolon's management, with both sides expressing interest in buying out the other.

Legal problems

If that wasn't divisive enough, Exolon's president, Hans Pfingstl and one of Exolon's competitors, Washington Mills Electro-Minerals Corp., were indicted in February 1994 on charges that they schemed with officials from Washington Mills Electro-Minerals Corp. of North Grafton, Mass., to fix the prices of abrasives used on sandpaper, grinding wheels, sandblasting equipment and dozens of other products through 1992.

William H. Nehill, Exolon's executive vice president, also was indicted on obstruction of justice charges.

After a 2 1/2 -year investigation by the U.S. Justice Department, Exolon agreed to settle the charges by pleading guilty to contempt of court charges and paying a $100,000 fine. All other charges against Pfingstl and Nehill were dropped. Exolon and Nehill also had been acquitted in 1995 of charges that they made a false statement on a federal bid application.

At the same time, Exolon charged that Michael Perrotto, the company's former vice president of manufacturing, had been stealing from the company's Thorold, Ont., subsidiary. Exolon later sued Perrotto for $2 million in damages and won a summary judgment in the case last summer. The damages are expected to be determined later this year.

Exolon and Canadian police officials said the price-fixing investigation was launched because of allegations Perrotto made to divert attention from his own improper activities, which led to his firing in September 1992.

"It was very troubling for us to find out the stuff that kept coming out," Dann said.

But now, Exolon's executives said those troubles are behind them. Despite the management and legal problems, Exolon's profits have improved sharply since the early 1990s, while its stock price has nearly doubled from Wacker's initial buyout bid 7 1/2 years ago.

"We've built a strong business," Rieger said.

Seeking high tech

Its once bitterly divided board has managed to put aside its past differences and hammer out the two-pronged deal that was announced last week.

"For this to come together is a real testament to everybody cooperating and working together," Dann said.

The biggest appeal of the deal to acquire ESK's silicon carbide plants in the Netherlands and Germany is the way it allows Exolon to become a major player in the European market, Rieger said.

Almost as important, the deal gives Exolon the ability to make super-fine abrasive particles, smaller than a grain of talcum powder. Those particles, called microgrits, are used to make the silicon wafers used on computer chips and to polish other high-precision products.

That part of the business initially will account for only 5 percent to 10 percent of Exolon's total sales, but those higher-margin products will contribute a much greater share to the company's profits, said John Redshaw, Exolon's vice president of sales and marketing.

Exolon currently buys those microgrits from an ESK plant in Germany and resells them. Because Exolon is acquiring that technology in the deal with ESK, the company expects to be able to make those products on its own within the next year or two, said Michael H. Bieger, its chief financial officer.

Silicon grades

Exolon also hopes to continue its push to convince customers that its less-pure metallurgical-grade silicon carbide is a useful product that can be used as an additive in the steelmaking process to allow the metal to be cut into thinner pieces, Dann said.

Rieger said Exolon's sales of metallurgical-grade silicon carbide, which amounted to $17 million of the company's $79 million in sales last year, is a major coup because most abrasives manufacturers aren't able to sell their lower-purity products.

Those lower-grade abrasives can't be used in traditional products, such as grinding wheels and sandpaper, because their impurities cause them to break down too easily, Rieger said.

"We've been very effective with this metallurgical business in the United States," he said. "We're going to take it worldwide."

The lower-grade abrasives are a major issue because they amount to about half the silicon carbide that is produced in Exolon's furnaces.

To make silicon carbide, Exolon mixes coke, carbon and sand in a huge pile, with an electrified graphite rod running through the middle. As electricity is pumped along the rod and through the pile, the material heats up and is converted to silicon carbide after about 10 days. The pile then is cooled for another 10 or 11 days, leaving a 600-ton lump of silicon carbide.

The half of that pile closest to the graphite rod is the most valuable, high-grade silicon carbide, with a purity of about 97 percent. The outlying material is the lower-grade metallurgical silicon carbide.

Control will be here

The material, which is produced at Exolon's furnace in Hennepin, Ill., is chipped into marble-sized pieces and shipped to its processing plant in Tonawanda, where it is ground into tiny grains. In all, Exolon employs 277 workers, including 142 people in Tonawanda.

The ESK purchase, which is expected to close by the end of September, will add another furnace in the Netherlands and a second processing plant in Germany.

"This is going to make us the second-largest producer of silicon carbide in the world," based on volume, Rieger said.

As for the pending ownership shift, the deal will put the company firmly in the control of its major U.S. investors, which includes Dann, Buffalo investor Brent D. Baird, and Toronto investor Patrick W.E. Hodgson.

Dann said one side buying out the other makes as much sense now as it did eight years ago, when Wacker proposed a similar move. But the latest deal got a boost when Wacker decided a couple of years ago to get out of the silicon carbide business.

Since then, the two sides held on-and-off talks, but weren't able to reach an agreement as the U.S. investors grappled with the company's ability to handle international operations.

Dann said those fears were eased last fall with the hiring of Rieger, who has extensive international experience after spending 2 1/2 years as managing director of Zircon Worldwide for Cookson Matthey Ceramics in London. Before that, Rieger was president of TAM Ceramics in Niagara Falls.

And Rieger said Exolon's expansion may not stop with the ESK deal.

"We're looking at expanding and globalizing," he said.

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