Peter McCausland of Airgas

The ex-lawyer, who built a local gas distribution company into a $3.3 billion operation, discusses his next moves and sounds off on his peers’ “ridiculous” paychecks.

THE CORPORATION

CEO INTERVIEW

Peter McCausland took a roundabout path to becoming a public company CEO. As general counsel for the U.S. unit of German industrial gas producer Messer Griesheim Industries in the late 1970s, he often worked on acquisitions. In that capacity he came across a company he thought Messer should buy: small local gas distributor Connecticut Oxygen. His employer balked. Soon after, in June 1981, McCausland left to start his own law practice. Eight months later he had raised enough money to buy Connecticut Oxygen himself.

The Boston University School of Law graduate saw the $3 million-in-sales outfit as an investment to fund his retirement and his kids’ college tuition. He didn’t dream that within four years he would leave his law firm to become CEO of the company -- renamed Airgas -- and take it public on the New York Stock Exchange in December 1986.

Instead of a safe little nest egg, McCausland had stumbled upon a big growth opportunity. He bought into the fragmented gas distribution business at the start of a major consolidation wave. By the time McCausland took the helm, Airgas had bought 17 locally focused competitors and begun to build a national distribution powerhouse. Since then it has made more than 300 additional acquisitions, including its biggest ever -- November’s $495 million deal for Linde Group’s U.S. bulk gas business.

Radnor, Pennsylvaniabased Airgas buys atmospheric gases such as carbon dioxide, helium and oxygen from bulk producers, packages it in cylinders and resells it to industrial and commercial users like chemical companies, health care providers and florists. Transporting these gases over long distances is cost-prohibitive, so it’s a local business; Airgas’s strategy has been to roll up the local providers and exploit economies of scale. And it’s working: The company posted record sales of $2.83 billion for its 2006 fiscal year, ended March 31, up 19 percent from $2.37 billion in 2005. Earnings per share surged 36 percent during the same period, to $1.62 in fiscal 2006 from $1.19 a year earlier. More recently, Airgas boosted sales by 13 percent in the quarter ended September 30; earnings rose by 34 percent. The company’s stock was up 22 percent in 2006, to about $41 per share.

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McCausland says there are plenty more acquisition targets to keep his distribution business rolling, but he’s also thinking about what will drive Airgas’s growth decades from now. To that end, he is looking to diversify, investing in a two-year-old unit called Airgas Specialty Products that sells ammonia, refrigerant and processed chemicals. With the Linde deal, he’s striking back against rising prices of bulk gas by acquiring a supplier.

In a recent conversation with Institutional Investor Contributor Hillary Jackson, he talked about future acquisitions and the challenge of pleasing investors focused on the short term. He also sounded off about what he considers runaway CEO compensation in the U.S. (McCausland, who has grown Airgas’s share price 40-fold in its 20 years as a public company, made $1.6 million last year.)

Institutional Investor: How do you identify acquisition targets?

McCausland: It’s a local market. You can only haul cylinders so far because transportation costs are so high. We go to all these different local markets to find companies.

What is in the acquisition pipeline?

I think we’ll continue to buy packaged gas companies. We have about 20 percent of that market right now and could probably get up to 35 or 40 percent without running into antitrust problems. We just started Airgas Specialty Products, and we’re looking to add to that business. There are a bunch of companies in the $20 million to $150 million range in this area. We think we can build that platform up to about $500 million over the next three to five years.

Why did you do the Linde deal?

This is the first very serious investment we’ve made in the bulk production business. It’s a very good business and a very profitable business, and the timing is very good. Bulk gases are very tightly priced in the U.S. now. These plants give us additional product, taking us from manufacturing 10 percent of our product to 30 percent. If we want to expand our bulk capacity in the future, it will now be much easier.

Will you expand bulk capacity?

We’ll look at it opportunistically. We consider ourselves a distribution company whose principal product is gas. We’re a very management-intensive company, and that is what’s required in distribution. If we come across good opportunities or we need the product, we can -- and certainly will -- build additional plants. Our goal is to have a good cost position on gases everywhere in the U.S.

Praxair, as you know, has a division that is the No. 2 distributor of packaged gases. Is that an acquisition target for you?

If they were for sale, we’d definitely be interested. But I don’t think they’re for sale. Each decade they come up with a different feeling toward their packaged gas business. This decade they like it. They’ve made some acquisitions in the business recently.

What are the biggest strategic challenges you face?

The major strategic challenge is finding the next growth platform. The further you get away from your core business, the more transformational these things become, the higher the risk. That certainly is a big issue. We have a very valuable distribution platform, with 900 locations over the U.S., Mexico and Canada. Developing strategies to lever that platform to the greatest extent we possibly can -- be it through new marketing programs over the Internet or product line extensions or service line extensions -- that’s going to be a strategic challenge.

What do you like the most about running Airgas?

I like the way we built this company and how quickly we can translate things that happen in our stores right up to the numbers that our shareholders get.

What’s your least favorite part of the job?

The thing I like the least is probably the same complaint that most public company CEOs would offer: The markets and institutional shareholders are very short-term-oriented. We’re forced to balance short-term results against the long term. I think the pendulum has swung too far toward the short term, and American companies are being hurt by that. It used to be that public shareholders were long-term partners, but now money managers are trading much, much more. Now private equity firms look like long-term holders compared to institutional shareholders.

Would you consider taking the company private?

It’s something I’ve thought about from time to time, although it’s not something I’m currently thinking about. It’s hard to develop a good long-term strategy and find public investors who have the patience to see the thing through and give the strategy a chance. That’s why a lot of companies are going private. It is attractive to CEOs who know that they have a strategy that’s going to take some time to develop.

What are your thoughts on the issue of CEO compensation?

This thing with [former Home Depot CEO Robert] Nardelli just drives me crazy. I think the board of Home Depot should have been fired if there’s something wrong with his contract, not Nardelli. I think it’s ridiculous that that board would give him that much money to go there and that much money to leave. It has gotten out of hand, and it’s a shame. And what these guys on Wall Street make is a shame. [Merrill Lynch & Co. CEO E. Stanley] O’Neal got $48 million last year, and the guy from Goldman got even more [CEO Lloyd Blankfein earned $53 million]. I think that’s ridiculous, and it has got to come down. They may be public companies now, but they’re being run like private partnerships. I cringe because I would never think of proposing that I make anywhere near what some of these guys have made, and I arguably have created more value for shareholders than most people.

How would you fix the problem?

I’m as much of a free marketer as anybody in the world. I can’t stand listening to [House Financial Services Committee chairman] Barney Frank get on the podium and talk about CEO compensation. I think it’s just a question of board members looking each other in the eye and saying there is a practical limit to what you can pay a CEO. I think the Home Depot board just did that. The same board that hired and fired Nardelli just hired [new CEO Frank] Blake and paid him a lot less, and none of them would say Blake is a second-rate CEO.

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