Subscribe to Inc. magazine

Anatomy Of A Merger

Bard Heavens' determination to expand his horizons by selling American Shim Die distracted him from the perils of being acquired.
Advertisement

This story is true, but not entirely factual. It is true in that it describes the way two people, married and in business together, saw and understood a series of events and decisions that influenced their business and personal lives. But it is not factual, in that other people in the story have a different perception of the same events and decisions. There are many true stories to be told here. each faithful to a unique view of the facts. We tell the one that Bard and Shirley Heavens lived. For them, this was the truth. When he is there, which is most of the time, Bard Heavens answers the telephone himself at the still-tiny company he and his wife, Shirley, started less than a year ago "Good morning, Shim-It Corp.," he says enthusiastically. The call might be some one with an order.

He wakes up optimistic every morning, probably too optimistic, in Shirley's view. If her husband's earlier hopefulness had been well founded, today she would be spending more time with her two teenage daughters. And Bard would be honcho-ing the international expansion of a multimillion-dollar manufacturing business while anticipating an aetive, early retirement in just a couple of years. They still don't know what went wrong. Whatever it was, it began three years ago when they decided to sell American Shim & Die Inc. (AS&D), the company they started in-1975.

Bard had spent 15 years with a company called U.S. Gasket & Shim Corp. (USG&S), in Cuyahoga Falls, Ohio. By 1974, when he was 41, he had been president of USG&S for three years, during which time the company's sales had grown from $2 million to nearly $4 million. He foresaw continued growth for the company, but he also foresaw problems. He wanted new managers in a reorganized management structure. He wanted a computer. The chairman, the majority stockholder, disagreed. Bard went to the bank, arranged a $400,000 loan, and offered to buy the company for $1 million with the balance to be paid over 10 years. His offer was turned down and in January 1975 he resigned.

"The only alternative," says Bard, "was to start a company of my own. So I did, and I knew it would be up and running in a year. I was Mister Shim. If God couldn't do it, I could." He and Shirley had been married two years, both for the second time; they threw themselves into the new business.

A shim, usually made of stamped metal, can be as thin as 0.0005 inch, less than the thickness of aluminum foil. Bard calls it "an engineer's eraser. " Shims are used in the construction of machinery to fill a space between adjacent parts that, by accident or by design, is slightly larger than need be. Shims make things fit together, everything from toasters to rocket engines. U.S. manufacturers buy about $50 million worth of these custom stampings every year from scores of suppliers, mostly small machine shops, although three companies probably account for nearly one-third of the industry's sales.

The growth of the shim industry is tied to the needs of its traditional consumers. Shim makers can't create new markets as, for example, computer makers did by moving their machines into the home. So any new shim maker grows only at the expense of its competitors. And, since a shim is a shim, the only way to take business away from the competition is to offer lower cost, higher quality, better service, a bigger smile, or some combination thereof.

The new company, AS&D, grew, albeit at a slower pace than Bard had optimistically projected. By 1979 the company had 22 employees producing and selling $750,000 worth of shims from the Kent, Ohio, plant. Pretax profits reached $100,000, according to the Heavenses, even after they pulled out $40,000 in combined salaries for themselves. The only serious glitch was an angina attack Bard suffered in 1977. With him in the hospital, Shirley had to quote prices to buyers and watch over the shop. Had it been Shirley in the hospital, Bard would have had equal difficulty stepping into office details. They resolved thenceforth to be better understudies for each other.

Despite the company's respectable growth rate, Bard was impatient. He had started American Shim only because he couldn't be the manager he wanted to be while at USG&S. He wanted American Shim to grow. Since shim suppliers must be reasonably close to their customers to provide quick delivery and frequent plant visits, growth meant opening new plants in other geographical locations. "We figured the Ohio plant could do about $1.5 million. If we could get a California plant doing about $1 million, then we could look into another market, maybe Texas."

Bard looked, unsuccessfully, for someone who could manage a new West Coast plant. In an industry as small as shim stamping, experienced plant managers are few in number and almost certainly already working for the competition. The man Bard decided he wanted had just switched jobs and wasn't ready to switch again soon. The Henvenses put their expansion plans on hold until, Bard says, "I heard that C.E.M. West was in trouble and maybe for sale."

C.E.M. Co., based in Danielson, Conn., had entered the shim business in 1977 by acquiring USC&S, Bard's old employer. The acquisition included USG&S's Westminster, Calif., and Ohio plants. Both Bard and Shirley were familiar with the California plant, now called C.E.M. West Inc., Bard from inspection trips made while he was president of USC&S and Shirley because she had worked in the plant's office. In fact, they had met for the first time there in 1969.

Bard put out feelers and in early 1980 got a telephone call from Hans Koehl, chairman of Spirol International Corp., C.E.M.'s parent company. No, Koeh said, C.E.M. West wasn't for sale, but he would like to meet Bard and talk about the shim business some day. He would call, he said, the next time he was coming to Ohio to look in on C.E.M.'s plant there. Events, however, eventually too an unexpected turn. About eight months after that first telephone conversation, Koehl bought American Shim & Die from the Heavenses, and Bard and Shirley became employees once again. It looked to them, at the time, like a very sweetdeal.

When Bard and Koehl met for the first time in March over dinner at the Silver Lake Country Club near the Heavenses' Stow, Ohio, home, Bard says Koehl spoke openly about the problems C.E.M. was having in the shim business. C.E.M.'s West Coast plant was much talked about in the industry. The rapid turnover of chief executive officers there had prompted one jokester to suggest that they form a President-of-the-Month Club.

"Koehl," Bard says, "talked about personnel problems, about misquoted jobs, about a lot of things I wouldn't want a competitor to know." When he got home, Shirley says, Bard was puzzled. "He couldn't figure out why that man was telling him all those things."

Koehl had, as Bard recalls the meeting, indicated indirectly that he could use someone like Bard to tackle the problem. besetting C.E.M. West, adding that, of course, there would have to be some sort of merger or acquisition if Bard ever became interested in taking on a challenge like that. "He didn't make a proposal," Bard says, "he just slipped the suggestion in, almost as an aside." However casually Koehl might have meant it, his suggestion planted an idea in Bard's mind that took root and was nourished in subsequent conversations and negotiations.

After their first meeting, Bard and Koehl talked by telephone a couple of times, and, as Bard recalls, while no proposals were exchanged, each conversation fanned the flame of his interest in pursuing a deal. In mid-April, as part of another business trip, he visited C.E.M.'s Connecticut facility. "We didn't negotiate that afternoon," Bard says. "There was some talk with C.E.M. president Terry Tobias about whether I might be interested in running their West Coast plant and if so did I think I could straighten it out. I think that what Koehl really wanted to do was to impress me with his operation in Connecticut. Koehl was flying back to Ohio in a Piper Aztec and offered me a ride. I took it." Soon after, Bard had his accountant work up an estimate of AS&D's market value -- $878,050 -- and he mailed this workup and a cover letter to Koehl. The cover letter suggested price tag closer to $750,000.

For nearly a month little of substance passed between Bard and Koehl, and even at dinner on May 15 at the Silver Lake Country Club they ate without discussing hard numbers.

But the following week, on May 21, Koehl wrote to Bard. "Again, " the letter opened, "I enjoyed talking 'shims' with you last Thursday. It gave me some further basis for consideration. " Koehl then suggested three aIternative ways of computing a value for Bard's company, based, the letter said, on the average price of companies sold during 1979: a) sales divided by 1.8; b) 1.6 times net worth; c) 10.9 times aftertax earnings.

Applying these formulas to the financial figures Bard had given him, Koehl derived three different values, in this order: a) $424,000; b) $481,700; c) $490,500.

"After deliberating on this subject off and on for the last four days," he wrote, "taking into consideration more thoughts, guidelines, and factors than I could reasonably set forth here, I have come to the conclusion that based on what I know and what I assume, a fair value would be $450,000." His "thoughts" were, he wrote, to offer 40% down, followed by six annual payments of $45,000 in principal, plus interest at 10%. "Part of the sale, as we discussed,' Koehl said in his letter, "would be an employment contract for five years together with covenants not to compete for the term of the contract and for a reasonable period thereafter . . . . I am considering you a valuable addition to our Group and I am not considering the employment contract part of the purchasing cost."

Since what Bard really expected to get was about $500,000, he says, Koehl's tentative offer looked good.

They worked out details of salary and position, and in a letter written June 20, Koehl formalized the offer he had suggested a month earlier. Bard, according to Koehl's letter, would be paid $45,000 annually as president of C.E.M. West, plus $15,000 annually as a vice-president of C.E.M. Co. Wearing his vice-president's hat, he would act as a consultant to the corporation's other shim-making facilities.

The letter contained some contingencies. Koehl still had not seen AS&D's plant, its customer lists, or a full set of financial statements, and no offer would be firm, the letter indicated, until these had been inspected by Koehl and other C.E.M. executives.

Bard was excited. "There was nothing negative about the deal at all. My accountant and my lawyer both said it was really super."

But more to the point, Koehl's offer promised to catapult Bard several years ahead of where he might take himself as owner-CEO of single-plant AS&D. "Bard really wanted to manage a staff. Part of him," says Shirley, "is entrepreneur, but part of him is trained manager."

"I had never thought I'd be running my own business," Bard says. "Being an entrepreneur was not my ambition."

Between his first meeting with Koehl in March and the day he and Shirley signed over their company to C.E.M. in September, Bard convinced himself that he was making not only the right financial move, but the right career decision as well.

"We had," he says, "just gone through the building of American Shim & Die, and it was working well. But what if something went wrong? Here was [Koehl] telling me all his problems, and I'm thinking, 'Hey, I could walk in there and be a hero!'I knew that in five years I could solve the problems at C.E.M. West and still have a nice piece of change for myself. The California house would be paid for, and, with some wise investments, we could do anything we wanted. So we were selling the company a bit earlier than we thought we would . . . . It was a good time to sell. We were at our business peak -- and we had someone who wanted to buy. In many respects thought selling out and going to work for C.E.M. would give me more freedom, because I wouldn't be operating so close to the financial edge. Besides, I thought would be a director of American Shim & Die, able to keep an eye on the operation. We wouldn't really be leaving it, we would just be picking up more responsibilities. I thought I was also going to be vice-president of shim operations at [C.E.M.], in charge of adding shim-making to the plants in England, Canada, ar Mexico. In many respects, working at C.E.M. was going to give me what I had wanted at American Shim & Die: the opportunity to manage a multiplant operation. I was diminishing my risk with a guaranteed payout and five-year employment contract. I was having my cake and eating it. This was it. We had it made." At C.E.M., Bard could see himself as a real manager -- traveling, setting up overseas operations, juggling competing claims for company resources, taking on new markets. The prospect, he says, was attractive.

On July 22, Koehl and a presidents flew to Ohio inspect the Heavenses' plant, their books, and their customer list. A week later, on July 30, Koehl, C.E.M president Terry Tobias, and Koehl's wife again flew to Ohio to make the terms of the deal final. Bard picked them up at the Kent State University Airport, waited while they checked into their hotel, the Brown Derby Inn in nearby Boston Heights, then drove them home for drinks. Shirley met Koehl for the first time. They chatted, and all five went to dinner at the Silver Lake Country Club where, after they had eaten, Koehl told them that a closer look at the company had eonvinced him that $450,000 was too high a price. He said, Shirley recalls, that he would be paying for "blue sky." Instead, Koehl offered the Heavenses $350,000 for their company. He felt that even that was high, but it was part of the price he was willing to pay to move an able president into the trouble-plagued California plant. While he reduced the offer on the plant, he sweetened his salary offer to Bard and suggested that employment was available for Shirley, too.

"We were upset," says Bard.

The talk that evening ended abruptly, and Bard and Shirley dropped the other three at the Brown Derby. Shirley wondered what the tax consequences of Koehl's amended offer might be. In effect, the new offer shifted $100,000 from capital gain to ordinary income.

I was also worried about what if something happens to Bard," says Shirley, since death or disablement nullified his employment contract.

The next day Bard went to the plant and Koehl negotiated specific dollar amounts in the proposal with the Heavenses' accountant. The accountant, Bard says, advised them that the tax consequences were not significant, "so I decided to go ahead. I thought it was risky, but you don't go into that type of situation thinking that the other guy . . . . "

"Congratulations!" began Koehl's letter of August 1 to the Heavenses. It outlined the terms of the agreement, and on September 17, at their attorney's office in Cleveland, the Heavenses sold all of their stock in American Shim & Die to C.E.M. for $100,000 in cash and a promissory note (see box, page 90). Bard agreed to accept a salary totaling $305,255 and consulting fees totaling $75,000 over the next five years. Shirley's two-year employment contract specified an annual salary of $27,500. The entire package came to $832,000 -- $435,000 in salary and fees and about $397,000 in principal and interest payments. Taken as a lump sum over five years, Bard points out, the salaries and payments of principal and interest in the final contract came very close to matching the price Koehl had first discussed with the Heavenses back in May.

"I saw Bard having such plans," Shirley says, "and such dreams. Finally there was a company behind him with enough resources, so that, for him, the sky was the limit."

Barely 12 months later, Bard and Shirley each applied to the State of California for unemployment benefits of $130 per week. C.E.M. protested their application, and Koehl flew from Connecticut to Los Angeles to testify personally against them at the hearing. They had been fired -- whether properly or not the courts have yet to decide. Each side accuses the other of failing to meet the letter and the spirit of their contract. Bard and Shirley feel abused. So, too, does Koehl.

Bard's employment contract did not specify his duties and responsibilities at C.E.M. West, saying only that they "shall generally be those of President of the company," and that they could be increased, decreased, or changed at the board's discretion. He could be dismissed, according to his contract, if he knowingly and willfully violated any instruction or policy of the board, or if the board judged him to be "culpably negligent or inefficient." Shirley's two-year contract, defining her duties as "those of general office manager," had the same two provisions for dismissal, provisions that they see now gave them little protection. "I guess we didn't pay enough attention to the what-ifs," Bard says.

It never occurred to Bard that the management style he had developed over 15 years at USC,&S, the same management style he had used to build AS&D from zero to a $750,000 business in four years, wouldn't work at C.E.M. The Heavenses' style is paternalistic but not authoritarian. Tom Corathers, now 26, first went to work for the Heavenses in Ohio back in 1977, when they were just getting AS&D off the ground. "It was an easy place to work," he says. "No whips were cracked, and everyone policed themselves well. We took a lot of pride in what we did. Bard helped along with everybody else. He wasn't an outsider in the shop, he was more of a friend.

"Bard and Shirley could have fired people, but they gave them a chance; they were willing to let people learn. The real losers would quit on their own. Nobody ever said, 'This isn't my job.' Wherever you were needed, you went. Nobody had to ask. Eventually we lost our shop foreman, so we ran things by committee. Five or six of us would meet every week. No one person knew enough by himself to take over. If we decided we needed a rule -- maybe people were starting to come in late -- we'd talk about it and make it a rule. We may not have owned it, but it seemed like our company.

"When C.E.M. took over, most things changed. They appointed a foreman, they dissolved the committee, they stopped giving incentive raises. Before you could grow with the company. But after C.E.M. bought it, people didn't feel like that anymore. Bob Kuhar [AS&D's new president] was a C.E.M. man. If something was against C.E.M. policy, even though we had been doing it for years, we'd change." Corathers followed the Heavenses to C.E.M. West. He is now one of Shim-It Corp.'s two shop employees.

Turning C.E.M. West around, Bard thought, would be easy. "It was just matter of realigning it the way it was when it was [U.S. Gasket's] shims division. Hell, they were losing money. They couldn't keep a president. If anything needed changing, that plant needed changing."

The plant was profitable when C.E.M. acquired it in 1977, but in the fiscal year ended September 29, 1980 C.E.M. West lost $166,000. The Heavenses arrived on October 9 to take charge. They found most of C.E.M. West's problems not on the shop floor, but in the boo keeping, sales, and administrative systems. There were, Shirley says, too many office people, and most of them were untrained, unsupervised, and sullen. But changing people or policies proved difficult. Often, they contend, they were told whom to fire and whom not to fire. A young woman, who did telephone sales work, frequently came to work in dirty blue jeans and with a bare midriff. The Heavenses found her work unprofessional, but, they say, they were told to keep her on. She was, Shirley says, one of the employees that visiting C.E.M. executives would ask out for a drink when they were at the California plant. Shirley found the plant bookkeeper, an older woman, adequate and, unlike some other employees, willing to learn and to accept suggestions. Corporate headquarters pressured Bard to fire her. He did.

Some employees apparently enjoyed a direct line to corporate headquarters in Connecticut, and the Heavenses were criticized and, they feel, second-guessed by Tobias and corporate vice-presidents on the strength of complaints lodged by their own subordinates. During a dispute over office procedures, C.E.M. West's outside salesperson told Shirley she would "tell Terry Tobias on you." The same individual, Bard says, frequently challenged his authority to make decisions and to set policy and spoke disrespectfully of him to the junior office staff. But the Heavenses had been warned against taking any action against the woman. "Tobias told me," Bard says, "that she could do the company a lot of damage if she went over to the competition. 'She thinks you're trying to fire her,' he told me. 'Take it easy."

In January, Bard says, C.E.M. executives began suggesting that Bard and Shirley were overpaid . . .

By February, Bard's self-confidence had frayed. "Mister Shim," the man who was going to be a "hero," began himself to doubt that he knew what he was doing. When a Connecticut executive insisted that a particular production job should take only a fraction of the time Bard estimated, he had to go to the shop and do the job himself to confirm what he thought he already knew. "We found ourselves playing a game," Shirley says, "that we didn't know the rules for."

"I'd been in this business," Bard says. "I'd run this plant before, but these guys kept giving me orders. At one point I told [headquarters executive] Mike Martin that I could just stop thinking and take orders from him. 'Oh, no,' he said, 'This is your show.' I kept trying to get some kind of handle on how these people were thinking," Bard says. "I couldn't believe this was happening."

"Monday mornings," says Shirley, "were always a new beginning. We both believed it would turn around, so we boosted each other. Neither of us could believe that Hans Koehl really knew what was going on. It all appeared so obvious to us, so we were sure that when he found out he would straighten things out in a hurry."

The Heavenses began seeing an industrial psychologist. They needed help, they say, in handling the stress of the situation. "The psychologist's basic message," Shirley says, "was to trust our own instincts, to believe in what we knew."

Finally, in June, Bard says, "I asserted myself. I'd finally had it with all this crap." In a 10-page memo to Koehl; Bard addressed point by point the criticisms that he thought had been unfairly leveled at him and Shirley. He recounted the progress he thought had been made toward profitability. He said that, unless otherwise ordered, he would proceed along his own course. And he asked Koehl for an expression of support.

"He never answered that memo," Bard says.

In August, the C.E.M. board approved a resolution giving Tobias authority to suspend the Heavenses at his discretion, and a week later he exercised his discretion.

"At 4:45," Bard recalls, "he came in, plunked himself down in my office, and said, 'It isn't going to work.' "'What isn't going to work?' "'You as president,' he told me. "'When is it going to be? End of the week?'

"'No,' he said,'Now.'

"'And what about Shirley? Does she stay, or do you want her out, too?'

"'She can go, too,' he said.

"I called Shirley over the intercom. 'Okay, Shirl,' I said, 'This is it; we're all gone."

"When I came in I smiled," says Shirley," and said, 'Am I really free? You're not kidding? I can go?" The emotion she felt the strongest, she says, was relief.

While Tobias watched, they packed personal effects into cardboard boxes and carried them out to the car.

"In the car," says Shirley, "the first thing Bard said was, 'Well, I guess we're back in our own shim business.' I made him promise that wasn't true."

On October 1, just one week shy of a year after his arrival at C.E.M. West, Bard was officially notified that his contract for employment with C.E.M. had been terminated. A telegram on October 15 delivered the same message to Shirley. Eleven months later, in September 1982, the Heavenses opened Shim-It Corp. in a small suburban Los Angeles machine shop. Along with the equipment, they had bought the shop's existing accounts, which amounted to less than $6,000 monthly. But the time between the telegram and the opening was more painful, Bard says, than he sometimes thought he could bear.

"I was still hopeful," he says, "for a reconciliation. Letting us go solved non of C.E.M.'s problems. Besides, I had a house in Ohio that still wasn't sold, house here, two kids in private school, [daughter] Diane's ballet lessons, legal fees. The stock market was down. Our oil and gas partnerships weren't paying out. Shirley told me I had to face up to reality."

He looked for a job through executive search firms and by responding to ads in the Los Angeles Times. "Even when there was some interest, as soon as people got my resume," Bard says, "that was it. Every company I'd ever worked for was now owned by C.E.M."

In February they went back to Ohio for a visit. Bard's best friend there, whose own business had failed, had taken to spending his days in front of the television wrapped in a blanket.

"After the trip," Bard says, "we thought about going back to Ohio to live but we'd seen the empty shopping centers, my friend. There was nothing for us there. What the hell was I going to do? For the first time in my life, none of my usual escapes was applicable. Having a drink, going to a movie didn't help. actually thought of getting the hell out, of just getting in the car and disappearing . . . maybe to Colorado, or to Texas. But then I'd think, What'll I do when I get there? I couldn't get a job. Mister Success couldn't get a job. What do I say to Shirley in the morning? What did I have to say the night before? The highlight of my week was 'Hill Street Blues.' When Shirley is down, she's down. What do you say to a person who has no more strength than to pull a blanket over her on the floor? She had had her own plans. Two years at C.E.M., and then she was going to go to school, open a dress shop. She had already worked herself stiff at American Shim & Die. She would say then, 'When does my life begin?' I had guilt trips about what I had done to Shirley. We had days of total silence. There was a lot of isolation. Who can you talk to at a time like that?"

Bard was a pilot, so he looked into aircraft sales. There was nothing there or in boat or car sales. He and Shirley investigated fast-food franchises, salad-bar restaurants; they even made a beginning on a janitorial service with a couple of small accounts but that didn't work out either.

"We walked," Shirley says, "and Bard would spend hours puttering in the yard. Some days I would pray 50 times. We wasted days, weeks. We'd sit here and go over it and over it . . . . What had happened? What if . . . ? If only we had . . . . Why did we ever do this? But in the end, it brought us closer."

In March the Heavenses found a small, well-equipped machine shop in Hawaiian Gardens, a suburb whose name is its loveliest feature. Bard and the retiring owner took four months to agree on terms. Financing, however, was a problem. The Heavenses could not obtain a loan.

"Bard went to every bank around with his proposal," Shirley says. "They all said no. Finally he found one that seemed interested. We went back together. I could see when we walked in that the man was going to turn us down. It was terrible to watch Bard just short of begging. That hurt me more than anything. Eventually we had to get my father to co-sign. It was very painful for me at the age of 38, to have to go to my dad for help."

Besides the Heavenses, Shim-It now has two employees who can easily handle the workload in the shop. Bard and Shirley share the sales job.

Things are slow in the aerospace industry now, but Bard says that slow time is the best time to solicit these companies. They have time to listen to you, to inspect your plant, and put you on their approved list so that you are there when business picks up again. He is already worrying about how he will finanee his receivables if too much business starts coming through the door too soon.

"C.E.M. was the first time I'd ever had to look at failure," says Shirley. "I shook my foundations -- temporarily, but not anymore. I know we can do it again. It may take selling the house and everything else. But we've decided this is our best chance to climb above it again."

The Heavenses have sued C.E.M., alleging that they were dismissed without cause and that C.E.M. deliberately harassed them and interfered with their attempts to solve problems that existed at C.E.M. West before the Heavenses took control. C.E.M. will try to show that Bard was ineffective and had to be removed to save the company's West Coast plant. Both expect the case to remain in the courts for years.

"When this thing is all put to bed," Bard says, "I'm sure that I will come out the better person."

"Not I," says Shirley.

"I can't forget how it feIt back then," Bard says. "We'd signed the papers. This was it. We had it made... and here we are today, starting all over again. "

Last updated: Feb 1, 1983




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: