Last year a record 90 companies were bought out of corporate empires. When Walter Lovejoy cut loose from Beatrice Foods with his little mold-making company tucked under his arm, he was rekindling the entrepreneurial spark that he had always preferred.
For Beatrice Foods Co. in Chicago the divestiture last May of A-1 Tool Division, a small mold-making company in nearby Melrose Park, was an adjustment, a shift in its assets dictated by a recession and a change in its corporate strategy. For Walter R. Lovejoy, the man who bought A-1, it represented, quite literally, the chance of a lifetime.
Lovejoy, who had headed Beatrice's Industrial Division, overseeing A-1 and 35 other profit centers, is a new breed of entrepreneur, one of a growing number of management buyout owners. Like Raymond V. Haysbert Sr., of H. G. Parks Inc., Baltimore, C. Hugh Fletcher, of U.S. Repeating Arms Co., New Haven; and the presidents of dozens of other recently liberated companies, he is benefiting from the latest theory of business building. of the go-go conglomerates, big was beautiful. It was believed that owning a large number of diversified companies made for financial security -- when one area was down, others were up. But subsequent developments have bared flaws in that theory. The downturn in the economy affected too many segments, management found it difficult to steer steel mills and soft-drink companies at the same time, and stock analysts shied away from the chore of evaluating broad diversity.
Now, or so the new theory goes, it is better to confine one's attention to a few lines of business and sell off the misfits. The recession, which has created extraordinary cash demands on many corporations, has accelerated the process. The resulting trend, which may continue through the end of the decade has been dubbed "deconglomeration."
During the past two years, while major mergers have continued to occur and to grab headline space (U.S. Steel and Marathon Oil, Du Pont and Conoco), divestitures have offset acquisitions. "The relative size of the country's largest corporations has not been growing," notes Lawrence J. White, director of economic policy in the Justice Department's Antitrust Division.
More and more frequently, the purchasers have been the men or women who ran a division, and, increasingly, the deal of choice has been the leveraged buyout, in which the buyer uses a company's assets to obtain large loans. W. T. Grimm & Co., a Chicago-based merger broker that tracks such transactions, reports that the number has nearly doubled since 1978. "There were 49 that year," says research director Tomi Simic. "We've spotted 90 through the first two weeks of November '82."
Banks and insurance companies like the arrangement because they lend above prime rate and are dealing with seasoned executives, rather than the fresh faces that characterize venture capital deals. "We take a financial risk, but, hopefully, not a business risk," says Leonard Shaykin, head of Citicorp's leveraged buyout unit, one of the few departments of its kind in the country. Citicorp has committed $100 million in capital to the cause, while the Prudential Insurance Co. of America has a reported $1 billion in its buyout portfolio.
Businesspeople such as Lovejoy, who have spent many years laboring on a corporation's behalf, love deconglomeration and the management buyout: It gives them serious equity in a company they might otherwise not be able to afford, and it frees them to pursue their own destinies
"It's a great feeling," says Lovejoy, relaxing behind a handsome desk in his Oak Brook, Ill., office. From the windows of the luxurious third-floor suite, he has a clear view of the building where Beatrice Industrial Division has its headquarters. When he made the move to business independence, he brought along not only A-1, but two other Beatrice companies as well -- Acme Die Casting and Artistic Texturing -- plus a few pieces of furniture.
"They consolidated and moved out of some offices, so I bought a few things," he explains, gesturing toward an expensive table and some chairs. In one swoop, Lovejoy became a conglomerate -- Lovejoy Industries Inc.
For Lovejoy, still ambitious and fiercely independent at age 54, the move was probably inevitable. A third-generation toolmaker, he joined A-1 in 1948 after graduating from technical high school, but he left after a year because he found it difficuIt to take orders from his supervisor. Norman Sauey, who had founded A-1 in 1946, called him back in 1950, and, four years later, offered the presidency to the "aggressive and bright young lad."
"I asked him if he was going to-give me full authority to run the business," recalls Lovejoy, whose dark hair has now gone gray but who still cracks gum like a teenager as he speaks. "He said, 'Yeah,' he'd give me that. I got up, walked out of the office, and came back about 10 minutes later. He asked me what I did -- I told him I'd just fired 50% of the work force.
"Jeezus, he turned an ashen color."
But Sauey backed Lovejoy's decision to cull the dead wood and handed him the reins. One of some 14,000 tool-and-die shops in the United States -- most of them mom-and-pop operations -- A-I manufactures molds for use in the plastic injection-molding and die-casting industries. It was a 20-employee business (that dropped precipitously, and briefly, to 10) when Lovejoy took over, but, like many tool-and-die companies, which rely on highly skilled labor, its growth had begun to flatten.
"The difficulty with the industry has always been the lack of a skilled work force," says Lovejoy. "But I don't take that position -- I take the position that a skilled work force is the result of good management. We've trained most of our people at A-1." Tenure now averages 20 years.
A strategy the company devised -- of over-engineering and overbuilding molds, and charging for it -- also helped it move off the flat-growth plateau. "We're known as one of the best and highest-priced tool companies around," Lovejoy admits without a trace of chagrin. "If you can afford our molds, they're well worth it."
In some cases, the reputation has paid off even better than planned. "Lovejoy's a good engineer and very quick of mind," explains Sauey. "Sometimes, in talking to a customer, he'd suggest design changes. 'Good,' the customer would say. 'How much more willit cost me?' 'Well, it won't cost you any more than $5,000 -- $6,000.'
"Well, actually, he was reducing the unit cost . . . so, consequently, we really made some money."
By 1969, A-1 had grown into a 100-employee, $6 million-a-year concern. Sauey, who had become a mostly absentee owner because of his involvement in other companies, gives complete credit to Lovejoy: "He just took over like it was his own."
The one thing the men disagreed about was how much Lovejoy should own. He had been given the opportunity to buy 30% of the business when he became president, but he wanted 50%. "He wanted to be 50-50 with me," recalls Sauey, "but I told him no. He said, 'Well, you know, you have a son coming along, and -- no reflection on him -- I'm not going to work for him, I don't want to work for anybody.' "
The stand-off was resolved in 1969 when Lovejoy and Sauey (who was interested in liquefying his estate) sold A-1 to Beatrice for $7.5 million in stock. As part of the deal, Lovejoy headed the newly formed industrial division and became senior vice-president of Beatrice Foods. Now that he was responsible for profit centers accounting for about 10% of Beatrice's sales, Lovejoy's involvement with A-1 waned, but his interest remained keen. "Those people were like family to me."
