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."
At Beatrice, he found himself involved with new people and facing new sets of problems. "My challenge at Beatrice," he explains, "was devising a strategy for managing nonequity-owned businesses. Invariably, the nonequity manager hadn't buiIt the business and didn't know it the way the founder did. The trick was to get him to look away from the ledger for a moment and to look at the people, the systems -- what his company was actually doing."
Lovejoy spent more than a year in research -- studying business-planning manuals from General Electric, Xerox, IBM, and others, and conferring with business guru Peter Drucker -- finally producing a 70-page guide, The Industrial Division Business Planning Manual, which is still used at Beatrice.
The aim was to produce "business generalists," a "dying breed" that Lovejoy feIt had to be preserved.
One exercise he devised required the managers of his profit centers to produce a strategic business plan "without using any numbers." The purpose, again, was to force them to stop asking "How much?" and start asking themselves more important questions: Do you know your business? Do you know your markets? Do you know your customers? Good management, Lovejoy felt, should be much more than a "numeric exercise."
Frank Femali, Sauey's brother-in-law and his first employee, took over the operation of A-1. Being part of a huge, diversified organization (fiscal 1982 sales, $9 billion-plus) had certain advantages, Femali discovered. "It's kind of nice to know that, if you do get in trouble, you have a sugar daddy," he admits. Beatrice also sharpened A-1's management and marketing skills. "They taught us how to do more formal strategic planning and had us run our projections out further than we would have otherwise, " explains Femali.
But there were also disadvantages -- the paperwork, especially that required by federal regulations concerning publicly held corporations, proliferated, and corporate delays hampered the decision-making process "In a small company," notes Femali, "you sit in a meeting and say, 'What seems to be the problem here?' And somebody says, 'We need a machine tool,' and you go out and buy it.
"In a large company, you've got to put in a requisition, justify the return on insays Eemali, "and, if they had any doubts the recession took care of that."
Lovejoy wasted no time: "I went to [Beatrice chairman] Jim Dutt, and I told him I had been private and I had been public, and, right now in my career, private looked better. I told him I was interested in buying some businesses." The negotiations and efforts to find funding took nearly a month and gave Lovejoy cause to regret a remark about not wanting "special treatment."
"Beatrice had a target price that they wanted," Lovejoy explains, "and I had to go up to it -- they didn't come down one cent." As in other management buyouts, the corporation, familiar with the buyer's hunger, obtained a better price than an outsider might have paid. (One source pegs it at about $14 million.)
Lovejoy's search for money involved "some scrounging and scratching," but it eventually paid off. It not only gave him an opportunity to fulfill the dream of a lifetime, it also saved his life.
"The lending institution [American National Bank & Trust Co. of Chicago] required a substantial amount of insurance," he recalls, cracking his gum," and I had to take a physical, including a stress test The doctor came out and told me 'Well, the bad news is that you've got some clogged arteries in there. The good news is that we can do something about it.' " Lovejoy eventually wound up in the hospital, where he underwent a double coronary-bypass operation.
"If I hadn't decided to buy the companies, I might not be here today," he observes, his eyes betraying some lingering concern. But, 4 1/2 weeks after the surgery, he was back on the golf course at the Glen Oak Country Club in Glen Ellyn, Ill., putting them in from 10 feet out.
The deal with Beatrice, signed on April 29, effective May 1, included A-1; Acme Die Casting, a 150-employee company in Northbrook, Ill.; and Artistic Texturing, a six-person chemical-milling concern in Milwaukee. "Like A-I, Acme has a reputation for high-priced, high-quality aluminum and zinc die castings," Lovejoy notes like a proud new father, "and Artistic Texturing was something I'd bought for Beatrice to go with A-1. It makes use of a patented acid process to do precision metal removal -- it's another tool in the toolmaker's box." Acme, which provides components for the telecommunications industry (among its clients are IBM, Xerox, and AT&T), is the largest of the three, accounting for 65% of the income of Lovejoy Industries.
Management remained the same at each of the companies, but Lovejoy's entrepreneurial energy was finally free. "Between Friday, when Beatrice owned A-1, and Monday morning, when I did, we had two completely different strategies," he says. "They had to continuously report increased earnings because that's what the stockholder looks at, but, as a private business, I'm more concerned about cash flow, particularly with the debt we have to service.
"The shareholder wants the return, earnings per share, but the general manageris screaming, 'Give me the money to buy the equipment to become more productive to beat the Japanese.' Those are two of the principal opposing forces at work in the economy today."
Lovejoy also promptly invested in a CAD/CAM system that will eventually cost $2 million to $3 million but that puts A-1 back on the leading edge of mold-making technology. "There are only about 10 shops in the entire country with CAD/ CAM capability," observes one slightly green-eyed competitor. "Lovejoy's a very progressive thinker. He's going to get things going again."
Operating decisions are made more quickly now, and the paperwork has been cut substantially. "I don't want to over-burden my people with controls," says Lovejoy. "I want them to have the authority and the responsibility and risks associated with it."
Femali notes that the principal change has been "the quickness with which we can react" to developments in the market or industry. "I wish I could say that business had spiked up quickly after the buyout, but that wouldn't be true." (A-1 now has about 75 clients, a number of them Fortune 500 companies, and annual sales of about $8 million.) After a moment of thought, he adds, "I also think there's a closer feeling again."
Lovejoy continues to monitor the companies carefully while the three employees at Lovejoy Industries Inc. headquarters provide centralized cash management, profit-sharing, and banking and legal expertise. In general, though, he still practices the decentralized brand of management that he preached at Beatrice. "You have to give people a chance to succeed as well as a chance to fail," he observes, noting that the combination has worked well for him.
He leans back in his chair, cracks his gum a few more times, and, considering what he has accomplished, shakes his head in honest amazement. "It's been a helluva '82," he exclaims. "I quit my job, I bought three companies, I became a grandfather for the first time, and I underwent open-heart surgery.
". . . and the primewent down!" he realizes with a burst of laughter.