An LBO snatched the Signode Corp. from the jaws of financial wheeler-dealer Victor Posner. Another, engineered by Citicorp vice-president David Thomas, resolved a major dilemma for the Devon C roup Inc., a Stamford, Conn.-based company with graphic-arts and wine-distributing interests. "We were traded on the American Stock Exchange and had about 1 million shares outstanding," says Devon president Marne Obernauer Jr., "but no more than 300,000 to 350,000 could have been actively traded." Institutional investors were uninterested, and the research community didn't bother following the stock. As a result, outside shareholders saw few benefits. "We couldn't get up any momentum," Obernauer concedes.
The solution was a $50 million buyout by company management, subordinated debt holders, and Citicorp (which took an equity position) that gave stockholders double the market value -- $28 for stock that had been trading at about $14 one month before the deal was announced -- and freed Devon from its public responsibilities and concerns.
"[The buyout] took care of a very difficult problem for stockholders," notes Obernauer.
The second scenario, involving the purchase of a corporate division, is by far the most common type of LBO. During the past three years, many of the conglomerates that spent the 1960s and early '70s acquiring are now divesting in order to make for a more compatible mix of companies, implement new strategies to address changing markets, or to improve their cash flow. In 1982, W. T. Grimm recorded no less than 875 divestitures (37% the number of acquisitions), 115 of which resulted in management buy outs.
Beatrice Foods Co. and Gould Inc. are among a number of corporations that have recently been busy spinning off. Faced with a sharp decline in profits, Beatrice has put some 50 companies on the auction block; Gould, moving from a diversified manufacturing base to strengthen its electronics group, may divest 75% of the company. And, observes Shaykin, "GE is moving away from middle-tech into higher-tech -- so you could say that GE itself is up for sale."
Among the recently liberated is Universal Electric Co., of Owosso, Mich. Founded in 1942 to manufacture gyro motors for the Norden bomb sight, UE moved into the HVAC (heating/ventilation/air conditioning) market after the war, and was acquired by ESB Inc., of Philadelphia, in 1969. ESB, in turn, was acquired by growth company that served as a cash cow for Inco, UE led a rather autonomous existence until 1980. Then the parent, eager to regroup its resources in Canada and to return to what it did best -- "pulling things out of the ground" -- announced a program of divestiture, beginning with UE.
"I was taken completely unawares," recalls president Bill Lawson, an electrical engineer who had joined UE straight out of college, "and my first thought was, we're going to be sold to somebody else." Later, it occurred to management that it might buy UE itself, but the $11 million to $22 million of up-front cash that would be required for an ordinary purchase was out of reach, and, at the time, Dawson had never heard of an LBO -- a situation that an acquisitions expert at the accounting firm of Coopers & Lybrand corrected.
"He mentioned the LBO as a possibility," says Lawson, "and noted that he had a friend who was gaining quite a reputation in this area, that being Leonard Shaykin." Lawson arranged an "audience" with Shaykin, who was still at Citicorp, and came away "utterly amazed."
"I sat down with Leonard," Lawson recalls, "and he asked me a number of questions -- about our annual sales, rates of return, the market we were in, the growth aspects of that market, our market share, why we were successful, who our key players were. At the end of a 30-minute conversation, he astounded me with his concluding comments. He said, 'Lawson, we want to do the deal. We'll make all the arrangements, we'll take care of everything. We'll handle your equity financing, your debt financing . . . We want to do the deal.' "
Eight members of management applied a total of only $250,000 of their own cash to the $45 million purchase price, but obtained 25% of the equity. In order to ease UE's heavy tax burden, Shaykin suggested a reverse merger. "He said, 'I've got a few companies with NOLs [net operating losses] that I'd like you to talk to . . .,' " Lawson remembers. One such company was First Wall Street Settlement Corp., a clearinghouse for brokerage firms. First Wall Street had run up a $50 million NOL. In a reverse merger, 51% of UE was acquired by First Wall Street.
The complex transaction, some three months in the making, was closed on June 26, 1981. "It took a lot of time, and put quite a strain on my family life," concedes Lawson, "but it was well worth it. This little company was worth any price I could have paid." UE, which employs some 2,000 people, will do more than $80 million in sales this year, clearing 3% to 4% in aftertax profits, and has already retired $9 million of its $34 million debt.
"I can't begin to tell you how excited we are," says Lawson. "The company's performance has improved incredibly, because everybody's working so damn hard . . . And the reason is that they've all got a piece of the action now."
Inco for its part, was so pleased with the way things went that, following the UE sale in 1981, it quickly did three more divestitures as leveraged buyouts.
The third context in which LBOs may make sense are situations involving liquidity. Generally, the owner of a private company, who is growing older, decides that he doesn't want to leave his company's destiny to fate, that he wants to sell during his lifetime. "And it often works out best," says Shaykin, "if he sells to his own management, to the people who have been working for him and been loyal to him for all those years."
The company doesn't have to be shopped, won't be absorbed by a competitor -- a blow to a founder's ego -- and the owner can generally get his price and get it quickly.
Jim N. Brown, president of GP Technologies Inc., in Philadelphia, a manufacturer of typewriter elements and print wheels, notes that founder Calvin Page decided, in 1981, that he wanted to get out of line management; he wanted to devote himself to other interests and, at the same time, effectively convert his ordinary income into capital gains. He also wanted, Brown explains, to protect his company -- "a very healthy firm, with good products, good markets, and good distribution" when Brown joined it in April 1982.
The company was presented to several likely purchasers, among them Gillette Co. and American Brands Inc., without luck, before Page heard about LBOs. Then, during nine months of "dancing," he shaped a deal with Citicorp and individual investors that gave him most of what he wanted. He has reduced his equity position from 100% to 30% of the company and is less active in daily operations, although he serves on the board of directors and remains vice-president of GP's research and development. And he knows that his "baby" is in competent hands.
