LBOs have been around in one form or another since the early '70s, but it was only four or five years ago that the theories, language, and mechanisms came together in a cohesive whole. ("The one thing we're lacking at this point," interjects Shaykin, "is a word to describe people who do LBOs".) Since that time, the technique has swept across the U.S. marketplace and has been utilized to move companies as diverse as Tenneco Chemicals Inc. and Expediter Systems Co. The press has often described it as "the salvation of sunset industries," but that definition is being superceded by the LBO's succcss, Adler & Shaykin, for instance, plans to add high-technology prospects to its shopping list.
Even now, LBOs seem omnipresent: The list of deals features Congoleum (flooring), Mid-Atlantic Coca-Cola Bottling (soft drinks), H. G. Parks (sausage), Chris-Craft (cruisers and sportsboats), U.S Repeating Arms (rifles), Hood Sailmakers (sailing equipment), Converse (footwear), Ray-O-Vac (batteries), National Psychiatric (mental hospitals), and A-1 Tool (mold builders).
The insurance companies, banks, and investment firms that pioneered the field -- Prudential Insurance Co. of America, First Boston, Oppenheimer & Co., and Kohlberg, Kravis, Roberts & Co. -- are now part of a greater LBO community that includes Merrill Lynch, Morgan Stanley & Co., Aetna Life & Casualty, Travelers Insurance; Northwestern Mutual Life Insurance, Forstmann Little & Co., Bankers Trust, First National Bank of Chicago; Lehman Bros. Kuhn Loeb, General Electric Credit Corp., and Oregon Public Employees' Retirement System "There's an entire infrastructure for doing LBOs now," says Burke of Merrill Lynch, who notes that investors are increasingly inclined to become equity partners.
For lenders, LBOs are attractive for a variety of reasons. Unlike the venture capital funded company, the typical LBO company is older, established, and has proven products and markets and a seasoned management team, all of which reduce the business risk Because it generally doesn't have the clout or credit rating of a Fortune 500 company, it is willing to pay above-prime rates And, because management is newly invigorated, the deals make for close and rewarding relationships "It gets back to those things bankers wish they still had with major corporations," notes Shaykin. If they take an equity position, lenders may serve in an advisory capacity (Adler intends to share a lot of his high-tech expertise with A&S concerns, showing them how they can use technology to improve profit margins), they get a hedge against inflation, and may see the value of their investment soar.
Although the rags-to-riches multiples that feed venture capital dreams are less likely, some LBOs have yielded imprcssive returns. In January of 1982, an affiliate of Wesray Corp. purchased Gibson Greeting Cards from RCA Corp. for $81 million, all but $1 million of it financed by bank loans and real estate leasebacks, in May, when Gibson went public, the 50% interest held by Wesray's two principals (one is former Treasury Secretary William E. Simon) was worth an estimated $140 million.
Sellers like LBOs because they are easier to arrange, generally produce the desired price, and reward the management team. For the buyers, LBOs represent what Shaykin calls a "Horatio Alger mechanism for the middle-aged manager."
"When he's sitting quietly behind his desk, or heading home on the highway at night, [the managers is] thinking, 'Gee whiz, I wish I were running my own company,' " says Shaykin, sketching the vision that drives him. "Do you realize how many people like that there are? They've got all the corporate marbles, but it simply isn't satisfying."
An LBO gives such individuals an opportunity to buy into a company they otherwise couldn't afford, and it gives them the freedom to run it as they think best -- "not for all sorts of exogenous reasons like quarter-to-quarter earnings," he says, "or emphasis on earnings instead of cash, or to defend some piece of the business that the president finds 'cute' . . . " And, Shaykin continues, "what happens in every case is an unleashing of entrepreneurial spirit . . . A seasoned management team really becomes young again."
He points to cases in which LBO owners have saved a company that might otherwise have faltered. "During the recent recession, Universal Electric suffered a major shortfall in business, Shaykin explains, "but they managed to reduce inventories much faster than the reduction in sales . . . and, throughout the whole sales decline, continued both to make money and to generate cash. . . I'm not so sure that they would have been so diligent if the business wasn't their own.
And, as the company pays off its debt, management's equity position may become quite valuable.
The pitfalls are those that attend any investment phenomenon: namely, that enthusiasm will take precedence over financial considerations, and bad deals will be struck -- a seller will find that he has been underpaid, a company will see that it can't handle the debt load. "There used to be more reservations about huge debt-financed purchases," concedes Shaykin. "There are fewer filters, inhibitions, and restrictions now." A few LBO businesses have failed$--Brentano's Inc. and a food distributor funded by General Electric Credit Corp., among them.
For the moment, though, Shaykin is consumed by the golden outlook: preparing for A&S's first deal this fall. He is putting in 18-hour days back-to-back, week after week. In preparation for the ordeal, he found he had to "structure" a relationship with his wife, Norah, and their two young children, but he has no regrets.
"I think Citicorp is absolutely terrific," he says, "but I left. . .
"I feel very, very lucky because I've come across something that I absolutely love doing and that lends itself to entrepreneurial formation -- to having a fund and doing it in such a way as to control one's own destiny.
Shaykin's vision, that of a frustrated corporate executive sitting in rush-hour traffic considering what might have been, has a personal source. Last year, he was that executive. Now, for the first time in his life, he is an entrepreneur. He has traded a plush office at Citicorp for a spot at the table and a croupier's stick.
