As 1983 approached, Robert E. Carr Sr. and Michael London faced crucial -- and not dissimilar -- decisions about the future of their companies. Carr, chief executive officer of Systems Engineering Associates Corp. (SEACOR), a naval engineering firm based in Cherry Hill, N.J., and London, president of Headquarters Cos. (HQ), a San Francisco-based company offering a nationwide network of technologically sophisticated business centers, both had hot performers on their hands. SEACOR was #192 on the 1982 INC. 500 list, with sales of $15 million and a five-year growth rate of 687%, and HQ, a younger company, was not far behind at #387, with sales of $5.6 million and a 347% sales increase since 1977.
Both Carr and London also knew that their campaigns for long-term growth would need to draw upon deeper resources than cash flow and credit lines. In 1982, SEACOR, a prime government contractor, was suffering from federal contracts a full quarter or more into accounts receivable. Worse, institutional lenders were wary of stepping into a company with little collateral beyond its own personnel; venture capitalists demanded high percentages from a limited (4%) profit-margin business; and the cost of a public offering -- not to mention Carr's feeling that his firm "had no pizzazz for Wall Street" -- seemed prohibitive. That left acquisition as the only palatable option. So Carr started shopping around.
London was shopping too. "We didn't necessarily want to be acquired," he says today, "but it seemed the best alternative. We hadn't yet reached the level of profitability to go public, and much of what we were doing was geared toward changes in the corporate landscape of the future."
What happened to SEACOR and HQ -- both were eventually bought by Day & Zimmermann Inc. and United Technologies Corp., respectively -- tells only part of the saga of the companies that failed to return to this year's INC. 500 list. Sixteen others were also acquired, and 12 went public. Some succumbed to market slumps, and many more put numbers on the board that, although impressive by almost any measurable standard, did not keep pace with 1983's first-stringers (this year's group had a minimum five-year growth rate of 397%, up from 1982's 235%).
In all, 318 members of the Class of '82 disappeared from this year's rankings, despite some very strong showings: 116 of them, in fact, more than tripled sales from 1978 to '82, and at least three -- Mainpro (#279 in 1982), an Irving, Tex., maker of lubricants; Bepco (#295 in 1982), a Winston-Salem, N.C., heavy equipment retrofitter; and Macom Industries (#330 in 1982), a Van Nuys, Calif., importer of antenna systems -- came within an eyelash of the 397% cutoff separating the 500 from the also-rans.
In other ways, though, the fates of SEACOR and HQ, while not necessarily representative, are instructive. Strongly entrepreneurial in character, each company looked for a buyer with a hands-off attitude and faith in current management. In neither case, paradoxically, was what they saw what they got.
"It's even better than what I'd thought," gushes London, who admits that his optimism sounds practically naive, given UTC's $13.6 billion size and enormous range of interests. "They've left my entire management team in place, growth has accelerated, and I feel strongly that our future success is assured on a very large scale. I'd talked to [United Technologies CEO] Harry Gray and [UTC's Building Systems Co. president] Tony Autorino seriously twice, and I talked to the presidents of several companies UTC had acquired before. They felt the promises had been kept. I've been so impressed since [the acquisition] that I told Harry I'd help him acquire other entrepreneurial companies if he wanted my services."
These are hardly the sentiments of Bob Carr, who lost 50 out of 450 employees ("some real backbone people," he says with a sigh, "and I'm afraid another big cut's coming"), was stripped of control over his own domestic operation, and finds himself in litigation with his bosses over certain clauses in his contract.
"I don't want to bad-mouth [Day & Zimmermann]," says Carr of the Philadelphia architectural and engineering firm that acquired SEACOR, "because they are a people company; they were good about the transition period, and certainly conditions in our marketplace changed drastically for the worse. But I miss the ability to say yes and no. Furthermore, under the terms of our agreement, I acted as an exchange agent, pledging personal liability, and I would certainly not do that again.
My biggest problem is talking about this. I never could get it to a personal level -- defining my personal criteria for the company, I mean -- and that's where I feel I could have done a better job."
Carr, former chairman of the Small Business Unity Council, a prime force behind the White House Conference on Small Business, sums up his feelings in no uncertain terms. "If you're a true entrepreneur and you decide to sell," he says, "don't stay on. Walk away and go do something else."
Not all of last year's true entrepreneurs fell by the wayside. Of the 182 returnees, 27 companies actually improved their rankings, including 5 who vaulted 100 places or more on this year's list. Thirty-two companies managed to jack up their growth rates but, due to the performance of faster-paced newcomers, they slipped several notches.
Among the many that failed to repeat, several were disqualified on technicalities -- for example, sales of less than $10,000 or more than $25 million in base year 1978. Falling into the former category were N. Bassil Ltd. (#280 in 1982), a Boston stationery shop, which had a 1,576% sales gain but 1978 sales of only $62,496; and Associated General (#45 in 1982), an Anchorage, Alaska, paving contractor,
which increased its sales 999% over the five years but had a 1978 sales volume of only $52,000. At the other end of the spectrum, Brenlin Group (#441 in 1982), California Plant Protection (#458 in 1982), and The Federated Group (#421 in 1982) all exceeded the $25-million sales limit in the 1978 base year and were dropped from consideration, despite significant growth since.
A major decline in 1982 sales (a drop of more than 15%) was evidentin only 19 of last year's 500, although a total of 77 suffered dips of lesser magnitude. It is not surprising that the most troubled companies were those whose growth depended on oil-and-gas development. Four of the 19 companies reporting severe setbacks are in Oklahoma, where oil-field suppliers and drilling contractors have been flattened indiscriminately. Temporary employment is another industry punished by recession. Of 10 service companies on last year's list, only 2 -- Willis Cos. (#51 in 1982, #217 in 1983) and Ad-Tek Engineering Services (#71 in 1982, #362in 1983) -- qualified for the '83 ranking, while fully half saw sales declines.
"Last year was a tough one for us," concedes Barry Wright, president of Temporaries Inc. (#390 in 1982), a Washington, D.C., company with 27 offices from Boston to Seattle. "Our clients found out where the holes were and where the fat was, and the business went to hell. Still, we didn't sacrifice profits by lowering our rates. We stuck with our markups and, because we did, we're in great shape this year."
Last year was also a tough one for Jer-Way of Texas Inc. (#304 in 1982) in Port of Brownsville, Tex., a sash-and-door wholesaler that had been riding a wave of local high-rise and condominium construction. When the Mexican economy took a dive, so did Jer-Way's sales, down 12%. "We're on the border," explains Roger McKnight, Jer-Way's secretary/treasurer, "where the construction business has been hit by the peso's devaluation. Everyone else in the industry is down about 50%."
Of all the shifts in fortune, however, none was more unexpected -- nor unusual -- than that of David Owens. Owens, founder of Terminals Unlimited Inc. (#2 in 1982), in Falls Church, Va., transferred ownership of his company, in a $21-million stock transaction, to Duke of Energy Corp. (now called TU International Inc.), a publicly traded holding company based in Cushing, Okla. Two months later, the new company s president and chairman resigned for health reasons and Owens was catapulted into the top slot virtually overnight. Among other challenges facing Owens as he grabbed the reins of the $25-million venture: selling off various portions of the original corporation, eliminating duplicate functions overseeing an audit of all the divisions, and complying with Securities and Exchange Commission regulations. Asked recently if he would do it again, he said emphatically "If I knew then what I know now, no."
Owens was only one of a dozen INC. 500 CEOs who were afforded the luxury (or the burden) of hindsight after steering their companies into the public trading place. First in most regards was Altos Computer Systems, the San Jose, Calif., microcomputer maker. Altos was #1 on the 1982 INC. 500 list and $52 million richer after a stock offering in November 1982, that fueled expansion of receivables and research and development. Has life for Altos CEO David Jackson been spent happily ever after?
"I never imagined the impact it would have on my personal life," admits the affable Englishman. "There are no secrets anymore: where I go, what I own, how much I make. It goes on and on."
Balancing off giant Altos were several smaller companies whose public offerings were far more modest and whose reasons for taking that route more varied.
"Of the three original stockholders," explains John E. Whalen, CEO of Northern Air Freight Inc. (#372 in 1982), which raised $2.7 million for the company from an offering last August, "I was the only one who was actively involved in management. The other two stockholders wanted to cash out, so we looked at options. I talked to some private individuals, and the price wasn't nearly as good. What were the advantages? Well, we got some surplus working capital, paid off our $400,000 long-term debt, and gave our employees the chance at stock options. It's been mostly positives."
Bob Jones, director of business operations at General Physics Corp. (#356 in 1982), also feels it was important that his company's $8.4-million offering ($3.4 million to the company) put equity in the hands of the company's employees. "Ninety percent of the people who work here are professional types who are in for the long haul," says Jones, "and it's important to keep them happy." But, he says, there was a finer focus to General Physics's desire for capital gain: acquisition. "We were very cash rich at the time, so rich that we were constantly asked why we were doing this," says Jones. "And the answer was, sure, we can finance internal growth from our own earnings, but we can't fund acquisitions, too, and that's the direction we have to go to diversify."
Bill Fletcher, CEO of Termiflex Corp. (#500 in 1982), a manufacturer of hand-held terminals, concedes that he was in no hurry to go public, but when the right deal with the right underwriter came along, he took it. "Frankly, we thought we were a little small to be doing this," says Fletcher, alluding to the $3.2-million offering handled by Advest Inc. "But we were also in a situation where we had only 25% internal management equity and the rest represented by venture capital. Sooner or later, they'd have to get their money out. The Advest people believed in our potential and were willing to support a price based on that future growth."
Fletcher adds that one other factor played an important role in the process by which Termiflex went public. "No question about it," he avers, "making the INC. 500 list last year was a real attention-getter. If any one thing did it, that was the trigger point." That may be useful ammunition for the Class of '83 to arm itself with.