To stay in business, Wallace Forman had to stay small -- at any cost.
Wallace Forman likes to think of himself as a reasonable, rational man. Until recently, he had a company called Gibraltar Industries Inc. It was a vigorous enterprise. Although small, with fewer than 500 employees, it was nevertheless among the half-dozen largest and most successful competitors in an industry comprising several hundred companies. Forman, for his part, enjoyed running the business, which he had founded with his father and brother back in 1952.
None of which explains why he walked away from it last December. In a nutshell, he did so because, try as he might, he could not keep the company from growing, and the ultimate reward for growth in the Alice-in-Wonderland industry he worked in is failure.
Gibraltar Industries is -- or, at least, was -- one of the leading manufacturers of military apparel and equipment. Its particular specialty was protective clothing, a business Forman and his father eased the young company into in the early 1960s. By the late '70s, nearly all of Gibraltar's growing revenues were coming in from successful bids on Pentagon contracts.
Sales continued to increase, reaching $46 million in 1980. Deciding that the time was right to take the company public, the Formans arranged for Gibraltar to be acquired by Pope, Evans & Robbins Inc. (PER), a small, publicly held energy-engineering design and consulting firm. Wall Street blessed the marriage by lifting the price of PER's stock from $1.50 just before the Gibraltar acquisition to a high of $14 a year later. As Gibraltar's sales climbed to $76 million in fiscal 1981, PER made a big commitment to its future with the $1.9-million purchase of an industrial plant in East Stroudsburg, Pa., which Forman planned to modernize, making it state of the art in the manufacture of specialized textiles. Meanwhile, PER further bolstered itself with the acquisition of Putnam Mills Corp., a textile converter whose year-earlier sales came to nearly $94 million.
By 1983, PER looked to most investors like a healthy, integrated textile and apparel manufacturing company. The price of PER's common stock hit 17 5/8 on the American Stock Exchange. To all appearances, the company was thriving, and the directors' annual report to shareholders for the year ending June 30, 1983, contained no hint that within six months the Pennsylvania plant would be sold, that Gibraltar would be out of the textile manufacturing business, and that Forman and his brother would be out of the company.
The turnabout makes sense, but only in the context of the peculiar market in which Gibraltar did business. In the defense-apparel industry, normal business strategies are turned inside-out and upside-down. One perverse objective overrides all others: To survive, a company must stay small.
When the Formans started Gibraltar in 1952, the company produced industrial textiles, so it was of no concern to them that during the following year, Congress created the Small Business Administration and charged the SBA with, among other things, seeing that a "fair" proportion of federal procurement from private industry was made from small business. When Gibraltar itself began bidding on Pentagon contracts in the mid-1960s, Forman recalls that about 15% of the military's apparel purchases were then specifically set aside for small business.
Gradually Gibraltar found that an ever-increasing proportion of its sales were being made to the Pentagon as the company became more expert at processing the specialized fabrics that went into clothing designed to protect military personnel from chemical and biological warfare agents, shrapnel and small arms fire, and even rain and fire. By the late 1970s, nearly all of the company's products were defense related, and in a market that approached $1 billion per year, there was still plenty of toom for growth.
But while the company was evolving, so were the small business set-aside regulations. From 15% in the early 1960s, the Department of Defense had gradually increased the proportion of its apparel business reserved exculsively for small-company bids to nearly 95%. For practical purposes, every article of clothing the military bought had to be made by a small business. There were no more big companies in the military-clothing industry, only small companies with a keen interest in staying small. Suddenly, to be a big business in this industry, says Forman, was to be out of business. There was nothing left for a big business to bid on.
So Gibraltar, like some of its competitors, elected to stay in the industry by staying small. It reduced its operations in the highly labor-intensive cut-and-sew end of the business, contracting much of that work out to small mom-and-pop shops that typically operated with fewer than 150 workers. When Gibraltar's employment did begin to creep close to the 500 level, Forman says, he would sell off something, perhaps a sewing plant. "None of our major competitors would be a major competitor if they hadn't done the same thing," he says.
What set Gibraltar apart from its competitors, however, was the Formans' decision to take the company public. Having to keep the business small, by SBA standards, had created an estate problem. In the absence of family successors, who could Forman, or the owner of any other company in the industry, sell his company to? Anyone interested in buying would likely already be in the business, and the employees of both companies added together would surely exceed the 500-worker limit. Selling shares to the public, however, gave Forman a market for his own equity and a way, eventually, to cash out.
But in solving one problem, Forman stirred up a different batch of troubles. In an industry in which the key to staying in business is to stay small, the easiest way to eliminate a competitor is not to underbid him, but to get him declared "other than a small business concern," the phrase used by the bureaucrats who make those determinations to describe a business that, one way or another, fails to comply with their size standards.
Gibraltar's qualifications as a small company had been challenged before. "Everybody in my industry who does a substantial amount of business is under challenge frequently," says Forman. But as a public company, it was subject to financial reporting and disclosure requirements that, Forman says, created a "treasure-trove" for a few Washington, D.C., lawyers.
A business in the military-apparel market is small, by SBA standards, if it has 500 or fewer full- or part-time employees. That is pretty clear, but what if the company subcontracts some of its work? And, what if one of the subcontractors is a former company employee? What i f the subcontractor acctually bought his plant from Gibraltar? What if Gibraltar holds a mortgage on the subcontractor's plant or on some of its equipment? Is the subcontractor actually an affiliate of Gibraltar, and should its employees be added to Gibraltar's in making the size determination?
