Tender Offers
Charles Leighton's approach to managing acquisitions is enough to make even the most independent private business owner want to be bought.
"THE ART OF CHOOSING MEN IS NOT nearly as difficult as the art of enabling those one has chosen to attain their full worth." Though it's his favorite saying, Charles M. Leighton isn't quite sure who first uttered it, or why. No matter.As he sees it, the sentiment applies neatly to the managers of nearly a dozen companies he has acquired, and who now work under him. The corporate overseer of this collection is in Acton, Mass., and is known as CML Group Inc., of which Leighton is both the "CML" and the chief executive officer.
Co-founders Leighton and G. Robert Tod (CML's chief operating officer and "GRT," of nothing so far) have been accumulating others' enterprises for 17 years, and by now have become adept at it. They're not the hostile raiders of today's popular mold, squeezing unwary businesses for quick profit. They don't leverage the assets of takeovers, they don't terminate redundant executives, they don't exploit the public marketplace, and they don't green-mail quaking management. On the contrary, by the time CML concludes its pursuit -- a humanistic quest that can stretch out over many months -- initially dubious founder/owners of privately held businesses not only have been convinced to sell, but are eager to do so.
Products aimed at outdoorsy 35-to-50-year-olds with incomes over $40,000 a year are what Leighton, 51, and Tod, 47, seek in their operating companies. To attract such specialty retailers, most already successful on their own, they hold out the promise that after the owner cashes out, he can continue to rule his domain as if nothing had been changed. Indeed, he is urged to. CML takes over financial control, but prevails upon the former owner to remain as chief executive officer, since he knows how to run the business better than Leighton and Tod do. The way CML couches it, the notion of staying put sounds so appealing that several looking-to-retire founders have been talked into staying on for a few extra years.
CML's relative anonymith means Leighton and Tod must deliver an unconventional pitch to attract such fast-growing companies as haberdasher Britches of Georgetowne (from around $30 million in sales at acquisition in 1983 to more than twice that this year), clothing mail-orderer Carroll Reed ($2 million in 1969 to $42 million this year), and boat builder Boston Whaler (in the red in '69 and now more than $40 million). Although CML's first acquisition, Boston Whaler, was in need of fresh capital when CML took it over, since then the holding company has tried to stick to thriving, positive-cash-flow situations.
Reward's the thing, preach Leighton and Tod, who had done acquisitions for Bangor Punta Inc.'s leisure group before setting off on their own. As students at Harvard Business School in the 1960s, they each had listened to the father of the conglomerate -- Textron Inc. founder Royal Little -- lecture on how to keep good people happy. "The worst thing you can do is buy a guy's business for all cash," Little teaches. "Then the guy quits. He has no incentive to continue to work." When the cash isn't there all at once, one concludes, the guy hangs around to get it. Clock-kit maker Mason & Sullivan's co-founders, Ed and Marjorie Lebo, for instance, bit at the offer of a five-year earnout calculated on book value, plus bonuses built into Ed's executive salary, when they sold to CML in 1970. Britches of Georgetowne's co-founders, David Pensky and Rick Hindin, got $8.25 million up front and the prospect of up to an additional $27.3 million in an earnout based on profits over the next five years. Their salaries, enhanced by incentive formulas hitched to Britches's incremental earnings growth, have been outstripping Leighton's and Tod's, whose bonuses stem from slower-growing consolidated figures.
"If you believe in the entrepreneurial spirit, you have to reward people," Leighton feels. Besides, grousing over others' success would run counter to a takeover philosophy under which everybody benefits -- founders, employees, principals, and public stockholders, not to mention yuppies by the millions. Bonuses, which can exceed salaries for key management of the operating companies, are dependent on annual results of that company only. The distinction prevents a successful subsidiary from being dragged down both in takehome and spirit by the fiscal ennui of its kin. Conversely, no income growth results in less salary; and no income growth for two or three straight years, as a handful of foundering founders found, results in no job.
What with disposing of some subsidiaries that didn't meet expectations, Leighton and Tod are currently monitoring a potpourri of 10 independent specialty marketing companies that collectively have about 110 stores throughout the country, send out some 20 million mail-order catalogs annually, and produced more than $200 million in net sales for fiscal 1986. Founders Leighton and Tod have seen CML's net worth sprout from the original $2 million, which they convinced The Ford Foundation and others to invest based on their outline for a specifically people-oriented holding company in 1969, to a valuation by the over-the-counter market (NASDAQ symbol: CMLI) of over $100 million as of July 1986.
Following a tenet that meeting the people behind the business is more revealing than meeting the business behind the people, Leighton prefers a diner over a boardroom for opening discussions with prospective sellers. Thus it was in a Chaska, Minn., eatery that he first sounded out the founders of CML's latest acquisition, NordicTrack, after hearing from an investment banker that the profitable family-run manufacturer/retailer might be acquirable. The company's sole product, a personal-fitness device, sold exclusively through the mail for around $500. That's certainly a stout price to stay slender -- especially for an odd-looking contraption that simulates cross-country skiing without the slush -- but the high-ticket item promised to nestle neatly among CML's upscale offerings. So Leighton arranged to meet with NordicTrack's husband-and-wife founders, Ed and Florence Pauls.
