Interview with a successful corporate raider.
Irwin Jacobs, out gunning for small public companies earlier this year, vows he's sworn off raiding for the '90s
A visitor to the dark-paneled, art-hung suites spread across the top floor of one of Minneapolis's tallest buildings would little suspect that their occupant, Irwin L. Jacobs, chief executive officer of Minstar Inc., possessed the capacity to unsettle the innards of public corporations big and small. Indeed, INC. had paid scant heed when the renowned practitioner of the hostile takeover mixed it up with giants like Borg Warner, Tidewater, and Pabst Brewing (each unsuccessfully), and AMF (successfully). But last year, when Jacobs picked on CML Group, a frequent entry in INC.'s pages, the editors sat up and took notice. Doesn't a founder/owner deserve some consideration? Is every small public company up for hostile grabs? Is nothing sacred?
Facing a long, cash-squeezed winter, the $235-million (in '89 sales) Massachusetts holding company -- CML Group owns such consumer-products subsidiaries as NordicTrack, Britches of Georgetowne, and The Nature Co. -- sold off its prominent Boston Whaler boat subsidiary to Reebok for some $30 million after Jacobs's plot was revealed. Seemingly stymied, this April Jacobs backed away from a threatened proxy fight, and CML stock sunk like a rock. Did Irwin Jacobs care that stakeholders lost millions? Hardly. "It only shows what Wall Street really thinks of the company without me in there," he told INC. senior writer Robert A. Mamis. Lest one judge him unfeeling, the point is, as possessor of 14.8%, Irwin Jacobs is one of CML's largest stakeholders, and a few million dollars up or down in his checking account doesn't dictate what model Rolls-Royce he drives.
Jacobs began dabbling in takeovers in 1975 with the purchase of a Minneapolis brewery. His latest foray was a $2.9-billion bid for Avon Products. Through a private holding company, he owns and actively operates over 30 businesses.
Reaching his 49th birthday in July, a mellowing Jacobs is laying aside a career of trespass, leaving the next decade's takeover pickings to institutional financiers. This May he announced the formation of World Fund LP, a proposed billion-dollar capital pool backed by domestic and international investors. The partnership intends to minister to needy extant companies, among others, with working capital and know-how -- for, of course, a substantial equity stake. But he won't be a threat to management, Jacobs vows; the fund will deal only in "friendly" situations. We'll see.* * *
INC.: Raiders have been branded scourges of capitalism -- and worse. Doesn't that bother you?
JACOBS: Do I approve of those descriptions? I didn't, at first. The original name they hung on me was Irv the Liquidator. I was troubled when I heard it. It came after a transaction I was involved with in the '70s with W. T. Grant, when I was liquidating their receivables.
INC.: So it was accurate.
JACOBS: Well, it was nasty. The Wall Street Journal wrote, "Irv the Liquidator bought the receivables . . ." and the press picked up on it. But by the time the '80s came around and I was doing takeovers, I had learned you can't beat the media, so I stopped worrying about the raider image. The fact is, I'm proud of what I do and how I do it. You're assuming every business that's bad or undervalued, I'm out there raiding it. I don't bother every company. Indeed, I think I've been quite complementary to business in the '80s, creating an awareness that made bad situations better. The fact remains that even people who were not vulnerable believed they were vulnerable and reexamined their businesses.
INC.: With what effect?
JACOBS: For one, directors understood they had a fiduciary responsibility -- that they're there at the behest of the shareholders, not of management. That's why it's so hard to get D&O coverage today. Insurance companies finally figured out directors and officers didn't give a damn about the shareholders; they were dealing out of self-interest and not taking care of the shop.
INC.: That's the conventional rationale -- with, one admits, some merit. Still, they pass legislation against what you do. Massachusetts, for example, this year enacted a statute that explicitly thwarts takeover attempts by requiring that board votes be staggered over three years.
JACOBS: There's worse legislation than that. In Pennsylvania you can't even stage a proxy contest.
INC.: Are you thwarted?
JACOBS: I'd hestitate to conduct a business in such states, due simply to their hostility toward shareholders. The government conceives of itself as a knight in shining armor, but those companies didn't go bad because theydidn't have laws to protect them; they went bad because of poor management. The laws will not stand up, believe me.
INC.: Are you claiming there's such a thing as a "good" unfriendly takeover?
JACOBS: Sure there is. I'll give you an example that was very good: AMF, one of the most poorly managed companies I ever saw. AMF held about 20 businesses around the world; some were well managed at the company level, but they had to deal with obstacles they couldn't overcome at the corporate level. AMF's bureaucracy had created 300 jobs in the corporate structure that there was no reason for. They threatened 22,000 jobs because of those 300.
INC.: This buy-scare-sell stuff -- it has to be a game.
JACOBS: To you it is. To me it's my business. Can you imagine making a wrong decision? If I were broke today, you wouldn't be talking with me. Are you giving me credit or taking it away? It's difficult for you to understand why anyone should make $50 million in one transaction, but I then reinvest that $50 million. And no one brought me these millions. No one laid them on my desk and said here, We're scared of you, take it. I've always put up my own money.
INC.: Have you always won?
JACOBS: By no means. Last year I lost $10 million in Columbia Savings & Loan. When all was said and done, I lost $8 or $10 million in Tidewater. Let me say this, though: I have nothing to complain about.
INC.: To some eyes, there's a macho, even glamorous, aspect to raiding.
JACOBS: I'm not trying to be a cowboy. The fact is, most of the companies I own, I didn't raid -- I bought and kept them. In one stretch, I bought a company a year for three years -- Bekins, Aegis, and AMF. They were hostile takeovers, but they had businesses I kept and developed. I wanted Hatteras yachts from AMF. I wanted Wellcraft Marine, but it was owned by Aegis, so I bought the com-pany, kept Wellcraft, and sold everything else off. When I bought Wellcraft in 1984, it was doing about $50 million a year; in '88, $220 million. Then it had 300 jobs; now there are 2,500. And I didn't just junk the rest. We sold Aegis's rubber business to Goodyear. And Aegis's shipyard was already shut down; we sold it, now it's working.
INC.: Personally speaking, do you prefer to manage a business rather than indulge in the adventure of taking one over through Wall Street tactics?
JACOBS: That's pretty much all I do. I have thousands of people working for me today. Ninety percent of my time is running my companies. I don't sit there buying stocks.
INC.: Therefore, you consider yourself more a businessman than a raider?
JACOBS: Well, I bought a bankrupt boat company in 1978, Larson Boats, in Little Falls, Minn. I paid $675,000 for it and over the next few years lost $5 million. But it worked out, and I started buying other boat companies. I've built it into the largest pleasure-boat company in the world -- over 5,000 people. But don't assume everything I own was a hostile takeover. Larson was tickled to death to see me come in -- they got their paychecks! Our steel company, our printing company, our direct-selling company -- each bought out of situations that anyone else could have walked into.
INC.: Then why the bid for Avon?
JACOBS: Because it happens that I also like direct-selling as a business. I have a direct-selling company, Watkins, that competes with Avon in a small way -- I bought it bankrupt in 1979 and it now has 37,000 direct-selling people. And I'm in the steel fabrication business. I bought out GATX's tank division when they closed it down because of the oil situation. I'm in the quick-printing business, Insty Print, the first one in the United States. We're 40% owner of Bekins Moving & Storage, and we're part owner of several bottling plants. . . .
INC.: We get the picture. Therefore, you'd argue you pump capital into the system, rather than remove it?
JACOBS: I absolutely put capital in -- fresh capital. I put $25 million into R&D in our boating businesses alone last year, all for new-product development. By the way, we spent over $11 million for magazine ads.
INC.: Where did the money come from to buy all those businesses -- $3.25 billion for Borg Warner?
JACOBS: It started with my father in the Midwest. We picked up used gunny sacks -- flower seed, feed -- and junk metal and barrels. He drove a truck and he liked me to come along for company. I got a driver's license and started peddling on my own when I was 15, buying what-ever I could pick up, things other people had thrown away. When I got back to the city, I'd clean them and sell them. I guess I've dealt with other peoples' adversity all my life . . . in fact, I excel at it.
INC.: It's not too abstract a connection to surmise that the past affects your appreciation of the present.
JACOBS: It certainly gives me the insight to look at things most owners don't look at. Nothing went to waste in our business. For example, we used to buy coffee bags from coffee roasters. We had suction machines that drew the coffee out of the bag. We accumulated the beans until we had enough to sell. We drew the feed out of feed bags and sold it to hog farmers. We'd take the strings that were around the gunny sacks and bundle them up and sell them for roofing. If the bags had wires around them, we'd sell them for metal scrap. When a bag was torn, we'd cut out a whole piece and sell it for balling to nurseries. Today my people are flabbergasted when I go to factories and ask questions about details: what do you do with that scrap aluminum? How do we move our freight?
INC.: When you tendered CML Group, you launched a raid on a company that, unlike your other targets -- AMF or Avon -- was owned and operated by its founder. Surely you understand the fear that a small-business founder has about someone who hovers over the takeover landscape: he's about to lose his own company.
JACOBS: Charlie Leighton does not own his company! He gave up his ownership when he went public. If he kept 51%, he could make 51% of the decisions. You can't speak as 100% owner when you own 5% of the company. That may sound cruel to you.
INC.: Why didn't you simply buy Boston Whaler from him, then disappear?
JACOBS: I didn't want it, although when we bought that CML stock originally, there wasn't a person alive who didn't believe we bought it to get their boat business.
INC.: Then it wasn't Boston Whaler you were after?
JACOBS: I'll tell you what I told Mr. Leighton when he came to see me and assumed I was interested in making a bid. I said no, I'm not buying it. I'm not saying I won't buy it at any price, but the price I would buy it at, I don't want to be party to -- for my stock, anyway. If you get a good offer, I'm first to tell you as your largest shareholder -- sell it. It about floored him.
INC.: It didn't floor Reebok, though.
JACOBS: I must say, that was one deal he did well. To me, Reebok's purchase makes no sense. The boat business hasn't been this bad in 10 years, and Reebok's timing couldn't have been worse. When I first heard it, I asked, "Are you sure it wasn't NordicTrack they bought?" That would have been sounder business. What's Reebok going to do -- sell boats in Foot Locker stores?
INC.: Be more specific. What really is your objection to the way CML Group is being handled?
JACOBS: That they've rarely been able to sell their businesses at the right time. They always seem to have been forced out. Gokeys, Boston Whaler, Carroll Reed, SyberVision -- all great businesses to them at one time. It wasn't that they turned bad because they were bad. It's that CML didn't recognize when it was time to move on and build something else, or to enhance the value of what was already there.
INC.: Because of your presence, to some degree, Mr. Leighton seems to be streamlining his holdings. If that trend continues, will you go away?
JACOBS: Hey, I'm not signing any stand-still agreement! But if in three to six months he can get on track, I'm willing to give him that much time. I'm not trying to be Irwin the Terrible; that's not my mission. It's to bring out the company's value by making it do things its management won't do or doesn't see.
INC.: On the other hand, you've operated a host of companies simultaneously. Is there a common thread in why those companies didn't do well and yet you were able to make them perform? Take your boat companies -- what's the difference between your touch and former owner-managers'?
JACOBS: When I started in '78, they said, "Irv the Liquidator is in the boat business? He won't last long." Nonetheless, I drew up a plan and stayed with it. I introduced a contemporary attitude in an industry that was totally fragmented.
INC.: Tell us the difference between that plan and, say, Boston Whaler's.
JACOBS: I was going either to make it or break it with a distribution system. At present, we have 1,100 dealers, and you'd be hard pressed to compete with us if you were Boston Whaler. You couldn't offer them anything next to what we offer them. I wanted to build the strongest distribution system in the industry, and to do that, I needed to offer a full range of products -- entry-level boats to yachts. We had to build the line a block at a time. That took several years, but it's the secret of our success.
INC.: Isn't it a risk to assume you can run a business where someone else couldn't?
JACOBS: I've gone that route lots of times and have yet to fail. So I don't consider myself the risk taker the rest of the world does.
Say a person constructs a 50-story building and puts up an Offices for Rent sign and goes bankrupt. I come along and buy the building. Who's the risk taker -- me or him? When other people fail, I come along and put up a smaller percentage of dollars, rather than 100% of the up-front dollars.
INC.: Didn't you ever start a business from scratch?
JACOBS: Oh, sure. Our family closeout business -- excess inventories in retail and wholesale goods -- we started that. And Cable Value Network; we bought a little company, but it was like starting from scratch. Since then, I've taken on many businesses that were worse off than if I had started them from scratch. There were so many problems, it's unbelievable.
INC.: You took Minstar private. Why?
JACOBS: In 1980 its stock was trading at 50¢ a share. Six years later I bought out shareholders at $63. Why? The market didn't put the value on it that I did, and I made an offer for it. When you make an offer for your own public company to take it private, somebody from the outside can always come in and better the offer. Or the shareholders could vote against my offer if they thought it wasn't enough. But they didn't. At the time, there was a huge short position in Minstar on NASDAQ, and nothing pleased me more than to see those shorts get hurt. They were betting against me; they didn't think the company was worth the kind of money I thought it was. I won, they lost.
INC.: And now you have no more public companies?
JACOBS: None. I sold the last two last year. I'm out of everything public.
INC.: But you don't have an aversion to being public? For example, the usual gripe that everything is measured by the short term.
JACOBS: If you're going to be public, do as the public expects or get the hell out.
INC.: Wouldn't it behoove small-business founders to stay private, simply not to be picked off by you?
JACOBS: Absolutely. If they want to own their own companies, they'd better be private. But if you need the capital markets, you have to be public. The problem is that once you're public, there are established, technical rules.
INC.: Some of which allow raiders to put a company into play to run the stock up, then dump it for a quick profit.
JACOBS: I don't have to defend that. Just look at my record.
INC.: We have -- and it seems to show you're doing it.
JACOBS: I have made millions in stock that ran up -- when I couldn't pay the price that other people paid. We made $44 million in Shaklee last year, for example. The stock was $19 to $20 when I started buying. I offered $40 for the company. Somebody else came along and offered $48; I wouldn't pay $48. So it turned out that I doubled my money, but is that "running up the stock"?
INC.: It's so facile. If you're in business, be in business.
JACOBS: But Shaklee was poorly run! It was a terrible company. If it was well run, the stock wouldn't have been available that low. Avon's another example. I have a major investment in Avon -- over $125 million. They haven't shown me anything, I can tell you. The same board members are still there who were there when the disasters took place, when Hicks Waldron drowned the company. Avon is one of the greatest franchises in the world, as far as the name is concerned. But they went off looking at other things -- Mediplex health care and Tiffany jewelry and businesses they had nothing to do with. Now, they say, "We've given up on all that stuff. We're going back to doing what we do best." What were they in the past 10 years -- bored?
INC.: When you sell, whom do you look to for buyers?
JACOBS: We try to sell to management. When we sold AMF's businesses off, I sat with all the managers of the companies from all over the world and said, I can't afford to own all these. Any business I put up for sale, management will have number-one shot at it. If you want to buy your company, tell us; if you don't want to, we'll give you incentives to help us sell it.
INC.: Don't you ever kick out management?
JACOBS: Absolutely! When they do a terrible job, why wouldn't I? On the other hand, I have 11 boat businesses, and I don't think I've made any changes from the time I bought them. Usually, it was the holding company that was in the way, or a lack of working capital.
INC.: Give us some Jacobsian advice -- what's your prime managerial tenet?
JACOBS: When you have problems, make sure you get them surfaced. All businesses have problems; they're not bourbon, they don't get better with age. I tell my people: don't sweep anything under the carpet; let's get it out there; let's deal with it.
INC.: Would you operate a small business?
JACOBS: Oh, sure. We have several in the $50 million or so range, and they were a lot less when we bought them. Brown Minneapolis was doing $8 million when we bought them, now they're five times the size. Another is Insty Prints, our $25-million franchise printing company, now grown three times. Watkins, the oldest direct-selling company in the world, was doing $7 or $8 million when I started; it's multiples of that today.
INC.: How is it you're able to grow all those businesses, when you complain Mr. Leighton can hardly manage three?
JACOBS: The best explanation is in bringing in the right management and keeping hands off. We decentralize. We don't run them as a conglomerate, like the old ITT, which had 500 businesses and had meetings with all 500 together. We never meet together. We don't have our food company meet with our steel company meet with our franchise company. These are stand-alone businesses. I make my people take responsibility, good or bad, and give them praise -- or otherwise.
INC.: Your managers decide on their own?
JACOBS: If they had to come to me for everyday answers -- what do we do next? What are we going to make? How much do we sell it for? -- they wouldn't be working for me long. If there's anything I have going for me, it's the ability to pick the right people. Then they're highly incentivized.
INC.: In order to meet a standardized growth rate?
JACOBS: Not necessarily. Some businesses shouldn't grow beyond the point where they lose their intimacy, their relationship with the customer and the people in the company. On the other hand, I've never held a business back in my life. Whenever one's potential has peaked, I've sold it. Let someone else try to add value if they think there is some.
INC.: What financial statistics do you use to evaluate management's success?
JACOBS: None. I don't have a cookie-cutter formula. I own those businesses, so I don't have to answer to anybody. I don't mean, though, I'm going to reward people for losing money or breaking even for the year, unless it's part of the scenario.
INC.: When you look at struggling businesses -- which you do unflaggingly -- can you identify some generic failing that runs through the lot -- too little capital, say?
JACOBS: What happens is that officers of struggling businesses refuse to believe what they see. They only believe what they want to: that somehow the sun will come out tomorrow.
INC.: The new billion-dollar fund, why do you intend to limit it to being only "friendly"?
JACOBS: There's no thrill in hostile takeovers. I don't have to do that anymore. There's nothing to prove. After things went so crazy in the '80s, there are problems out there, and we think we can take part in solving those problems. The difference between us and others who raise money is that we're operators. We have a team of people in many industries, and it won't be the first time we've taken over a problem. We're just going to go out and create commerce.
INC.: So you might do private deals with INC.-size companies?
INC.: How will you know about them?
JACOBS: The flow of possible deals today is so brisk that it won't be a problem; we won't even be able to look at them all.