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BUYING A SMALL BUSINESS

Case in Point
 

A profile of the 1995 Turnaround Entrepreneur of the Year and the runners-up.
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Joanna Lau saw promise in a company she analyzed as part of her M.B.A.education. Others saw a company in a shrinking industry -- defense -- and losses of $1.5 million. Lau bought the business anyway, and proved that she was right

TURNAROUND ENTREPRENEUR
Turnaround Entrepreneur: An individual whose management skills resurrected or repositioned a declining company

* * *

THE WINNER
Joanna T. Lau
Company: Lau Technologies, Acton, Mass.

1989 Revenues: $7 million

1989 Losses: $1.5 million

1994 Revenues: $49 million

1994 Profits: $2.7 million

Number of employees: 210

Business: Electronic-systems manufacturer. A former division of a public company, Bowmar Instrument Corp., bought by Lau in 1990

* * *

THE RUNNERS-UP
Steve Sanghi
Company:
Microchip Technology Inc., Chandler, Ariz.

1990 Revenues: $74 million 1990 Losses: $2.5 million 1994 Revenues: $208 million 1994 Profits: $49 million

Number of employees: 1,450

Business: Semiconductor manufacturer. Spun out of General Instrument Corp. in 1989; bought by Sanghi in 1990. Went public in 1993

* * *

Mo Siegel
Company:
Celestial Seasonings Inc., Boulder, Colo.

1991 Revenues: $49 million

1991 Losses: $3.3 million

1994 Revenues: $65 million

1994 Profits: $7.2 million

Number of employees: 220

Business: Herbal-tea marketer. Founded by Siegel in 1970; sold in 1984; bought back in 1988. Went public in 1993

* * *

All turnaround buyout stories start out the same way: What were you thinking? The company Joanna Lau bought in 1990 was as pitiful as they come. Bowmar/ALI was a defense-industry subcontractor (reason enough for fainter hearts to flee); its three customers had given notice; its suppliers were shipping COD only; and its profits had turned to losses -- $1.5 million on sales of $7 million the previous year.

That was the bad news. Of course, there was some good news. Neither Lau nor the 24 employees who joined her to buy the company from its publicly owned parent thought that the problems were entirely their own. They put much of the blame on the parent company, Bowmar Instrument Corp., saying that it had stripped the division of too much control. Bowmar Instrument had posted a 1989 loss of almost $3 million on overall revenues of $42 million and was struggling with a postbankruptcy reorganization, which included having another company handle the entire business's finances. Bowmar/ALI could do little more than watch and cringe as its suppliers got strung along for 150 days. It was slowly becoming all but impossible to get new materials or to meet production commitments. "We were dying on the vine," is how Jim Bender, a 30-year career executive with the division, remembers it.

Lau was a 30-year-old General Electric-bred engineer looking for a manufacturing operation she could run on her own when she did a manufacturing case study on Bowmar/ALI for her M.B.A. studies. (She'd gone in to look at how the company used information systems, and ended up writing about how it was surviving despite its obsolete systems.) She liked the people, she liked the company's niche -- building electronics for the Bradley armored personnel carrier -- and she thought the business had the potential to thrive, given some freedom and focus. "From what I saw," says Lau, "the parent company was treating this division as a cash cow."

Lau couldn't finance a buyout herself. Her family had immigrated from Hong Kong to New York when she was 17, and she didn't have family money. She didn't want to do the buyout that way anyway. To keep the company's program managers (who had the customer contacts), its purchasing people (who had the relationships with the vendors), and the people on the manufacturing floor (who understood the process), she offered the 60-some employees the challenge and opportunity to buy the company with her. More than a third said yes.

With $3.1 million -- $1.2 million in a bank loan, $750,000 from a minority-targeted Small Business Administration loan guarantee, $300,000 in notes from the former owners, and $850,000 from Lau and the other employees -- the new company, renamed Lau Technologies, became independent in March 1990. Lau herself had 56% ownership, the employee owners had 36%, and the company retained 8% for future new hires.

In five years Lau Technologies, with Lau as president, transformed itself. Revenues grew from $7 million in 1989 to $49 million in 1994 and should close at $60 million this year. The company paid off its debts in its first two years and has paid out dividends totaling about 75% of what employees originally invested. Pretax income last year was $2.7 million, a little more than 5.5% of net sales. Two hundred and 10 people, all cross-trained, now work at the company, which follows a total quality management program.

The company's first big break came five months into its independence. Lau had been traveling to vendors and the company's customers -- FMC Corp., GE-Pittsfield (now part of Lockheed Martin Marietta), and the U.S. Army itself -- promising to win back their trust and produce at new standards. The staff had been meeting every day at 9 a.m. to go over cash flow and check on how much, if any, of its $1.2-million line of credit was still available.

But in August Operation Desert Shield started. With U.S. ground troops taking positions in the Persian Gulf, FMC and the army pushed up their orders for the Bradley, asking Lau Technologies to produce in one year the electronics parts it had been contracted to make in five.

The company was up for the challenge. It went from one shift to three, setting up 24-hour production. It hired 70 temp workers for the assembly area, working with a temp agency specializing in workers with manufacturing experience, and added another layer of inspection to ensure quality control.

At the same time, FMC needed help fixing a circuitry problem that arose on the Bradley -- a gun turret was on the fritz. Normally, the lead time would have been 270 days to design and program a new chip and wire it onto the new board. "We said, 'Give us a try, and let us talk to our vendors,' because we had the manufacturing experience building these boards," says Lau. "So we talked to our vendors at Hughes, at Texas Instruments -- we literally were calling vice-presidents and saying, 'We have a national emergency here. If we don't get this changed, it'll be detrimental to our soldiers.' So we were able to work out a deal and turn it around in 45 days." Engineers were working "unbelievable hours," she says. "They literally lived at the plant."

That was, of course, just after they all had bought the business. "It was kind of strange to have to say, 'Oh, by the way, guys, you're going to work 20 hours a day," says Lau. But on the other hand, everyone knew it could be a turning point for the organization. And many of the employees were part owners, which helped. Says Lau, "We all knew the company needed to build a reputation."

It did.

The next year Lau Technologies was one of a handful of companies to win a U.S. Army Contractor Excellence Award. That endorsement signaled to the world that the company was a new player. Lockheed Martin, which at one point had done as much as $7 million a year with Bowmar/ALI, had a project it needed done fast, and company management decided to give Lau Technologies another chance. Before Bowmar/ALI had been bought out, it "had quality issues, delivery issues, pricing issues -- they had lost the formula," says sourcing director Bob Morin, but the new company did a job in 1991 in 10 weeks that normally would have taken a year. "They were making real-time decisions," Morin says. The Lau team worked with a professionalism, he adds, "as good as I've seen in over 20 years in this business." Lockheed Martin now does more than $10 million a year with Lau Technologies.

Joanna Lau's minority status helped secure that work. The 37-year-old was not shy about using her status as an Asian American to her advantage, getting a targeted SBA loan guarantee to buy the business and letting her defense-contractor customers know that she could help them fulfill their obligation to give a percentage of work to minority-owned companies. But customers say that the company's minority status is just icing on the cake, following well after quality and price as a criterion. "Our involvement with Lau Technologies initially was on a critical business need," says Morin. "We had already met our parameters for SDB [Small Disadvantaged Business] measurements. But on the other hand, as we've grown that relationship, they're one of five suppliers that make that requirement very easy for us to fulfill."

The way Lau Technologies produced during the Gulf War was its first test. Its second test was also a big risk: it began looking for nondefense work. "This company is not worth a lot without a product," says Lau. "We're a manufacturing service company -- you give us the drawing, and we'll build anything you want. But we needed a product to build equity."

Finding a new technology and market to serve would work only if the company was extraordinarily thorough, and it was. In 1992 it committed $300,000 to the process, 35% of the year's $860,000 in retained earnings. Managers drew up a list of about 10 areas and researched them through discussions with industry sources and professors from places such as MIT. The next year's research-and-development budget surged to $1 million -- almost the entire profit on that year's $32 million in revenues. Five people worked full-time on finding a new business.

Being privately held made it easier. "We didn't have to answer to Wall Street," says Lau. "We just had to deal with employees and explain why we had to do this." It was a bet, and it represented a lot of money for the company, but "actually not a lot when you're going after completely new technologies," Lau says.

The area Lau Technologies ended up focusing on was digital imaging -- systems that make identification cards and store the images digitally. In two years it has won contracts with departments of motor vehicles in three states to produce drivers' license photos; in Massachusetts it beat out Polaroid, the state's supplier for 25 years. "The technology we selected is far superior to the current 'sandwich-type' system of license production," says Massachusetts Bureau of the Registry spokesman Aubrey Hazner. And in Ohio, where Lau Technologies won a contract last fall, registry controller Jim Spurrier says, "Quite frankly, they blew the socks off the competition."

With one corporate client signed on as well, the new business already accounts for 25% of the company's revenues, and by next year that figure should reach 40%. Lau Technologies recently won an $8-million contract to produce ID cards for immigrants, and another contract, for $1.6 million, to make security systems based on facial recognition. Its goal is to be 50-50 in defense and nondefense business.

The credit for the newly energized operation, says co-owner and manager Jim Bender, goes to Lau herself. "The bottom line is Joanna. She runs the place, she's totally in control of the MIS -- she's a genius when it comes to computers -- and she's really a genius when it comes to handling people, motivating them. She's unique."


CUTBACKS, LAYOFFS, PLANT CLOSINGS

After peaking at 3.7 million in 1987, the number of workers at primary and subcontracting defense companies has declined to just 2.2 million, and it may drop by another 500,000 to 750,000 in the next five years, according to the National Commission for Economic Conversion and Disarmament, based in Washington, D.C. Total defense procurement dollars have been halved in the last decade, from $90 billion in 1985 to $45 billion in 1995.

For companies that have served that shrinking market, help exists -- sort of. The federal Technology Reinvestment Project, for instance, funds the development of technologies that are applicable not just to the military but to commercial markets as well; its fiscal year 1995 appropriation was $208 million. And many states have programs within their economic-development offices for industrial reinvestment. But "defense conversion" is, as one Department of Defense spokeswoman puts it, more a state of mind than any kind of program a company can plunk into place.

Lau Technologies, for one, began its conversion from subcontractor of defense electronics to manufacturer of digital ID-card systems for civilian uses without targeted conversion help. Its change started internally, where neither the government nor anyone else could have ushered in a transformation. "A company has got to have the will to change," says president Joanna Lau. "You have to say, 'OK, I'm going to walk out of this comfort zone and into a totally unknown black hole." Her business was ready. But also, it didn't look for government money because the paperwork seemed too overwhelming. Instead, it spent 35% of its profit one year and almost 100% the next on research and development.

Competing in the defense business has actually been excellent preparation for competing outside it, Lau says. "When you're a military contractor, you can't get high margins, because most of our contracts are a fixed price or cost-plus -- expenses plus either a fixed percentage or a flat fee. So when we bid on civilian projects, we pretty much leave a lot of money on the table."

Last updated: Dec 1, 1995




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