Case in Point

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."