In the 1980s, LBOs certainly got a bad rap. But tiny Royal Appliance was one that has worked like a charm.
John A. Balch and a group of investors got the vacuum cleaner company for a mere $4.5 million in a 1981 leveraged buyout. Not bad, especially since it came with more than $1 million in cash in its treasury. Better yet, in early August Royal Appliance Manufacturing Co. went public with a $100.7 million offering of stock. It hit the market at an initial price of $15.50 and immediately shot up $4. Investors had been tempted by the devil--the Dirt Devil. For the past seven years, the Dirt Devil Hand-Vac has kept Royal in the appliance industry spotlight.
Royal was no newcomer to vacuum cleaners. It sold its first models in the early 1900s. But after a string of uninspired owners and even a dip into bankruptcy in 1953, Royal's expensive and unwieldy metal models were losing to lighter plastic rivals. In 1979, Royal's 82-year-old president, Stanley E. Erbor, died at the company water fountain.
Balch then was a vice-president for finance at Cleveland medical-devices maker Technicare Corp. He had seen Johnson & Johnson buy his employer, and that kindled in him a desire to run his own show. By December, 1981, after his investor group bought Royal from Erbor's estate, he was doing just that.
He hired a marketing staff and got Royal's sluggish sales force back in the field. He took the company's handheld metal vacuum and made a cheaper model in plastic, thus creating the original Dirt Devil, whose old-fashioned styling makes it look like a relic from your mother's broom closet. Short of capital, Balch hired outside component suppliers. "We're an assembly operation," he explains. "We don't make anything." A buy-American devotee, Balch purchases no less than 95% of his parts in the U. S.--unlike many rivals. To keep customers happy, Royal imprints a toll-free number on each vacuum, inviting consumers to call with problems and questions. Balch handles some calls himself.
He became a marketing whiz and spent heavily on national advertising--$15.5 million in the first half of 1991. He runs Dirt Devil TV and print ads nationally, as well as radio spots on the syndicated Paul Harvey show. Balch also cultivated lucrative contracts with mass retailers such as Wal-Mart Stores Inc., pushing Royal's sales above $120 million in 1990, up from $6 million in 1982.
With its revolving brush, the Hand-Vac cleaned up on rivals. The bright red vacuum has hotly challenged Black & Decker Corp.'s DustBuster, the cordless wonder and innovator of the portable concept. Black & Decker was forced to introduce its own plug-in, revolving-brush model this year.
TIDY PROFIT. Royal markets a full line of Dirt Devil products, spanning the upright, canister, and push-sweeper categories. As Royal matures, similar success may prove harder to come by. "They picked up Wal-Mart, K mart, then Target, so they grew, grew, grew," says one competitor. "But that's done now." Jennifer Baker Fischback, a marketing vice-president, disputes that, pointing to waves of new products she expects will yield plenty of new growth. "We've got a lot of good years left in us," she says.
Royal's initial investors, a group of Cleveland business executives, have won handsome rewards--a full $54.2 million in the IPO, as well as dividends along the way. As for Balch, he has kept a 19% stake, worth about $37 million.
Balch isn't letting success swell his head. He idolizes Wal-Mart Chairman Sam M. Walton and his legendary lack of pretentiousness. So he has practically mandated modesty at Royal. "It's kind of our image," explains Fischback. "We try not to hire snots." Or, as Balch puts it in one of his favorite slogans, "When you're in the business of picking up dirt, you gotta stay pretty low to the ground." With the IPO, however, that unobtrusive cover is blown.