Lords Of Leverage For The '90sRon Stodghill II
These are supposed to be sleepy times for leveraged-buyout firms. Humbled by hard-learned lessons of the deal-crazed 1980s, such powerhouses as Kohlberg Kravis Roberts, Forstmann Little, and Wasserstein Perella have slipped largely into hibernation. But at least one buyout boutique, Clayton, Dubilier & Rice Inc., appears to be stirring. Since the start of the year, it has snapped up three companies. The most recent deal came on Oct. 22, when Clayton Dubilier agreed to acquire DuPont Co.'s Remington Arms Co. rifle-making unit for $300 million. And it hints at yet another buy before the end of the year.
The Remington deal is a typical one for Clayton Dubilier. Since its founding in 1978, the firm has specialized in buying what President Joseph L. Rice III calls the "stepchildren" of giant parents looking to shed assets. In September, it bought Indianapolis' Allison Gas Turbine, which makes turbines for small jet engines, from General Motors Corp. for $300 million. Clayton Dubilier figured Allison, like Remington, represented an inherently strong business that could flourish if separated from its distracted parent.
SCOUTING. Clayton Dubilier gets involved in every aspect of its various businesses, from marketing to research and development. Like other LBO firms, of course, it cuts costs--often by selling assets and laying off employees. But it also works to build up its properties. Just days after acquiring Van Kampen Merritt Inc. from Xerox Corp. in February, for example, the firm began scouting for acquisitions to expand the investment bank's range of products from fixed-income securities to equities and global products. Clayton Dubilier says it's in talks to acquire four separate firms to add to Van Kampen. "We hope to end up with a far more diverse financial-management company than the one we originally bought," Rice says.
Although Clayton Dubilier sets its sights lower than other LBO firms, which tend to go after big public companies, the gritty, roll-up-your-sleeves approach is paying off for investors. Investors in Clayton Dubilier's $1 billion LBO fund say they are reaping cash returns in excess of 40% a year on companies the firm has acquired and then sold. In contrast, KKR's biggest LBO fund is averaging returns in the mid-teens, say Wall Street sources, in part because of protracted problems at RJR Nabisco Inc. Clayton's returns "are high through up and down cycles because they know how to improve the operating efficiencies and bottom lines of their companies," says Scott Sperling, who runs Harvard Management, an investor in the fund.
The resume of Rice, 61, resembles that of a typical LBO expert. A former securities lawyer at Sullivan & Cromwell, Rice has spent the bulk of his career in the investment game. But Clayton Dubilier's culture places as much premium on managerial savvy as it does on financial engineering: Four of its 10 senior partners formerly served as chief executive or chief operating officer of a big company--something none of KKR's senior partners can claim. Clayton's No.2 partner, B. Charles Ames, for example, is a former chairman and CEO of Reliance Electric Co.
That emphasis on operations was underscored in June, when Westinghouse Electric Corp. tapped Clayton Dubilier partner Michael H. Jordan to run the embattled industrial giant. Jordan had joined the firm in September, 1992, after serving as president and chief financial officer at PepsiCo Inc. "They are not a bunch of lawyers and financial engineers who don't know much about running a business," says Carl Kester, a professor at Harvard business school who has studied Clayton Dubilier.
Like other firms, Clayton Dubilier moves quickly to assume control of companies it acquires. Within days of closing a deal, it assigns two of its senior partners--one an operating executive, the other a number-cruncher--to the board. It's also quick to link pay to performance. When it acquired lawn-care company O.M. Scott & Sons Co. from ITT Corp. in 1986, it required senior managers to buy 12% of their own company's shares. Remington's managers will acquire 15% of the company.
Like its Wall Street rivals, Clayton Dubilier also moves quickly to boost productivity. And that means cutbacks can sometimes be steep. That was especially true at Lexmark International, formerly IBM's typewriter division. Since Clayton Dubilier bought the unit in 1991, it has trimmed Lexmark's payroll by a third, to 4,000 staffers.
But Rice says the firm often discovers that the companies it acquires need nurturing, after years of neglect by parents preoccupied with their own problems. Consider Nu-kote, a former Xerox division that makes typewriter supplies. When Clayton Dubilier bought the company in 1987, nearly 98% of its business was selling typewriter ribbon. The popularity of personal computers, however, made the outlook for that market dim. So Hubbard Howe, a senior partner at Clayton Dubilier, began to shift the company into toner for laser printers and fax machines.
It was an expensive strategy. In 1992, the firm acquired International Communication Materials Inc., a Pittsburgh toner maker, for $8.5 million. A year later, Clayton purchased Future Graphics, a Chatsworth (Calif.) company that repairs toner cartridges, for $5.5 million. The result: Toner and toner-related supplies account for 37% of the company's $175 million in sales. "Now that the shackles are off the business, we have room to grow," says David F. Brigante, Nu-kote's CEO, who was a sales manager when the company was first acquired.
LAWN BOOM. Similarly, when Clayton Dubilier bought Scott, the company had only a dozen lawn-care products. Its sales were stagnating at $197 million. But Henry Timnick, a former senior partner overseeing Scott, reckoned the industry would grow steadily as baby boomers settled in the suburbs and started puttering around the yard.
To strengthen Scott's consumer business, Clayton Dubilier purchased Hyponex Corp. in Atlanta, a private-label potting soil company, in 1988. The deal virtually doubled the size of Scott's consumer business, to $328 million. Next came new products, as Clayton Dubilier began a long-term program to expand Scott's product line and customer base. The firm steadily boosted Scott's R&D spending. In 1992, it stood at $5.9 million, up 40% from 1987. And now, Scott is reaping the benefits. Next year, the company will offer 43 new products ranging from crabgrass preventer to potting soil for African violets.
Besides strategy and marketing, Clayton Dubilier gets involved in the details of manufacturing. To improve quality and productivity at Allison, the firm has started to overhaul the assembly line by organizing workers into separate teams to manufacture specific products. "We'll constantly be trying to spur management to think of new ways to do things," says Donald J. Gogel, a partner overseeing Allison's finances.
To win greater cooperation among rank-and-file workers, Clayton Dubilier experiments with distributing equity to all employees. At Remington, for example, the company's 22,000 employees will receive 10% of the company's shares through a 401(k) plan, provided they meet productivity goals. At Scott, a worker on the assembly line, Emerson Hileman, says that "things just seemed to get a lot tighter" when Clayton Dubilier arrived on the scene. Still, Hileman says it was difficult to get too upset with his new bosses, who set aside 17% of the company's shares for an employee bonus program. For the past five years, the 37-year-old Hileman has received annual profit-sharing checks averaging $2,000.
So far, Clayton Dubilier has generated impressive operating results for most of the companies it owns (table). That has helped it to ease the debt burden that fell on its stepchildren when they were acquired. Scott's long-term debt, for example, was just $30.5 million at the end of 1992, down from the $191 million it owed when it was purchased in 1987.
Of course, the big payoff comes when the firm cashes out. In January, 1992, it sold 89% of its shares in Scott in an initial public offering that fetched Clayton Dubilier $258 million--$58 million above its original purchase price.
Despite such accomplishments, executives at some of its former companies complain that Clayton Dubilier uses a cookie-cutter approach to management. At Scott, for example, the firm tried to push executives into expanding overseas, arguing that foreign markets could add an additional $600 million to sales. But Scott managers resisted, arguing that the company lacked the name recognition and distribution channels to succeed in a sudden international expansion. "They all thought they were quick studies, but there were times when they just didn't understand our customers," says Tadd C. Seitz, chief executive of Scott.
And Clayton Dubilier has had its share of woes over the years. In 1988, for example, it bought Kendall Co., a medical-products maker, from Colgate-Palmolive Co. for $960 million. The firm had big plans for Kendall, including expanding production facilities and introducing new products. It built a plant in Orange County, Calif. to make a new line of antibiotics, but Kendall failed to win approvals from the Food & Drug Administration. "We had a new $30 million plant that couldn't manufacture anything," says partner Alberto Cribiore. Worse, Kendall lost one of its major customers with the collapse of the Soviet Union, which had been buying $40 million worth of medical adhesive tape a year. But fortunately for Clayton Dubilier and its investors, such stumbles have been fairly few.
CLAYTON DUBILIER'S FAMILY Company/ Operating profit* Percent change Description Millions since acquisition PILLIOD CABINET Family-owned furniture $8.1 72% maker acquired in 1985 for $43 million HOMELAND STORES Supermarket chain pur- 21.5 59 chased from Safeway in 1987 for $165 million KENDALL Medical-products com- 104.9 83 pany purchased from Colgate-Palmolive in 1988 for $960 million APS Auto-parts maker bought 18.5 5 from Wickes for $200 million in 1989 Company/ Operating profit* Percent change Description Millions since acquisition LEXMARK INT'L. Office-equipment maker NA NA purchased from IBM in 1991 for $1.6 billion ALLISON GAS TURBINE Former GM jet-engine NA NM maker bought in September, 1993, for $300 million VAN KAMPEN MERRITT Xerox' former invest- 42.7 NM ment-management unit purchased in February for $415 million REMINGTON Leading eunmaker pur- NA NM chased from DuPont in October for $300 million DATA: COMPANY REPORTS, BUSINESS WEEK NA: NOT AVAILABLE; NM: NOT MEANINGFUL SINCE INVESTMENT HAS BEEN HELD FOR LESS THAN ONE YEAR *FOR LATEST FISCAL YEAR
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