`This Is Like My Baby Child That These Guys Have Stolen'
Entrepreneurs are expected to endure their share of knocks--that goes with the territory. But few have had quite the climb and fall of Matthew W. Botsford Jr. At his finest moment, Botsford was CEO of WorldClass Processing Inc., a steel-coil processor he started in 1992 after raising an impressive $33 million.
Today, Botsford, 60, is jobless and nearly broke. The financiers who backed him, and even some of his original partners, ousted him from the company he spent years creating. Just before Easter, he paid for prostate surgery at the Mayo Clinic with a maxed-out credit card, and in late April, the bank repossessed his '95 Mercedes. Like many fallen entrepreneurs, Botsford is now in court, suing to regain control of the company. "This is like my baby child that these guys have stolen," he says.
Of course, entrepreneurs run aground all the time. Some butt heads with backers who are more interested in profits than dreams. Others try to grow too fast and founder for lack of focus. Botsford's story has both of those elements, plus another that proved ruinous. The same traits that led to his triumph as a salesman and a fund-raiser--boundless enthusiasm and fierce determination--also resulted in his downfall. When people said no, he regarded them as obstacles to be overcome--except that they could take away his company. And they did.
In the beginning, Botsford's persistence worked wonders. In 1987, as steel mills were shutting down along Pittsburgh's rivers, he quit his sales job at Signode Industries Inc., which makes machinery for steel mills, and set out to raise $33 million for a steel processing plant. It wasn't quite as crazy an idea as it sounds. At Signode, Botsford was part of a management group charged with identifying promising investment opportunities. The team concluded that a small, efficient processing plant designed to handle the painstaking work of cleaning and trimming steel coils would be welcomed by older mills seeking ways to outsource.
Signode ultimately went with a cheaper idea. But Botsford, by then a true believer, decided to try to do it himself. Most people would probably find the prospect of raising $30 million daunting, but not him. Although he had never started a company before, he had 30 years of experience as a salesman in the steel industry. And he was a winner, or believed himself to be.
"TEAM MEMBERS." A former Harvard quarterback, Botsford brimmed with confidence in his idea and his ability to raise money for it. He was also sure that when he assembled his various teams of investors and workers, he would introduce an egalitarian culture and take the tired, hierarchical steel industry by storm. With this game plan, he placed a second mortgage on his Pittsburgh house and spent four years hitting up investors for money. In the end, he raised just under $2 million in equity from private investors and got $31 million in loans from Westinghouse Credit, a Finnish bank, and a state development agency. Banc One Corp. in Ohio and AT&T Capital Corp. came in later. Although the loans were high-interest--some banks charged 16%--Botsford had what he needed. He built a processing plant on a former U.S. Steel site, just down the Ohio River from Pittsburgh, in Ambridge, Pa.
To manage the plant, he turned to other former athletes. Edward Neese, a veteran steel man who played basketball at Indiana Tech, would run the plant. Cornelius W. Dugan III, a former colleague of Botsford's and former tight end from semipro flag football days, took marketing. John W. Tietz, an accountant who moonlighted as a Big Ten football referee, would handle the finances. They hired 60 workers, called "team members." In July, 1992, WorldClass processed its first shining coil of steel.
The niche concept worked, and within eight months, WorldClass broke into the black. Over the next few years, the plant generated $25 million to $35 million in annual revenue. And although profits were small, the company stayed current on its debt. Ever the promoter, Botsford hired a public-relations firm and trumpeted the team culture at WorldClass, its niche focus, and a steel renaissance in Pittsburgh. At the same time, he began to dream of expanding: building WorldClass clones elsewhere in the U.S. and in Mexico--even in Saudi Arabia. Botsford was concerned that other well-financed steel companies in nearby Ohio were announcing plans to build processing mills of their own and that WorldClass, with its huge debt burden, would have a hard time competing with them. His plan was to entice new lenders to finance an expansion. He figured new loans would be cheaper than the company's original construction debt. "We had to grow to refinance," says Neese.
One day early in 1994, when Botsford and Neese were looking for investors, they visited Tippins Inc., an equipment manufacturer in Etna, Pa. Tippins and its partner Samsung had developed new technology for a minimill that melts scrap and then casts it into sheet or plate metal. They were anxiously seeking their first customer, preferably one nearby. Tippins suggested that if WorldClass wanted to take on the mill, it would pony up $10 million in equity, with Samsung adding $20 million. The result: Botsford would have to locate only $30 million more in equity to anchor a $440 million mill.
To most entrepreneurs, raising that kind of money would be pure fantasy. But Botsford saw it as just his latest challenge. Again, he sold the idea to Governor Robert Casey's administration. Eager for new jobs in the depressed Ohio Valley, the governor promised a $22 million loan if Botsford got his latest project off the ground.
BUILDING MOMENTUM. At a board meeting that spring, Botsford unveiled the idea to his two outside directors, Carl Sorenson, a venture capitalist from Ohio, and Roy V. Gavert Jr., a former vice-president at Westinghouse. Between them, Gavert and Sorenson had invested a half-million dollars in WorldClass Processing and owned 5% of the stock. They expressed concern that the big project would broaden the focus of the company and delay dividends, which were due in three years. "Steelmaking was in conflict with the niche we were created for," Gavert said in a recent interview. Despite misgivings, they did not try to derail Botsford.
By summer, Tippins was pressing for a public announcement so that it could start building momentum for future sales. Although neither Tippins nor Samsung will talk about Botsford's situation now, on a sticky August morning, they were standing proudly with Botsford's team as the regional press corps and a host of political dignitaries descended on WorldClass Steel. A frail Governor Casey headlined the show, making one of his first public appearances in the region since his heart and liver transplant a year earlier.
Initially, at least, the financial community seemed to embrace the idea. According to Botsford, Mellon Bank Corp. was pushing to be lead lender for the Pittsburgh venture. AT&T Capital was also interested. It proposed lifting its $25 million loan to the mriginal plant to $40 million. Mellon and AT&T deny, however, that any commitments were made. Perhaps most important, Peter F. Marcus, PaineWebber Inc.'s metals analyst, one of the biggest names in the industry, offered to have his firm find equity partners for the venture. "We believed in the project," Marcus says. PaineWebber booked WorldClass and its partners on a road show.
Not long after, a host of established and well-financed steel companies, including Nucor Corp. and LTV Corp., began announcing plans for their own minimills. With tiny WorldClass facing burly competitors with proven technology, PaineWebber had trouble getting equity investors to commit. At the same time, Gavert and Sorenson said they wanted out. At this point, Botsford recalls, he was still thinking like the salesman he had always been: "If people tell me `no,' what they're really saying is, `you haven't communicated well enough yet."' He tried to communicate better. In the end, he agreed to buy out the small investors at generous terms once the financing was completed. He didn't lose much sleep over their decision to bail out. After all, it was a half-million in equity in a $440 million project.
But those shareholders would soon enlist powerful allies. As auto demand cooled and the steel market took a dive, Mellon and PaineWebber turned to other ventures. Meanwhile, Dugan and Teitz, who were running the processing company while Botsford and Neese pursued the steel mill, quietly informed directors and lenders that the steel mill was draining resources from the processing business, according to Botsford's suit. Dugan and Teitz have no comment.
In March, John J. Geraghty, an AT&T Capital managing director, sent Botsford a letter explaining that the spending on the minimill project had put the company in violation of debt-equity covenants on its loan. Geraghty instructed Botsford not to spend more than $400,000 on the plan. Botsford cut his spending back, but didn't slow his efforts. In his four years of raising money, he had learned the value of persistence. This sometimes meant fudging a little, he says, translating "maybes" into "absolutelys," leveraging handshakes into ironclad agreements. But above all, it meant to keep pushing when naysayers said to slow down.
DIFFERENT VERSIONS. As the year went on, steel continued to stumble, and communication between Botsford's investors and AT&T grew more agitated. By July, AT&T Capital's Geraghty flew to Pittsburgh for his only face-to-face meeting with Botsford. With Gavert there, they hammered out an agreement. Botsford would take WorldClass Processing out of the steel mill venture by Sept. 1. And he would do what he could to recoup the money spent on the venture, something under $400,000.
Here the two sides' stories diverge most widely: With AT&T pulling the plug, Botsford encouraged Tippins to find a company to replace WorldClass in the minimill venture. When Tippins landed New Delhi's Mesco Klalinga Steel Co. in September, Botsford and Neese proposed that they become consultants or collaborators. They figured they could parlay the work they had done for WorldClass on the deal, worth several hundred thousand dollars, into a windfall for WorldClass. But Gavert and Sorenson's court filings make clear they thought Botsford and Neese were trying to cut themselves a deal on the side. AT&T Capital says it agreed with their interpretation. Rather than confront Botsford, the lender chose to oust him in a coup.
The stage was set. On Nov. 6, AT&T Capital quietly exercised warrants for 15% of the stock it had received at the time it made its loan. It did the same with warrants it bought from Banc One in Ohio. This gave the lead lender 30% of WorldClass Processing's stock.
On the morning of Nov. 7, Botsford and Neese walked into a scheduled board meeting unaware that their 57% ownership position had been diluted to 44%. Botsford had in hand a preliminary agreement with Mesco that seemed to promise WorldClass Industries $1.3 million--money to pay back the funds spent on the steel mill, with enough left over for new processing equipment. Before he could open his mouth, he and Neese were informed that the other directors, with AT&T's support, had gained control of the company and were firing them, effective immediately, with no severance pay. When shouting erupted, security guards came and walked the two from the building.
Botsford's and Neese's next stop was a tavern, followed shortly thereafter by a lawyer's office. Now, in an unlawful-dismissal suit, they charge the rest of the board with engineering a conspiracy to take away their stock in WorldClass Processing. The defendants in turn accuse Botsford and Neese of ignoring the agreement with AT&T.
Back at WorldClass, newly installed President Dugan and Chief Financial Officer Teitz are searching for a way to refinance the company's heavy debt load. Just as Botsford found, without cheaper money, they'll be hard-pressed to compete with the other processing mills popping up in the area.
Meanwhile, a thinner Botsford, recovering from his surgery, is poking around the Ohio Valley, looking for new mill sites. He's not thinking of anything big this time, certainly not a minimill. But if he can put together a few investors, he has this idea for a niche company....