Can Kohler Keep It All In The Family?
The village of Kohler, Wis. (pop. 1,900), seems like a community frozen in a peaceful past. You see it in the immaculate, tree-lined streets and the aging foundry and pottery, where Kohler Co.'s workers have turned out toilets and bathtubs since the turn of the century. Aside from the introduction of robots into the factory in the 1970s and the transformation of a former workers' dormitory into a hotel, little appears to have changed since 1916, when John Michael Kohler moved his operations up the road from Sheboygan to create a company town amid rolling farmland about an hour northwest of Milwaukee.
Yet some thorny modern problems are intruding on this placid landscape. Closely held Kohler, with record 1997 sales of $2.2 billion and earnings of $88 million, is mired in a messy ownership squabble. On one side is Herbert V. Kohler Jr., 59, the visionary company chairman and grandson of the founder, and his immediate family, who control an overwhelming majority of Kohler's shares. Opposing them are some dissident family members and an angry group of outside investors, including one big fund manager who holds a few of the thinly traded and richly priced shares.
Herbert's success in buying out those other shareholders--at an offering price they consider absurdly low--will determine how one of the largest and most innovative family-run companies enters the 21st century. The buyback plan calls for cashing out the 170 or so nonfamily shareholders, who control 4% of the stock, for $52,700 a share--nearly a 50% discount to the $100,000 apiece that was fetched on a sale of 30 shares by two of Herbert's cousins to outsiders just days before he set the buyback terms.
About 20 other family members will be offered the option of taking cash or a mix of voting and nonvoting shares; if they hold on and later want to sell shares, they would have to sell them back to the company. The end result would be to keep the company firmly in the hands of Herbert, his sister, Ruth De-Young Kohler, and a cousin, John Michael Kohler Jr. Herbert and Ruth control about 75% of the shares directly and through estate trusts, including that of their recently deceased brother, and through a charitable foundation.
With such control, what triggered the buyback proposal? Herbert says the plan has been in the works for several years. In part, the lower stock price helps hold down estate taxes. But his primary concern was a loss of privacy. He feared that the sale in the last year of several blocks of shares at eye-popping prices would induce more relatives to sell to outsiders. By limiting the number of shareholders, Kohler can continue to avoid federal reporting requirements. And remaining private, Herbert argues, allows Kohler to take long-term investment positions; otherwise, "we would be focused on whatever was needed to keep quarterly earnings moving."
SOGEN SUIT. The plan is so controversial that Herbert anticipated that virtually all holders might have voted against it at a shareholders meeting originally scheduled for Apr. 14. A federal court judge in Milwaukee, hearing a suit by one holder to block the plan, postponed the meeting until May 8 and agreed to hear arguments on May 1 as to whether it should go forward even then. Under Wisconsin law, they are allowed to seek a second appraisal of the shares' value and to ask for a court-appointed arbitration if there's a big discrepancy between that value and the company's figures.
One holder, SoGen International Fund Inc., a longtime investor in closely held companies, has filed suit in federal court in Milwaukee to block the plan. "This is outrageous," snaps Elizabeth Tobin, associate portfolio manager of New York-based SoGen, which bought 63 of its 80 shares in early March from a Kohler family member at $103,600 apiece. SoGen complains that it is being disenfranchised by the cash-out requirement.
Julilly Kohler, one of Herbert's cousins, who controls 330 shares with her sister, says she'll fight the buyback--and insists it needn't have come to this. "If they had paid decent dividends"--the shares typically yield less than 1% of market price--"or made reasonable buyback offers, it would have gone a long way to keep people on board."
The plan could prove costly for Kohler. If, say, 900 shares are bought back at the offer price, it would cost $47 million, which Kohler can easily afford. If the value on the shares is deemed too low, however, Kohler will have to ante up much more, take on more debt, and, perhaps, defer capital spending on some projects. It might also, outside lawyers say, increase the valuation of stock held in the charitable foundation, which would force it to increase donation levels. Could that lead to a public offering? "It ain't going to happen," insists Herbert.
"GREAT MARKETER." To understand the Kohler squabble, one must first understand how the company got where it is. Kohler owes much to its hard-driven chairman. A stout and cheerful man, Herbert became chairman and CEO in 1972, four years after his father, the former chairman died. He soon faced a key decision. With annual sales of around $300 million, Herbert gambled on a $10 million investment in an all-cast-iron-molding line. The resulting leap in quality vaulted Kohler into the No.1 position in U.S. kitchen and bathroom plumbing fixtures, with a 25% market share in North America.
Kohler's products include the $4,100 Body Spa--a combination shower/waterfall/foot bath--and an Artists Editions line of high-style bathroom products. Herbert's bold use of colors and innovations in toilets and showers have brought cachet to the entire industry. "He's a great marketer who has created a very strong image at the top end," says Emmanuel A. Kampouris, chairman of American Standard, Kohler's chief rival.
But Herbert has taken Kohler way beyond plumbing. The company is a leading supplier of high-end furniture, through its Baker line. An avid outdoorsman and golfer, Herbert is eagerly awaiting the July opening of his latest big project: a Pete Dye-designed golf course stretching along two miles of Lake Michigan shoreline, near his American Club luxury hotel. Herbert says all Kohler's products are designed with a certain aesthetic in mind--to "improve your sense of gracious living."
There seems little doubt that Kohler's strategy has not been to maximize short-term earnings. Heavy investments in products and locations--it has spent $70 million over the past three years on factories and joint ventures in China--and conservative accounting have kept operating margins in single digits. That's below those of competitors American Standard and Masco.
This isn't the first time Herbert has moved to stem the dilution of family ownership. Twenty years ago, he initiated a 1-for-20 share split and offered a $8,200-per-share cashout. Those who stayed in, Herbert notes, have enjoyed a 10.1% compounded annual return since then--slightly below the overall market--at the new offer of nearly $53,000. But, of course, they'd be doing much better at $100,000 a share.