When Managers Are Owners

By Gordon Bock

Leveraged buyouts come in many different varieties. In some cases, corporate raiders snap up a company with borrowed money, then throw out the management, dismember the firm and sell off the pieces. But in other deals, including the proposed buyout of RJR Nabisco, the managers initiate the action. In one of the least controversial types of management buyouts, the executives of a particular division buy it from a larger parent company. These managers are out to prove they can run their own show -- and run it better than some sprawling conglomerate that has grown inattentive or slothlike in responding to the needs of its far-flung divisions. Some 1,100 units of U.S. companies have been acquired by their managers since 1982, and it is a blue-chip list: the Montgomery Ward department-store chain, bought by its executives from Mobil; the former ITT subsidiary that makes Scott lawn products; the onetime Unisys unit that produces Nu-kote ribbons for typewriters and computer printers. "Management buyouts create powerful incentives for entrepreneurship, risk taking and long-term planning," says Martin Dubilier, chairman of a New York City investment firm that bankrolls many executives seeking control of their companies.

Take the case of Scott. The longtime message from ITT had been to "do O.K. and stay out of trouble," recalls Tadd Seitz, now president of O.M. Scott & Sons of Marysville, Ohio. "There was no great push for excellence." But after Seitz and his fellow managers bought the unit in 1986 for $133 million, they promptly came out with several new products that ITT executives had blocked. Among them: Winterizer, a compound that protects lawns during the winter. ITT management, Seitz says, had feared that Winterizer might sabotage sales of other Scott lawn-care products. But it has become the company's second biggest seller without hurting overall revenues a whit: Scott's sales rose 16% last year, to $187 million, and are expected to top the $200 million mark this year.

The executives who bought Nu-kote also felt ignored by their corporate parent. After the 1986 merger of the Burroughs and Sperry computer companies that produced Unisys, corporate headquarters decreed in a confidential memo that "ancillary" units would be put on the auction block. Reinhold Tischler, then president of the Nu-kote division, called his boss and said, "Ancillary division reporting in. We'd like to buy it." On Jan. 16, 1987 -- Tischler calls it Independence Day -- he and 20 other managers bought Nu-kote for $60 million. After they eliminated several aging product lines, overall sales grew 17% last year, to $150 million.

Despite such impressive showings, most of the companies that have been bought by their managers are weighed down by debt. Scott's $133 million in outstanding obligations is more than five times as great as its shareholders' equity. Nu-kote's $55.6 million in debt amounts to more than eleven times equity. If sales plummeted or interest rates rose, those debt loads could become crippling burdens. The new manager-owners have made a good start at running their companies, but the test will come during the next economic downturn.

With reporting by Raji Samghabadi/New York