Gibbons, Green Adept in Risky Field : Bicoastal Firm Becomes Major Player in Leveraged Buyouts
Standing in his New York office, Leonard I. Green described his investment firm’s recent history with a metaphor from Los Angeles entertainment legend: “I guess we’re one of those overnight successes that’s been around for 16 years.”
Green’s choice of words reflects the dual orientation of Gibbons, Green, van Amerongen, which became a pioneer firm specializing in leveraged buyouts with its founding in 1969.
Working from headquarters in New York and Los Angeles, the firm has emerged from its relative obscurity with its announcement of two major buyouts in the last month, at prices totaling more than $1 billion. That is more than the combined prices of all its acquisitions in its first 12 years.
The first announcement, Aug. 11, covered the purchase from Transamerica Corp. of Budget Rent-a-Car for $520 million. Ten days later came an announcement of the purchase of Bath Iron Works, one of the nation’s most successful shipbuilders, from Congoleum Corp. for about $550 million.
Gibbons, Green has also been raising new financing for its drive to remain among the top tier of leveraged buyout firms, a level dominated by two partnerships with well more than $1 billion each in capital.
Those are Kohlberg, Kravis, Roberts & Co., the largest leveraged buyout firm, and Forstmann Little & Co., which recently disclosed total committed capital of more than $1.5 billion. Gibbons, Green is in the process of raising $500 million to add to the $270 million in capital it had previously.
These funds will also make Gibbons, Green one of the best-capitalized such firms in Southern California, a region that has been Leonard Green’s focus since he moved to Los Angeles in 1980. While Green’s three partners operate out of the firm’s Madison Avenue office in Manhattan, he and an associate staff an office in downtown Los Angeles.
“I saw something happening that was very dynamic,” Green said of his move to the West Coast. “But I saw San Francisco as a closed community, while Los Angeles was growing rapidly.” Today, he sees Los Angeles as a cultural and financial center second only to New York, a perception he said is only slowly infiltrating Wall Street.
With certain exceptions, such as First Boston, Drexel Burnham Lambert, and Morgan Stanley, “a lot of the investment banks still don’t have first-class people on the West Coast,” he said.
This is not to say that West Coast interest in leveraged buyouts has lagged. Kohlberg, Kravis partner George Roberts has maintained a San Francisco headquarters for several years, for example. Another Los Angeles-based firm, Riordan Freeman & Spogli, recently announced the closing of a $125-million pool to make leveraged buyout investments.
These firms specialize in one of the most complex and risky types of financial transaction known to corporate America. Leveraged buyouts involve the purchase of a business mostly with borrowed money, against which is pledged the firm’s assets. Because the purchased company must produce a set return to cover interest and principal payments on the debt, it must be delicately managed, particularly in the first few years after the buyout.
The purchased entity might be a public company going private, or a larger corporation’s subsidiary being spun off, or even a privately held company being restructured. In each case, a crucial element is the cooperation of top executives, who are generally expected to invest a large share of their own funds in the buyout.
“We don’t want a business in which management doesn’t have a significant stake,” Green said. “They must be at risk.” That produces an entrepreneurial spirit that might have submerged itself in managers working in a large corporation: “We find that costs somehow get cut, and the work day expands to from 7 a.m. to 11 p.m.”
In return, said Lewis W. van Amerongen, a former research analyst who is another of the firm’s four partners, “we shorten the decision chain. In a big company, a unit’s managers are competing for funds with a lot of other units.” After a buyout, “strategic decision-making is more focused.”
The ultimate goal of a leveraged buyout is often the resale of the target company, either in its entirety or in pieces. The liquidation of Purex, a public company that sold soaps and cleansers as well as owning an aircraft maintenance service, still produces hard feelings among some executives, including those who benefitted financially from the transaction. Purex was acquired in 1982 by Gibbons, Green for $372 million. Now its soap and cleansers business is owned by Greyhound, another portion by Armour-Dial, and much of the rest is being liquidated.
“We worked our heart out for 10 years,” said one former highly placed Purex executive who asked not to be identified. “We just broke our backs making that a good company. Now it’s gone.”
This executive noted that the very structure of a leveraged buyout mandates the company’s ultimate resale. “The banks, insurance companies and so on put their money in it to make money, and the only way to make money is liquidation. Once the buyout happens, it’s just a money game.”
For all that, in 1982 Gibbons, Green was viewed by Purex’s management as the shareholders’ savior. The company was the subject of a hostile takeover offer from Esmark and agreed to be taken private when Gibbons, Green offered a higher price per share.
“As management, our responsibility was to the shareholders,” the former executive said. “In this case they benefitted; it was certainly better than Esmark trying to get the company at a bargain price.”
For his part, Green said the firm has never entered a transaction with the expressed plan to liquidate the target for its asset value, although it sometimes plans to sell off pieces to make the remainder more efficient.
“Purex was almost a mini-conglomerate,” he said. “There were businesses that were just there because the image of a public company required counter-cyclicality and so on. You have to ask yourself if you really want to be in the soap and cleansers business--and the aircraft maintenance business.”
Once Considered Radical
Much as they may be a mainstay of corporate finance today, leveraged buyouts were radical maneuvers in Gibbons, Green’s early days. “Ten years ago, the chief financial officer and the chief executive officer didn’t understand the buyout business,” Van Amerongen said. “So within the corporation, they’d be going out on a limb by proposing an LBO for a unit.”
Green added: “We were not welcomed with open arms as an alternative to a corporate purchaser.”
Now, leveraged buyouts are so familiar and potentially profitable that Gibbons, Green faces competition not only from other LBO specialists, but from mainline investment firms.
“Now many of the investment banks, such as Morgan Stanley, First Boston, and Goldman, Sachs, are raising pools of funds,” Green said. The firm commonly finds itself dealing with an investment bank as an agent on one deal and competing directly against it on another.
“We’ve been in a multiplicity of roles with Gibbons, Green,” Edward N. Robinson, a Los Angeles-based vice president at First Boston, said. Robinson represented Transamerica in its sale of Budget Rent-a-Car this year to Gibbons, Green. First Boston also functioned as an agent in the Gibbons, Green purchase last month of Bath Iron Works from Congoleum Corp.--and bid successfully against Gibbons, Green this summer to buy out the home and automotive products business of Union Carbide.
The greater mass of capital available nationally for commitment to leveraged buyouts means that deal-making takes place at what the merger specialists of 10 years ago would consider a blinding pace. “Timing is more critical,” Gibbons said. “Five years ago, we might spend 30 to 60 days analyzing a deal before committing. Today, it might be done in three days.”
Nevertheless, executives who have worked with the firm say that its principals have coped well with the exigencies of today’s merger climate. In the negotiations over Budget Rent-a-Car, “they were the best prepared and the most responsive of any group,” said Clif Haley, senior executive vice president of the car rental company and the executive most closely involved with the talks. “When they arrived, they were ready to do business with a team that could get quickly up to speed.”
Gibbons, Green grew slowly for its first decade, partially because even after it compiled a track record of successful deals, its partners did not have the connections in the financial community necessary to raise a large pool of independent capital.
“It has taken us longer than Kohlberg, Kravis because they put their capital pool together as soon as they split off from Bear, Stearns in 1976,” Green said. “But none of us was so connected. We didn’t travel or live in circles where we knew people with access to capital.”
The firm’s first partners, Green, Edward W. Gibbons, Joseph L. Rice, and John Laupheimer, had met when they were recruited in the 1960s as executives at McDonnell & Co., an investment house that was soon to fail. Laupheimer later left to become an executive in professional golf, and Rice to join the leveraged buyout firm of Clayton & Dubilier. The partnership now includes Van Amerongen, who joined in 1970 after working as an analyst at Teachers Insurance and Auerbach, Pollak & Richardson, and Todd Goodwin, a managing director of Merrill Lynch Capital Markets before joining the firm in 1984.
“In those early days,” recalled Green, “we’d start each deal from scratch, going to insurance companies for both debt and equity financing.”
Raising More Funds
In 1981--five years after Kohlberg, Kravis--Gibbons, Green completed its first capital pool, the $39-million Fulcrum I pool. The firm said the pool is fully invested and now worth $85 million. Last year brought Fulcrum II, a pool of $135 million. Now, Green said, the firm is aiming to raise another $500 million to continue playing in the increasingly costly and competitive market.
“With that fund, we’ll stay competitive,” Green said.
Gibbons, Green’s first deal was the $11.5-million purchase in 1970 of Vecta Group, an office furniture unit, from Brunswick Corp. Vecta was later sold to Steelcase.
After several successful ventures, the firm faced its biggest failure: The purchase of AMC Corp., a tape-cassette maker, from Mattel in 1974. After a military coup in Portugal forced the closing of the company’s efficient plant there, AMC failed. “It was a total wipeout,” Green said. “For the equity holders, that is. The banks got paid.” The equity holders lost about $3 million.
The 1980s brought transactions of a larger magnitude, starting in 1980 with the acquisition of Trailways, the nation’s second-largest bus line, from Holiday Inns for $117.4 million. A year later, Gibbons, Green took Coca-Cola Bottling of New York, one of the nation’s largest bottlers, private in a $240-million deal. In 1982, the firm surfaced as a “white knight” in the hostile takeover battle waged by Esmark for Purex and bought the soap and cleanser manufacturer for $372 million.
Although the Gibbons, Green partners generally win praise for their analytical skills and fairness in negotiating, the buyout process scarcely wins such unalloyed favor. By its nature, the leveraged buyout stresses the capital appreciation of a company. Green said that, nearly from the beginning, the firm’s partners “knew the real potential was in the capital gains created if the entity was successful.”