When Wall Street Meets Main Street : A takeover threat at Cummins Engine Co. has shaken the firm’s little hometown.
With mergers and acquisitions sweeping the nation, it was probably only a matter of time before this small town’s biggest company, Cummins Engine Co., would shed its Midwestern innocence in an anxious and costly face-off with one of Wall Street’s toughest corporate raiders
Cummins and Columbus’ 32,000 residents were rescued two weeks ago from the uncertainty of a possible takeover when members of the Miller family that founded Cummins paid $72 million, or $5 million above the market price, to buy back the nearly 10% stake in the company held since December by Hanson Industries. Hanson is the American arm of the British conglomerate that has built a reputation as a take-no-prisoners corporate raider.
The unusual gesture by J. Irwin Miller, the 80-year-old retired chairman of Cummins, and his sister, Clementine, was greeted with sighs of relief by workers and town residents, who had grown used to the paternalistic and benevolent nature of the wealthy family, but it didn’t spare the city from further anguish. On Wednesday, for example, Industrial Equity (Pacific) Ltd., a Hong Kong company, said it holds 9.9% of Cummins and may attempt to acquire up to 25% of the company.
But some say the Millers’ purchase marks an ominous turning point for Columbus--a picture-perfect, postcard town whose well-ordered world suddenly seems under siege by Wall Street investors and foreign competition. The diesel engine maker, which has focused on improving its long-term competitiveness at the expense of short-term payoffs, has built a reputation over the years for quality and innovation.
“People here now realize that they must be in charge of their own destiny and can’t always rely on Cummins and the Miller family to take care of them,” said John Rumple, whose Columbus law firm drew up the original incorporation papers for Cummins in 1919. “I think that’s a very healthy development.”
The transaction with Hanson was notable because it was one of the few known instances of private “greenmail” in which a major stockholder, acting without the prompting of the company, paid a premium to buy back another investor’s shares.
Nevertheless, the move could backfire. Some experts say Cummins’ philosophy of investing heavily in research and development may be jeopardized by the added debt that Cummins will incur when, as promised, it buys the Millers’ Hanson holdings and 5% stake in Cummins.
Thus, Cummins may become more vulnerable to a takeover at a time when the company has just spent $1 billion in a decade-long effort to retool to introduce a new line of smaller diesel engines to fend off foreign competitors.
Threat Not Over
In addition, Cummins’ recent completion of a $1-billion investment in a new line of smaller diesel engines makes the company vulnerable to a takeover because it provides a promising new product and no new spending plans as ambitious as the decade-long effort.
Steven Colbert, an analyst at Prudential-Bache Securities, dismisses the possibility of a takeover because the Miller family and the employee stock ownership plan own nearly 25% of the company. “You can argue both ways but I think it’s tougher,” he said. “Twenty to 25% of (Cummins) is now in friendly hands.”
However, Gurudutt Baliga, an analyst at McDonald & Co., disagrees: “The price (of Cummins’ stock) is very sensitive right now to the possibility of a takeover. The Millers can swallow $5 million without batting an eye, but if the stock price drops (as Baliga expects), then you are talking about (the Millers’) taking a bath” and not being able to fight off another potential adversary.
Bold and controversial moves have long marked the career of family patriarch J. Irwin Miller, a one-time Sunday school teacher who was touted by Esquire magazine in 1968 as a presidential candidate. Miller was one of the few business executives to take an active role in the civil rights movement. And he has long been an advocate of corporate community responsibility.
Yet Miller does not view the extra $5 million that he spent as a heroic financial sacrifice for either his family or Cummins. He said the gesture will help eliminate the fear of employees, suppliers and town residents that Hanson would attempt to dismantle the company.
More Stable Now
“In this world there are no perfect solutions,” said Miller, “you just try to make your vault a little less attractive.”
Henry B. Schacht, Cummins chairman, said he’s not certain that the Millers have succeeded in insulating Cummins from a hostile takeover. But, he adds, “the issue is, ‘are we more stable than we were before?’ And I think we are. Anyone who is thinking about acquiring Cummins has to realize that if you want to buy it, you better be prepared to run it” because Cummins does not have a lot of divisions or easily liquidated assets to sell off. “For most takeover people, that’s not the business they’re in.”
Indeed, Hanson, whose American subsidiaries make Smith Corona typewriters and Jacuzzi whirlpools, among other products, has become one of the fastest growing and most profitable industrial companies in the world by acquiring conglomerates and breaking them into independent concerns operated by local managers under strict financial controls. Hanson, which reportedly made $17 million from its investment in Cummins, routinely aims for a return on its investments of more than 20%.
So fearful were some Columbus residents that Hanson would pursue that same strategy at Cummins, that several suppliers began asking Cummins to write contracts that would become void if Hanson acquired Cummins, said William Miller, J. Irwin Miller’s son.
Hanson officials declined to comment on the transaction with Cummins.
In contrast to Hanson, there has never been much uncertainty about Cummins. It has always been, first and foremost, a manufacturing company specializing in diesel engines.
During a period when old-line U.S. manufacturing concerns were getting drubbed by foreign competition, Cummins set the standard among diesel engine makers by applying good management, superior craftsmanship and advanced technology.
Dominated Community
And although Cummins took 16 years after its founding in 1919 to post its first profit, the company has since reigned over the unglamorous but profitable heavy diesel engine industry and supplies more than half the engines powering large tractor-trailer trucks in the United States.
Likewise, Cummins dominated Columbus with a mixture of corporate paternalism and patronage. The company annually donates some 5% of its pretax profit to community organizations and has helped support or establish everything from the local human rights commission to the city’s two symphony orchestras.
“I’ve always seen the Millers as benevolent people,” said Barbara Hull, a nurse and lifelong Columbus resident who was interviewed recently at a county fair in Columbus. “Because of the Millers, Columbus has a lot to offer that a lot of small towns this size just don’t have. I’m glad Hanson didn’t succeed in buying the company.”
In addition to the financial impact, Cummins has altered the look of Columbus. The company has paid for so many renowned architects to design public buildings for Columbus--including a city library designed by I. M. Pei--that the town calls itself, the “Athens of the prairie.”
“Columbus is not like a lot of other small Midwestern towns,” observed Thomas Dell, who owns a men’s clothing store downtown. “Sometimes it seems like it’s Dr. Jekyll and Mr. Hyde here because you have so many contrasts. We have symphony orchestras (and) . . . a lot of wealthy people who play golf, but we also have a local 4-H (county) fair and a pretty significant-sized blue collar work force.”
Yet Cummins and the Millers have seen their influence erode in Columbus, which has lost more than 5,000 jobs since 1978 when the city’s four major companies employed 16,932 people, according to the chamber of commerce.
Recently Cummins tried unsuccessfully to prevent a developer from building a shopping mall on the outskirts of the city instead of a downtown site preferred by the Millers and Cummins officials.
Waiting for Housing
And some poorer residents in the area complain that due to the concentration of high-paid executives in Columbus they can’t afford to buy homes in the city, which has one of the highest household incomes in the state of Indiana.
Even some middle-income residents are chagrined by the city’s plan to convert a local farmer’s cornfield into a golf course to accommodate well-heeled executives from Cummins and Columbus’ other Fortune 500 company, Arvin Industries. They note that the town already has two golf courses. Meanwhile, they say, there are 700 people on the waiting list in Columbus for low-cost, subsidized housing.
“There has been a certain amount of control exercised by them (Cummins) in this town and that sometimes cuts both ways,” said lawyer Rumple. “This is undoubtedly a more affluent community than it would be without them here. . . . But I think the wealth has masked (the existence of) the disadvantaged here. On average, we in Columbus are a wealthy community. But averages don’t tell the whole story.”
So far, Columbus has regained 2,240 of the jobs lost since 1978. But ironically, many of the town’s new employers are foreign-based concerns such as Mitsubishi, Onkyo, Toyota and Enkei, that could eventually challenge Cummins’ waning power.
“We know that with a takeover . . . Cummins might stop spending money on research and development,” said Columbus Mayor Robert N. Stewart. “You know what happens after that--it wouldn’t take long for Cummins not to be a major player in the diesel engine industry and people would lose their jobs. And as large as Cummins is, when it sneezes, everybody else catches a cold.”
