Why Should White Guys Have All the Fun?

by Reginald Lewis

  Exciting things were happening on Wall Street and Lewis was itching to get into the game.

  One day, Lewis chanced upon a Fortune magazine article that focused on The McCall Pattern Company, a designer, manufacturer, and marketer of home sewing patterns. McCall’s parent company was Norton Simon Industries, a multibillion dollar conglomerate with its hands in everything from Avis rental cars to Hunt Wesson food products.

  In 1983, Norton Simon was acquired in a hostile takeover by Esmark, Inc., another conglomerate that owned among other companies, Swift, a meat and poultry producer, and Playtex, a maker of women’s undergarments. Esmark head Don Kelly was quoted in the Fortune article as saying that McCall was one of several Norton Simon companies that didn’t mesh with Esmark’s long-range plans. When Lewis read that, his eyes lit up.

  Lewis had represented Norton Simon in 1973 when it sold McCall’s magazine to Capital Cities-ABC. From the due diligence he’d done in that transaction, Lewis had learned quite a bit about the pattern company’s operations. Intrigued by the Fortune piece, he put in a call to Tom Lamia. Lamia had served as Lewis’s lawyer in the abortive attempt six years earlier to buy Almet, the California furniture firm.

  Lewis told Lamia he was giving some thought to taking a run at McCall and solicited Lamia’s suggestions on how to get the ball rolling. Lewis liked some things about McCall that repelled other potential suitors. For one thing, fewer women were staying at home to sew and the home-sewing market had been declining at a rate of roughly 9 percent each year since 1976, when 171 million home sewing patterns were sold. And McCall, a wholly-owned subsidiary of Norton Simon, had no long-range expansion plans.

  Consequently, Lewis could practically envision a giant “Discount” sign hanging around McCall. He would buy the firm on the cheap, light a fire under management, reduce expenses, and increase profitability. Then he’d sell it after a few years. McCall would be Lewis’s toehold the realm of high finance.

  On July 29, 1983, Lewis began his campaign in earnest. He created TLC Pattern, Inc. for the purpose of taking over McCall. He also created a Delaware-based holding company, TLC Group, Inc.

  In June of 1983, Dave Mahoney CEO of Norton Simon, announced a proposed management buyout of Norton Simon, Inc. My law firm had done some work for NSI in the past and had an excellent relationship with the company. My interest was not merely in the potential effect on my law practice, but also in whether one of the businesses under the NSI umbrella might be for sale if the buyout went through. I pulled out several years’ worth of NSI annual reports and their 10k (an SEC document with detailed financial information on a corporation) and started poring over the various businesses. There were a number of potential acquisition possibilities.

  Don Kelly of Esmark announced his interest in NSI and put in a bid superior to Dave Mahoney’s. Anderson Clayton and KKR were also nosing around, I studied Don’s bid and concluded that it was a great deal for Don and for Esmark. The jewel of NSI was Hunt Wesson, but there were other valuable properties like Avis and Somerset Imports, which had Johnny Walker scotch, Glass Containers Co., and lots more. There was also $40 million to $50 million of holding company overhead that could be eliminated and good cash on the balance sheet. There was plenty of debt, but much of it was off-balance-sheet and related to Avis. Don Kelly was masterful in his approach, and in July he took NSI for Esmark.

  I remember calling Cam Trowbridge, longtime general counsel of NSI and a friend and a client, shortly after the deal was announced, We had lunch a few days later at the Boardroom, a luncheon club on Park Avenue, a favorite NSI watering hole. Cam, always pleasant, thanked me for offering my help during the hectic past few weeks and said that things had moved so fast that he hadn’t had an opportunity to get me involved. I said I’d imagined as much and fully understood, I then made the faux pas of remarking that “I thought Esmark was not paying enough.”

  Cam gave me a benign look that suggested I was nuts. “Reg, they are paying a billion dollars. Before this deal, the market cap was about $600 million.” I let the matter drop with something like, “Well, I always felt NSI was a great company even at that price.”

  We then turned to other topics. I told Cam that I needed a change from practicing law and was interested in buyouts. I asked him which management teams within NSI did he especially like, and so forth. Around dessert, I mentioned McCall Pattern Co. and sought his views about its management. Cam gave them high marks across the board but said the market for home sewing was going down and not likely to improve.

  I asked him who I should call if a group I represented might be interested in taking a crack at buying it. Cam said the Esmark people would, of course, call the shots. But Bob Walter, who was Dave Mahoney’s finance man, was staying around through the transition and would be a good place to start. Cam knew that I knew Bob and suggested I give Bob a call, and he said he would let Bob know of my interest. We parted in a warm and friendly manner, as usual.

  I called Bob Walter that afternoon. Bob took the call right away and said that Cam had just called and mentioned my possible interest in McCall’s. Bob said Esmark would probably want to sell it, and he would pass along our group’s interest to the Esmark people. He also said McCall would report to Joel Smilow, who ran International Playtex for Esmark. Bob said he would get back to me.

  A few weeks passed and I’d heard nothing. I called Bob a few times, but could not get through. During that two or three weeks, I gathered as much information as I could on McCall. I put together a small summary of financial data and, most important, read everything on Simplicity, which was a direct competitor of McCall’s and a public company controlled by Charles Hurwitz, the Houston investor and deal man.

  The more I looked into Simplicity and McCall, the more I liked the business. It had very high profit margins, value-added products, brand names, and excellent distribution—and it generated significant cash.

  At the same time, I was also working on a deal involving six radio stations. It had been brought to me by Phyllis Schless, who was then at Bear, Stearns. Even though our radio deal didn’t go through, I was very impressed with Phyllis’s approach, which was to try and keep things on track. I showed Phyllis my assessment of the McCall situation, told her of my earlier conversations with Bob Walter, and said I thought it was time to go directly to Esmark. Would she arrange a meeting?

  Phyllis put in a call to Joel Smilow who was the head of Esmark’s Playtex division and responsible for McCall. Yes, they would entertain offers and were willing to meet. Within hours after the meeting had been set up, Bob Walter called and was beautifully candid. He said management was trying to put something together at McCall Pattern but they’d had enough time and that he had let Smilow know of my group’s interest. I asked Bob if he would let the Esmark people know of my prior favorable dealings with NSI. Bob said he would, but not to worry about all that. He wished me luck and said, “Reg, they want to sell it.” I quickly asked if he knew of any other interest in McCall, and Bob said, “I don’t know of any. Most people don’t like its prospects.”

  I gave Cam a call and asked him to tell me a little more about McCall’s management. I also asked him to give McCall CEO Earle Angstadt a call and let Angstadt know I would like to meet.

  Now, this was the team for the meeting with Smilow: There was Phyllis, of course, Tom Lamia and myself, and Doug Walter, a very bright tax lawyer from Chicago. I did not have a top finance man, but that would come later.

  After studying McCall’s financial situation, Lewis had determined that McCall was worth at least $18 million. Schless had advised him that because he was an unknown quantity and a novice at the acquisition game, in order to succeed his bid would have to be higher than any competitor’s. In other words, he would have to pay a premium, the price of admission, as it were. Lewis agreed.

  The role of investment bankers in this world generally, and in the business world specifically, is one of the great mysteries of the universe. The simple fact is that you don’t hire
investment banks, you hire people—or in some cases, a person. Because Phyllis Schless had labored for many years on Wall Street with one of the top investment banks in the country, Bear, Stearns, I wanted her thoughts about the price to pay for McCall.

  Doug Walter, a tax lawyer, was important, too. I always respected Doug’s ability to think through a problem. Actually, I utilized Doug’s services as much for this as his tax skills, which are considerable. In chatting with Doug about McCall, I said, “Okay, we want to take this—let’s discuss the key points.” Doug asked about price, but I suggested we forget price for the moment, since that was simple. I was being a little cute, but I meant it.

  Doug went along, but asked, “Okay, why?” I said, “Because No. 1, we will require a financing condition to our bid and, No. 2, we will offer whatever we can finance.” Doug said, “So Reg, you want to be preemptive?” I liked that line and would use it often thereafter. TLC would be preemptive in its approach.

  McCall was earning about $6 million in operating profit. This was a figure I would repeat often. The fact is, however, I never focused on earnings. Others like to hear it so I repeated it, but I kept my eyes glued on cash flow. When I worked through the numbers, over a 2½-year period NSI had pulled about $18 million in cash out of McCall. That, then, was my price—$18 million. In my heart I was ready to go higher.

  Before meeting with Smilow, Lewis, Tom Lamia, and Doug Walter put their heads together and crafted a letter of intent that outlined the terms of their offer for McCall. They would offer Playtex $20 million in cash and $2.5 million in subordinated debt, a total of $22.5 million and $4.5 million more than Lewis’ original price of $18 million.

  The letter of intent for Smilow said the McCall offer was being made by the TLC Group, TLC being an acronym for The Lewis Company. Lewis had a proclivity for giving his acquisition vehicles and his companies personalized acronyms—recall the birth of Republic Furniture and Leisure, Inc. (RFL) in the failed Almet deal. In future years, Lewis would smilingly deflect queries from reporters curious to know what the TLC in TLC Beatrice stood for.

  Lewis had more work to do before the Smilow meeting. After his failures with the radio stations and Almet, he decided to play things differently with McCall. Reluctantly, Lewis decided to rely on a little guile. Instead of presenting himself as the person looking to buy the company, Lewis claimed to represent a consortium of investors. He knew everyone on the other side of the table would automatically assume the members of the investor group were white. Because Lewis did not hold himself out as the potential acquirer of the McCall Pattern Co., he could at least rest assured that race was not a factor if he failed this time.

  He discussed his strategy with his wife before going after McCall and she supported his idea. “Yes, darling, you’ve got to go with guile on this one,” she told him. Lewis asked his friends who had been on the board of Caribbean Basin Broadcasting to invest in his bid. Only two, Sam Peabody and Rick Olivarez, could come up with money quickly enough to help finance his acquisition effort. Peabody and Olivarez contributed $10,000 and $5,000, respectively. Now Lewis could maintain, with a straight face, that he was representing an investor group.

  Lewis rented a stretch limousine for the trip to meet with Smilow in Stamford, Connecticut. Lewis was excited and ebullient during the journey, confidently mapping out his future plans for McCall as though the purchase were a fait accompli. After Lewis and his team pulled into the parking lot of International Playtex headquarters, they were ushered inside and made to cool their heels for about an hour. Normally, Lewis would never have endured a 60-minute wait. But in this instance, he had little choice.

  Playtex headquarters were in Stamford, Connecticut. I hired a limo and we all piled in for the one-hour trip. When we arrived, we met Smilow, who had Hercules Sotos—his longtime right hand—and Coleman, his longtime counsel with him.

  I opened by thanking them for meeting with us and said I represented a group that was interested in McCall Pattern. Smilow said they were open to offers and that McCall was a good business that really did not fit with their plans. We agreed to exchange some information. They gave us McCall’s business plan for 1983 and a good bit of other information. They said they would tell CEO Earle Angstadt of our interest and ask him to cooperate. The meeting went very well. Finally, I was talking to professional managers who did not want to fool around and posture. This deal felt right.

  Smilow, Sotos, and Coleman received the TLC delegation in a huge conference room. Initially, Smilow was quite curt with Lewis. “What’s this all about?” he asked brusquely. “I got this letter—who are you?” Lewis told Smilow that he and his team were the TLC Group referred to in the letter and that they wanted to buy McCall.

  “Who are your investors?” Smilow demanded. Lewis cagily responded, “I can’t say right now.”

  Smilow began looking around the room, fixing his gaze first on Lamia. “How about you, Tommy, are you an investor?” he asked. Receiving a noncommittal answer, Smilow turned to Doug Walter. “How about you, Doug, are you an investor?”

  Lewis didn’t want his people to say yes, but he didn’t want them to say no, either. Smilow’s pointed questioning made for some uncomfortable moments. But Lewis accomplished his initial goal of getting his foot in the door. Smilow ended the meeting by setting a deadline for Lewis to produce a commitment letter from a financial institution pledging to come up with most of the McCall purchase price.

  Personal credibility is priceless in most fields of endeavor, but particularly so in high finance. Lewis had assembled a quality team, a fact not lost on Smilow.

  “He came in with financial advisers who were credible,” Smilow recalls. “He was very smart, gentlemanly, dignified, tough. The kind of person you like to deal with.”

  Here Sotos liked what he saw of Lewis also. “He bowled us over,” Sotos remembers. “He came in prepared, he came in attuned to events that were unfolding, he was able to get the financial support he needed from the banks and he was determined to do it. He said, ‘Here, I’m going to do this deal.’”

  But it would take a lot more than favorable first impressions for Lewis to win McCall. To facilitate his quest, Lewis devised the following division of labor at Lewis & Clarkson: He and Kevin Wright were to devote all of their time to the McCall transaction, while Charles Clarkson and Laurie Nelson were to continue doing the legal work that paid the bills.

  In the meantime, Lewis boned up on the sewing pattern business and on McCall. He may not have grasped the minutiae, but from a macro-economic standpoint Lewis had an excellent sense of how the pattern industry operated. That’s because he would sit down at his desk in his law office or in his den at home and study the business until he understood what made it tick.

  An obsession of his was to “get behind the numbers” generated by a business. In the course of reading prospectuses, he would grab Kevin Wright or Charles Clarkson and say, “Here’s a figure on the page. I want to understand why that number is there, what are the components that go into making up that number. What individual had to do A, B, C, and D to make it what it is? And why isn’t it better?”

  When not studying the pattern industry, Lewis was making sure his business advisers for McCall were earning their keep. He held a number of animated, late-night discussions with Phyllis Schless, Tom Lamia, and Doug Walter that lasted until the wee hours of the morning.

  “The McCall transaction was a much more emotional transaction for him than anything that happened subsequently,” Schless observes. “He was really deeply involved in it, not simply analytically, but emotionally. It was the first real big test of ‘Could he do this?’”

  Lewis also consulted a few other people outside his circle of advisers, freeing him of the burden of constantly having to appear the supremely confident leader. One person whose counsel Lewis sought during the McCall deal was Joerg Klebe, who was involved in Lewis’s Caribbean radio deal.

  “He showed up at my office every day to tell me about the progress
and ask me, ‘Should I do this or shouldn’t I do this,’” Klebe says. “The deal kept changing and he was very uncertain about whether he should or should not do the deal. I said, look, this is a great opportunity for you. Go for it. I was prepared to give him a million dollars for the deal, except that he didn’t want to sign for it personally.”

  McCALL—PUTTING IT TOGETHER

  Lewis had other ideas about how to get the finances necessary to buy McCall. First though, he had to meet with McCall’s management.

  Let’s forget price. This was a people deal and I had to get to know management.

  Enter Earle Angstadt. Earle is right out of central casting for a CEO. Tall, blond, blue eyes, well-tailored, and in command of the social graces. He had been CEO of McCall’s for 15 years and had survived when many division presidents at NSI could not.

  When I called Earle and said I’d like to get together, the first thing he said in a rather crusty way was, “What are you going to do for management?” My response was, “Let’s talk about that.” We had our first of many meetings at the Harvard Club. He came dressed in a corporate blue Brooks Brothers suit, looking great. I was well prepared for the meeting. I knew his background and had a couple of people call him to let him know I didn’t have horns.

  I decided to sell him. I opened with my work in putting deals together. I knew how to buy this company. Would he run operations substantially as he had in the past? I needed his knowledge and experience. Of course I could find another manager, but if it ain’t broke, why fix it? Earle and I both looked each other right in the eye and decided to continue taking small steps together. He had been told to cooperate.

  Good relations with Earle enabled us to expand our team rapidly. I decided we would piggyback on the McCall organization, which was formidable.

  Lewis’s acquisition strategy called for recruiting the top manager of the target company. He intended to set the strategic direction for the company, while a professional manager ran day-to-day operations. That was why he needed Cammer in the Almet deal. To do McCall, he needed Earle Angstadt.