BUSINESS WEEK July 5, 1969 Companies Some glitter is gone at Gulf & Western "There's something in the American way that wants to cheer and hoost a winner, and at the same time look for another champion," broods Charles G. Bluhdorn, 42-year-old founder, chairman, and chief executive of Gulf & Western Industries, Inc. "They put a guy up, then try to shoot him down." Bluhdorn is not merely philosophizing. He is appraising his own situation. A Vienna-born, Hitler-era refugee, Bluhdorn is one of the most successful conglomerators around. Through more than 80 acquisitions in 11 years-starting with a tiny, near-bankrupt auto bumper maker-he has assembled a company with $1.5-billion in sales, with operations rang- ing from cigars and zinc mines to sugar and motion pictures. Over the past five years its per-share earnings soared an av- erage of more than 50% annually, its sales more than 60% a year, and its stock more than six times. By all measures, Bluhdorn has been a "winner" himself. Reverses. But now Bluhdorn and his company are taking their lumps. Since December the stock has plunged more than 30 points, costing shareholders well over $500-million, and now sells at less than eight times earnings. A company that grew largely through merger, G&W has made no acquisitions since last summer. The reason, of course, is Washington's anticonglomerate drive and Wall Street's resulting disenchantment with con- glomerate companies. But like some other conglomerates, G&W has also been buffeted lately by operational problems. Tijese include a strike in a major machin- ery plant, drought in the Dominican Re- public where G&W grows sugar, a soft market in fertilizers, overcapacity in pa- per, and a managerial overhaul in a big manufacturing division. "Not anything we bought is heaven," says Bluhdorn. In the nine months ending Apr. 30, 1969, G&W's operating earnings were down nearly 19% to $39.6-million. On a fully diluted per-share basis, the decline was 25% to $1.51, and operating earnings have fallen for two straight quarters. Says Bluhdorn: "We're riding a plane through bad weather- 1969 is to be a cleanout year for us." It was only because a $19. 1-million gain from securities was added to the oper- ating results that G&W showed a 15% in- crease in total net income for the first nine months of fiscal 1969. In the accounting community, which regards securities profits as nonrecurring income, the com- pany has been criticized for playing down the extraordinary nature of these gains. New test. For an industrial-based com- pany, G&W possesses an unusually big securities portfolio. It was valued last week at more than $244-million, including at least $25-million in unrealized profit. At one point, earlier in the year before profit-taking and before the market's sharp decline, the portfolio was worth more than $350-million, and showed pa- per profits of at least $50-million. For all of fiscal 1969, the company's total net was only $69.8-million on $1.3-billion sales. All of which has raised the question, asked by one analyst: "Is G&W an in- vestment trust, a mutual fund, or an oper- ating company?" Whatever the answer, the company has reached a crossroads. Its aggressively ac- quisitive instincts will be inhibited for some time by the climate in Washington and by its depressed stock. No longer can G&W produce spectacular growth-or p05- sibly conceal a mediocre operating per- formance-with a continuous diet of acquisitions. It now faces the test of gen- erating virtually all its growth internally- and at a time when it is suffering oper- ating setbacks. `Still running.' Is Gulf & Western up to it? "Do not worry about our momentum," Blubdorn says. "We're still running like we did 10 years ago." He even describes the current tribulations as a potential "blessing in disguise-if it weren't for the psychological problems of our small stock- holders." Referring to G&W's acquisition spree during 1966-68, he says, "We suffered indigestion." He rationalizes that a pause will allow more emphasis on in- ternal growth and more time to remedy problems inherited from some of the ac- quired companies. Blubdorn claims that G&W has already averaged from 10% to 15% internal growth annually in recent years. But some analysts are skeptical. "It is impossible to discover the extent of internal growth on the basis of figures as now published by G&W," says one. "If they broke down divi- sional profits and went back five years, then we'd have a better picture." To dramatize claims of internal growth, G&W's president, David N. Judelson, likes to cite before-and-after evaluations of some acquisitions. Two favorite cases are forging companies-one with sales of only $ 12-million after 40 years under the old management, the other with $50-million sales after 60 years. In five years with G&W, the first has grown to $52-million, the other to $82-million. "And the earn- ings increases," Judelson says, "exceeded the increase in sales for both." At least 75% of G&W's acquisitions have been small, family-run businesses with modest horizons, Judelson says. "They didn't want large sales, for this would have required more capital investment. Their cash flow wasn't generating enough for large capital expenditures. We say we want more sales, more market pene- tration, and we rattle and wake up the op- erations." Aside from new capital investments to stimulate growth, another spur to the ac- quired companies has been what those around Blubdorn consistently describe as his "ability to motivate people" and his "personal charisma." Blubdorn's charis- matic qualities are of a very special type. Alger hero. Blubdorn combines the zeal of a storefront preacher, the vigor of an Alpine mountain climber, and the back- slapping spirit of a chamber of commerce booster. He once explained G&W to a group of astonished security analysts as "sort of a youthful disease, youthful hustle . . . Our secret is that we have people with spirit, momentum, and desire at the top. No mountain is high enough for us, nothing is impossible. The sky is the limit." Invariably, Blubdorn describes his per- sonal success in terms of Horatio Alger blended with overblown patriotic rhe- toric. Says he: "I came to this country [in 1942] without a penny, and built a com- pany with 100,000 employees. This is what America is all about. I feel I'm part of the American dream. To be able to do what I've done is a matter of pride to me and to the country." That anyone should now challenge the merit of what he has done is regarded as something of a personal affront. The polit- ical fuss over conglomerates shows, Blub- dorn says angrily, that "the American public puts no value on initiative, the de- sire to succeed, the American dream." Bluhdorn will get a chance to amplify Business Week July 5' 1969 on his grievances later this summer, when he testifies before the House antitrust sub- committee, which is investigating the per- formance of six conglomerate companies. "Charley is just itching to testify," says a Blubdorn aide. Image problem. In a review last year of Gulf & Western's achievements, John Westergaard, president of Equity Re- search Associates, a longtime G&W-touter, unabashedly said: "Not only has [G&W's] growth . . . been matched by few com- panies in the world, but in compiling this record it has gained a secure niche in the folklore of 20th Century capitalism . . G&W represents the prototype of what the American corporation of the future is all about." But not everyone on Wall Street has shared Westergaard's passion for G&W. Despite its dazzling growth rate, G&W was selling at very modest price/earnings mul- tiples- well below other big con- glomerates-even before the collapse of the conglomerate stocks.. And though G&W's earnings grew more than twice as fast annually over the 1958-68 period as IBM and Eastman Kodak, for example, G&W common sold recently at less than one-third the IBM and Kodak multiples. The problem has long been one of "im- age on the. Street. Analysts have been unimpressed by the nature of G&W's ac- quisitions. "In terms of their manage- ments, growth potentials of their products, and operating efficiencies says Roland B. Williams of E. F. Hutton Co., "G&W primarily bought second-quality companies." Williams projects an annual internal growth rate of only about 5% for G&W without important acquisitions. Moreover, G&W has consistently been criticized for its ultra4iberal accounting practices-capitalizing costs that had - been expensed by acquired companies, employing the pooling-of-interest tech- nique when buying a - company at over book value and the purchase-of-assets method when the price was below book value, and minimizing diluti6n in per- share earnings statements until it was forced to make a reporting change. To be sure, virtually every other con- glomerate has done the same sort of thing to create a pattern of steady profits growth. But Bluhdorn, wnho has never been able to shed the stereotype of a flam- boyant wheeler-dealer, has probably re- ceived more lambasting than other conglomerators. Bluhdorn is not good at "verbalizing," says a sympathetic in- vestment banker. "He tends to spnutter, spout, and fume, and makes a bad impres- sion with more sophisticated types." Analysts' views. The negative image has been accentuated by G&W's aggressive stock trading and takeover attempts in the past year in such deals as Armour; Sinclair Oil, Pan American World Airways, and Allis-Chalmers. "They gloss over operating earning de- clines with capital gains," says analyst Williams. "They buy into situations, hoping either to make an acquisition or get out at a huge profit. They seem to be doing stock trading as an end rather than as an incidental operation. This shouldn't be an objective of a conglomerate's man- agement." G&W brushes off the criticism. "Buying and selling securities," says Judelson, "is one of our normal activities. That's as much of an expertise, and requires as much business acumen as bringing a pound of zinc or a box of cigars to market. Where the company makes its profits is of no concern to anyone, as long as it makes profits." But is the company gambling with its stockholders' money in trading stock, as some analysts suggest? Answers Judelson: "If [securities trading] is carefully done, there's no more risk than what we've seen in bad investments in plant and equip- ment and new products by companies we've examined for acquisition. Looking at acquisitions has given us expertise in recognizing under-valued assets." Big deals. In its search for undervalued assets, G&W's first big deal last year was Armour. Bluhdorn says Armour was "like a girl preguant with a lot of babies that are more valuable than the mother." Translated, Bluhdorn figured Armour's non-meatpacking assets were worth more than the stock market's valuation of the company itself when he bought nearly 10% of its stock. The Justice Dept. dis- couraged any idea Bluhdorn may have had about merger, but he sold his holdings at a profit of some $ 16.5-million. In Sinclair, G&W acquired 7% of the stock, made a tender offer for more, which management resisted, then sold out to At- lantic Richfield at what Bluhdorn calls a "fairly substantial capital gain." G&W be- gan buying Sinclair at $72, Atlantic Richfield paid $145 for its shares. - Bluhdorn says merger plans were not on his mind when he bought 8% of Pan Am's stock. But he had ambitious plans for the airline to develop hotel-resort complexes around the world, to exploit the passenger capacity of the new 747 jets and the air- line's globe-girdling route structure. "I lectured to [Harold E. Gray, Pan Am's chairnian and chief executive] like a pro- fessor," says Bluhdorn, "about the things we could do in Pan Am to increase our in- vestment two to three times." Bluhdorn, however, was unable to infect Gray with his own enthusiasm. "They were running a glorified country club," he says dis- gustedly, "and after a while I realized what it was." Bluhdorn has since sold a big block of his stock to Resorts Inter- national, raking in what he calls "big money on the deal. G&W 5 overtures to Allis-Chalmers-also rebuffed by the management-were also less profitable. The G&W holdings, amounting to one-third of the stock, were sold to White Consolidated Industries. Bluhdorn says he came out even on the deal. A-C claims G&W realized capital gains as an insider and is suing to recover the alleged profits. Gulf & Western's portfolio now in- cludes nearly 10% of Grumman Aircraft shares; 250,000 shares of White Consoli- dated, partial payment for the Allis-Chal- mers stock; a warrant to buy 618,000 shares of Atlantic Richfield, a partial pay- ment for the Sinclair stock; 500,000 shares of Resorts International and a huge block of warrants, partial payment for Pan Am; and $4-million worth of convertible notes of Perfect Film & Chemical Corp. Some of these have been badly beaten down in recent weeks. Hectic courtships. Discussing whether he is essentially trading in securities or is seriously interested in merger in deals of these types, Bluhdorn says: "We have made investments . . . that . . . along the way might in some cases lead to an en- gagement ring, maybe- a dinner home as part of the family, and perhaps a wedding in the process." These hectic courtships tend to obscure the fact that G&W is a smoothly run oper- ating company made up of 12 product- line groups and a corporate staff of some 200 executives. "Running a con- glomerate," Lammot du Pont Copeland once said, "is a job for management ge- niuses, not for ordinary mortals like us at Du Pont." Judelson, a pugnacious, re- markably self-assured man of 40, is amused by Copeland's statement, and sees nothing extraordinary in managing a con- glomerate. He explains plains G&W's managerial philosophy this way: "We don't believe in autonomous oper- ations, nor in a central staff that can run far-flung operations. How do you marry the two ideas? You set up the groups as profit centers, and make the group vice- presidents part of the corporate staff. This may sound like nothing, but it's every- thing. We have communications- this bridge between operational people in the field, working day to day with the corpo- rate staff. We have the best of all worlds." In this "best of all worlds," Judelson is largely in charge of both the staff and the operating groups. Bluhddrn now devotes most of his time to running Paramount Pictures and the company's investment portfolio. Close to liquidation when G&W took over, Paramount this year has recorded the highest box-office revenues in its history. It expects td gross some $90- million ion on a total investment of $11-mil- lion in five low-budget hits now running- Goodbye Columbus, The Odd Couple, Rosemary's Baby, Romeo and Juliet, and If-but has at least $60-million tied up in six films still in the works. Political furor. Blubdorn and Judelson are acutely sensitive about the political furor that surrounds conglomerates and by the sickening market plunge of their stocks. (Bluhdorn himself owns about 5% ion of G&W's outstanding common minon, the direc- tors and top management a total of 11%.) They have become overly defensive about the company's posture, and never tire ar- guing about its financial strength. The company, they say, covers its debt- interest charges better than three times before depreciation and four times after, and is in a very liquid capital position with about $600-million, including mar- ketable securities. Moreover, they stress, G&W's long-term debt of roughly $ 1-bil- lion (excluding Associates Investment Co.) is at low interest rates, from 4% to 5 3/4%. Much of the debt is convertible into G&W common at $58, a premium of some 200% over the current price. Including Associ- ates Investment, G&W assets- are $3.5-bil- lion, with $500-million in real estate. To offset G&W's disastrous stock market performance, Bluhdorn is thinking about emulating a tactic made popular by con- glomerator James Ling-spinning off some subsidiaries as public companies, but re- taining a majority interest in each, to niaintain separate markets. "Major por- tions of G&W would sell at higher mul- tiples than G&W itsel{" says Bluhdorn. This is probably not the kind of tribute Bluhdorn would like to pay to the corpo- rate empire he has built. Indeed, he says: -"Some day if conglomerates get low enough in price, there may be a tender offer for G&W, and I'll look for a new job. But I want you to know that's the Amer- can way." End Thinking big to make the big league "We are not an average company, says Charles G. Bluhdorn, chairman of Gulf & Western Industries. "When you start with $2-million in sales and end up with $1.5-billion, you're going to be a subject of controversy." Bluhdorn's "controversial" com- pany began taking shape in 1958 when he bought a Honston auto parts distributor and Michigan Bumper Co. "Neither one amounted to a hill of beans," Bluhdorn says. He ac- quired them as the nucleus of what was to become a large auto parts dis- tribution network, an operation he recognized as fertile ground for profits and growth. At the time, Bluh- dorn was only 31 and had built a pri- vate fortune in commodities trading. He quickly brought two young partners into the venture: John H. Duncan, a Houston coffee manufac- turer, and David N. Judelson, an en- gineer who was managing a family- owned metalworking plant in New Jersey. Bluhdorn had had an option to buy the Duncan family's coffee business (it was later sold to Coca- C9la), and Judelson was a friend. Growth. Late in 1965, the com- pany began to expand its horizons. At the time, G&W was essentially an auto parts maker and distributor with vol- ume less than $200-million. (G&W's network of 31 full-line warehouses, 158 jobber outlets, and 455 `indepen- dent franchised jobbers now ranks as one of the nation's largest.) ion The first step into a new field was acquisition of cash-rich New Jersey Zinc Co. The deal was stimulated by Harold U. Zerbe, a Reading, Pa., businessman, who had sold Eluhdorn his regional auto parts distributorship and who was a director of both G&W and New Jersey Zinc. To swing the deal, Bluhdorn borrowed $84-million in a matter of days from Chase NIan- hattan flank. New Jersey Zinc put Bluhdorn in an entirely new league, far beyond the world of automotive parts. With- in the next two years he picked up Paramount Pictures, which in turn acquired Ty's Desilu Productions; South Puerto Rico Sugar; E. W. Bliss Co., producers of rolling mills and presses; Universal American Corp., a diversified industrial equipment maker; Consolidated Cigar Corp.; Associates Investment Co., an insur- ance, banking, and finance concern; and a 68% interest in Brown Co., a paper producer. Interspersed with these big acquisitions were several smaller ones that involved real estate, race tracks, and publishing ventures. Haggler. To a large extent, Bluh- dorn bought companies with under- valued or hidden assets, then bor- rowed heavily against them to put his hands on large chunks of cash. "Eluh- dorn loves the acquisitive oprocess, says a Wall Streeter who has been close to G&W. "He's a trader at heart, a great haggler." To facilitate the process, G&W maintained during its busy acquisition days what Judelson called "a complete inventorv" of securities to meet sellers' terms. The company's highly complex capitalization includes convertible debentures, convertible notes, two is- sues of convertible preferred, a non- convertible preferred, and common stock. G&W's acquisitions have been made with cash, debt, stock, war- rants, or combinations of these. Says an analyst, "Gulf & Western's acqui- sition technique in itself became a growth product." About the only time Bluhdorn failed to think big about the company he formed was when he named it. Gulf & Westeorn reflects the com- pany's Gulf Coast origins and Bluh- dorn's view that the biggest growth would 1(1 l)e westward to California.