Why Should White Guys Have All the Fun?

by Reginald Lewis

  Lewis was in limbo, and the day-to-day uncertainty was grinding on him and his acquisition group.

  One night, after working at 99 Wall Street until 1 A.M., Lewis and Wright were on their way out together. They had something of a late-night ritual where Lewis would drop Wright off at the World Trade Center to catch a commuter train to New Jersey.

  As they waited for the elevator, Lewis looked Wright in the eye and asked, “Do you think we’re going to get this done?” Wright answered unhesitatingly, “Yeah, Reg. I do.”

  Lewis smiled and replied, “I do, too.” Wright’s vote of confidence had been reassuring.

  In the meantime, the calendar was inexorably moving forward. November gave way to December and still there was no word from Smilow. All the while the meter was running among Lewis’s business advisers, lawyers, and accountants, who were accumulating fees by the bushelful as Smilow continued to beat the bushes for a more lucrative offer.

  Acutely aware that the passage of time was costing him a small fortune, Lewis responded with an interesting gambit. He ushered Phyllis Schless, Doug Walter, and Tom Lamia into a conference room and laid a very big carrot on the table to encourage them to get the wheels turning on his transaction once again.

  “I don’t know what you guys can do that you aren’t already doing,” he said, “but I want to be sure you do it. So I’m going to double your fees on the deal if we get this thing closed in a reasonable time frame.”

  Bankers Trust was also eyeballing the calendar. Financial institutions pledging millions of dollars for corporate transactions can’t sit by forever. Bankers Trust had their lawyers send Lewis a letter that essentially said, “You haven’t done what you said you were going to do and Bankers Trust is no longer committed to providing you with $19 million.”

  Worried, Lewis began to approach other potential financial backers. Christmas was approaching and he could feel the deal slipping away. Lewis might wind up having to ante up hundreds of thousands of dollars in expenses with nothing to show for it. Each passing day solidified Lewis’s and Wright’s view that Lewis was being jerked around because he’d pulled off his end of the bargain too skillfully and stood to make too much money for himself if the transaction was consummated.

  One evening, Lewis was working in the study of his home with the television on when Jesse Jackson appeared on the screen. Jackson was talking about running for President. Lewis would later relate to a close confidant that a single thought ran through his head, “If this man can run for president of the United States, I can buy the McCall Pattern Company.”

  CLOSING THE DEAL

  By January 1984, it was clear to Smilow that Lewis held the most attractive offer. Smilow asked for a meeting, this time agreeing to come to Manhattan.

  The meeting was held at the Yale Club, to which Smilow belonged. Years later, Smilow and Lewis would become good friends and even discussed the idea of combining Playtex and TLC Beatrice. But as the McCall deal was being finalized, Smilow was not Lewis’s favorite person.

  Smilow sought more advantageous terms than he’d originally requested: Now he demanded a 7.5 percent stake in TLC Pattern, Inc., the holding company Lewis had established to control McCall Pattern Co. Lewis was not pleased by Smilow’s new demand, but he was anxious to close the McCall deal, so he acquiesced.

  “You reach a stage where you almost have to close,” Doug Walter explained. “You’ve got to make the last concession because you’ve got so much money invested in it that the only way you can get it back is to get the company. It doesn’t give you a whole lot of leverage.”

  Bankers Trust said that it would stand by its commitment of $19 million, prompting relieved sighs all around.

  The final terms of the agreement called for Lewis to pay a cash price of $20 million and give a note worth $2.5 million as well as the warrant for 7.5 percent of the new entity. The deal required McCall to have at least $1,855,000 in cash on its balance sheet by a specific date. Anything less than $1,855,000 would be subtracted from the purchase price; anything more would be added to the purchase price.

  The McCall transaction was back on track but Lewis was still not at the finish line. From a logistics standpoint, a corporate buyout is one of the most complicated human endeavors imaginable. The point man, in this case Reginald Lewis, has to ride herd on scores of major and minor transactions and crises, any one of which could be a potential deal breaker. Equity has to be raised at the same time banks are being contacted about how much money they’ll give and what their lending requirements are. Due diligence has to be conducted on the target company, which entails burrowing through mountains of records and making sure everything is in order. Armies of lawyers, accountants, and investment bankers are all working simultaneously at a fever pitch, sometimes at cross purposes due to miscommunication or petty rivalries.

  Someone must act as a conductor to orchestrate the efforts of these hundreds of players into a smooth and efficient exercise. The role of maestro fell to Lewis. Everyone looked to him for their cues. He was stepping into a role unlike any he had played as an attorney, and he had to remain calm and upbeat when situations were particularly tense or bleak. Lewis rose to the challenge magnificently.

  When Lewis was under intense pressure, his palms tended to sweat and they remained moist throughout the final stages of the McCall transaction. Otherwise, Lewis showed no outward signs of concern or worry. He had worked out this deal in his head many times, gauged the strengths and weaknesses of his team, and formulated a game plan for making an intricate and unwieldy transaction manageable. So when closing time came on the McCall deal, Lewis had his various players and their roles already assigned.

  Tom Lamia was to be Lewis’s quarterback. Lamia was responsible for handling negotiations, tax planning, and the drafting of documents during the course of the negotiation. Doug Walter would be a backup quarterback who would serve as a second pair of eyes for Lamia’s work. Charles Clarkson was assigned the role of document control, keeping tabs on the blizzard of paperwork the deal was manufacturing and making sure that documents wound up in the right place at the right time. Laurie Nelson was responsible for intellectual property agreements, which govern things such as trademarks. Kevin Wright was to review all employment agreements for key McCall personnel.

  Originally tasked with finding bank financing, Phyllis Schless served as a Lewis confidante who helped keep him focused on the big picture as the deal progressed. Lewis’s role was that of field general and big kahuna.

  “He didn’t want any sloppy work,” Lamia recalls. “He didn’t want any confusion. He didn’t want anybody stepping on his lines. He wanted to be the star of the occasion.”

  Lewis never lost sight of one simple fact throughout the complex buyout: He wanted the McCall Pattern Company. Period. He made full use of his ability to cut to the heart of a problem and to understand interpersonal relationships. Also, once Lewis staked out a position on some point, he never publicly wavered on it. He entertained plenty of second thoughts in private about the McCall deal and tended to agonize—even procrastinate—when it came to major decisions. But that process wasn’t for public consumption.

  His outward appearance of making a decision, focusing on it in the face of myriad distractions and not displaying any doubt would prove invaluable.

  Toward the end of the transaction to acquire McCall, Lewis began to follow a pattern of behavior that first surfaced during the failed Almet transaction. Until he was reasonably certain the target firm was within his grasp, Lewis would unfailingly appear at every meeting, every negotiation, every brainstorming session. However, once it appeared that he would prevail, he kept a low profile until the actual closing. Lewis would give his troops their marching orders via the telephone in the meantime. Although not present physically, Lewis stayed on top of developments like a hawk and was intimately familiar with the smallest setback or bit of progress.

  When obstacles were encountered, Lewis generally had a Plan B already at hand and waiting
to be implemented. “He was very unusual in his ability, or desire, to keep his options open until the very last minute,” Doug Walter says. “He was constantly keeping alternatives in front of him in order to sort of be able to rearrange them at the last minute.”

  As Lamia and Playtex’s attorney negotiated the purchase agreement for McCall, Lamia reported back to Lewis by phone, walking Lewis through a 40-item checklist issue by issue. After conferring with Lewis, Lamia would then go back to the seller’s lawyer and the issues were gradually narrowed until an agreement was at hand.

  The process took about four days. In the course of negotiating one contract, Lamia made a concession on a confidentiality agreement that Lamia assumed he had the authority to make. When told of the concession, Lewis was livid. “You mean to tell me you would just take it upon yourself to do something like this without asking your client?” Lewis screamed at Lamia.

  “Reg, either I have the authority to negotiate or I don’t,” Lamia countered. “This is the kind of thing I’ve got to have some discretion about.” The explosion caught Lamia off guard, because it was the first time he had experienced the legendary Lewis temper directed at him.

  In the meantime, Lewis had a pressing matter to deal with prior to closing: He needed $1 million in cash. He was very methodical in his approach. Who would be a logical person to hit up for that kind of money? A good place to start would be with McCall’s top managers: Giving them an equity stake in the company would stimulate them to seek optimum results. Plus, who would be easier to sell on McCall than someone already intimately familiar with it? Lewis put the touch on Earle Angstadt and Angstadt’s second in command, Bob Hermann.

  “He had acquired cash elsewhere, but he was very anxious for my check,” Angstadt says. “I put in about $110,000. My associate at McCall, Bob Hermann, put in $67,000. Reg was very anxious to get that money, because I think he was on the hook for it.”

  Lewis already had $15,000 from friends Sam Peabody and Ricardo Olivarez. He then turned to one of his MESBIC contacts, Equico Capital Corp., and came away with a loan of $500,000.

  Finally, Lewis asked his banker, Robert Winters of the Morgan Bank, for a personal loan of $500,000 which Lewis promised to repay within a month. Such was Winters’ faith in Lewis that the loan was made on an unsecured basis. Lewis now had more than he needed to close the deal, but kept that little piece of information to himself. And true to his word, Lewis repaid the Morgan loan in a month’s time.

  It was raining and snowing in Manhattan the Friday before the McCall transaction closed. Lewis, Kevin Wright, and Jean Fugett, Jr. had just come from Equico and they were standing at an intersection waiting for the light to change as a slate-colored sky drenched them with chilling precipitation. All three men were weary from working round-the-clock on the McCall closing. Looking at Wright and seeing that he was clearly fatigued, Lewis said, “You don’t have to come in tomorrow, take Saturday off. Just come ready to deal on Monday.”

  Wright walked off toward a midtown destination where other closing matters awaited. Before he left, he gave Lewis a contact phone number. As Fugett waited, Lewis used a pay phone to call Clarkson back at Lewis & Clarkson.

  “Wright is standing by if you need him,” he told Clarkson. “Call him if you need something taken care of.” Not long afterward, Clarkson summoned Wright to the law offices, but there was no work to do when Wright got there. When Lewis called again to check up on things, he was furious to learn that Wright was sitting by idly when there was plenty of work to do on the McCall deal.

  “Why the hell did you call him up there if you don’t have anything for him to do?” Lewis barked into the phone. “Why do you have him there when he could be doing something else?”

  In the meantime, McCall’s chief financial officer had come up with a balance sheet showing the company had less than $1,855,000 in cash on its books. According to the agreement between Lewis and Playtex, TLC Pattern Inc. was owed $627,000, the amount of the deficit. Esmark balked at paying the amount and the matter was sent to arbitration. Lewis won in arbitration a year later and as part of the settlement was allowed to repurchase the TLC Pattern, Inc. stock—7.5 percent—that Smilow had demanded. As a result, all of the common stock in TLC Pattern was controlled by Lewis.

  On January 29, 1984, the date of the McCall closing, everyone wondered about the $1 million Lewis was supposed to bring to the party. It should have been taken as an article of faith that he would show up with it, but not everyone was so sure.

  “Until the day we got to the closing, everybody thought that some white guy was the money man and he was going to appear at the last minute,” Kevin Wright says.

  Lewis arrived early at the offices of Kaye, Scholer, Fierman, Hays & Handler, a Manhattan law firm where the closing was to take place. After visiting the suite of offices reserved for the McCall closing, Lewis and Wright went downstairs to take care of some other matter.

  Meanwhile, businessmen associated with the closing were starting to trickle into the closing offices upstairs. Where was Reginald Lewis? Surely he wasn’t going to be late for the closing? Was he out somewhere making a desperate, last-ditch effort to round up the $1 million, or was he really just a front man all along?

  When the check for $1 million arrived, it wasn’t with a white businessman making a dramatic last-minute entrance, but in the hands of Reginald Lewis. He hadn’t lied when he claimed to be representing investors trying to buy McCall; Lewis just hadn’t bothered to say that he would be the principal owner. It is worth noting that he’d gotten a major deal done only after diverting attention away from himself—and his race.

  As Lewis took his place at a conference table in one of Kaye, Scholer’s offices, he got another vote of confidence from Peter Offerman, who’d made the $19 million in Bankers Trust money possible. “I already put $20 million in your bank account,” Offerman coolly volunteered.

  As the final touches to Lewis’s deal were administered, one part of Kaye, Scholer was devoted to real estate closings for mortgages on McCall land and property. Banking people were in another room. In the conference room that served as the nerve center was Reginald F. Lewis, standing serene and dignified near a conference table. Comporting himself in the manner of a powerful captain of industry would be no problem—Lewis had always carried himself that way. He was flanked by a coterie of advisers seated at the table, including Tom Lamia, who periodically passed along documents that required Lewis’s signature.

  Like falling dominoes, the conditions for closing McCall were being satisfied one by one. Several hours had elapsed by the time the last document had been signed. The only thing left to do was wire the money to the bank. Afterward, Lewis and the scores of people working for him waited for the ceremonial confirmation of the wire transfer, which would signify that the deal was closed. When confirmation came, Lamia turned to Lewis and said, “We’re now closed.”

  Reginald F. Lewis was now the chairman of the board of the McCall Pattern Company. He had managed to acquire the company for $22.5 million without putting up a cent of his own money.

  Lewis approached Lamia and did something he had never done before: He hugged Lamia, an act out of character for Lewis who hated being touched by nonfamily members. Lewis then handed Lamia his fee, a check for $75,000.

  Although there was no doubt McCall belonged to Lewis, he still wanted to see something indicating it was his. He turned to a beaming Kevin Wright and said, “Okay, Kevin, where’s my stock certificate in TLC Pattern, Inc.?”

  A look of dismay flashed across Wright’s face. “Oh, shit!” he thought. In fact, Wright realized that no one had prepared Lewis’s stock certificate, which would have been a big issue only if Lewis had been hit by a bus after leaving the closing. Still, Lewis wanted to see and hold that piece of paper, tangible evidence that he was attaining his true station in life. Wright scurried from the room and hastily had a stock certificate with Lewis’s name on it prepared.

  After all the I’s are dotted and T’s c
rossed in a corporate buyout, it’s a tradition for the investment banking firm involved to throw a party in honor of the new purchaser. Bear, Stearns never held such a celebration for Reginald Lewis, to the consternation of Phyllis Schless. Chagrined, Schless and her husband took Lewis and his wife to dinner at The Four Seasons in Manhattan.

  But all this was far from Lewis’s mind as he fielded congratulations. After taking a few moments to bask in the glow of his accomplishment, Lewis took Wright, Tom Lamia, and Charles Clarkson to the Harvard Club for lunch. Champagne flowed like water. After 11 years of trying to conclude a major transaction, and after nine roller coaster months of hell, he had finally pulled it off.

  9

  * * *

  Piloting McCall for a 90-to-One Gain

  Established in 1870, McCall Pattern is one of the nation’s oldest home sewing pattern companies. Its executive offices are located in Manhattan, New York City, while its production facilities are in Manhattan, Kansas. In 1984, the company had 580 employees.

  At the time of Lewis’s acquisition, McCall was making approximately 740 patterns for home sewing. Many of the patterns were based on drawings by such well-known designers as Willi Smith, Liz Claiborne, and Laura Ashley. Eighty-seven percent of its revenue came from the United States, with the rest coming in from Puerto Rico, the United Kingdom, Japan, Mexico, Canada, Australia, and other countries.

  McCall was then the second-largest company in the home sewing pattern business with 29.7 percent of the market. Its major competitors were Simplicity Patterns with 39.4 percent of the market, Butterick with 19.1 percent of the market and Vogue with 4.7 percent of the market.

  The company had revenues of $51.9 million with income of about $6 million.

  This was the company that Reginald Lewis took over and by the time he sold McCall three years later in June 1987, Lewis had piloted the company to the two most profitable years in its history. Under him, McCall’s income doubled in 1985 and 1986, years the company earned $12 and $14 million, respectively. And Lewis made himself a very wealthy man in the process. But within two years after he sold the company, he would be the subject of a major lawsuit. All this was still to come, as Lewis assumed the chairman’s office at McCall’s 230 Park Avenue headquarters in February 1984.