Why Should White Guys Have All the Fun?

by Reginald Lewis

  INTENSE MANAGEMENT STYLE

  As intense and focused as Lewis was prior to buying McCall, he kicked up his intensity level a couple of notches and became even more driven. He acted as if every decision carried life and death ramifications.

  Lewis ran McCall with a firm, yet innovative, hand. His style was an amalgam of Wall Street financial savvy, Harvard legal acumen and brassknuckle street toughness from East Baltimore.

  “When he realized how people reacted when he turned up the heat a little bit, he used it,” Kevin Wright says. “It was fun for me to watch this African-American intimidate these very senior, established Caucasian businessmen. His entire demeanor just changed and sometimes he was acting and sometimes he wasn’t. He could generate incredible passion, angry passion. He would just tell you in no uncertain terms that your way was fucked up, that this was the way it was going to be done, he’d tell you why it had to be done this way and that’s it. He’d give you a speech, an angry, passionate speech that could go a minute, two minutes, however long he felt he had to talk to get his point across.”

  “Reg was a powerful person even before he became rich,” Tom Lamia remembers. “He could be bullying at times, he could be charming at times, and he could be bullying and charming in the same conversation. Reg could intimidate people rather easily. There were many people who wouldn’t have dared to breathe a word of criticism around him. He had a dark side, a brooding side.”

  Ultimately though, Lewis was toughest on himself. Whatever his successes, he would invariably ask himself, “Why didn’t I accomplish more?”

  At home in his study, Lewis would indulge in a lifelong habit of rating his performance as well as those of his executives. Like a hard-to-please schoolmarm, Lewis would dole out A pluses, A’s, B minuses, C pluses, and so on.

  Nor was his personal life exempt from constant assessing and quantifying. He loved to talk about his tennis game and where it was at a given point in time, but Lewis couldn’t resist the impulse to dispassionately analyze the components of his play, be it his net game, serve or return of service. He’d grade himself on his oft-used A to F scale.

  Lewis would even rate novels or magazine pieces he was reading. His mind was constantly gauging, seeking ways to fine tune and perfect. It didn’t matter that perfection was usually unattainable—the quest for perfection was its own reward.

  Lewis was also constantly writing notes to himself, calculating the bottom line, scribbling out agendas and tasks to be accomplished during the day, a habit that first surfaced at Virginia State. Whenever Lewis would meet with Wright or Clarkson or members of McCall’s management team, he would always take copious notes.

  Lewis actually spent little time at McCall’s plush executive offices on the entire 10th floor of 230 Park Avenue in Manhattan. He had a two-office suite created for him there, but his favorite lair was his law firm at 99 Wall Street. He would go to McCall’s offices periodically to make his presence felt, however, and to put the executives on notice that the new owner was watching.

  Lewis still tried his hand at practicing law from time to time, but those occasions had grown infrequent enough to become noteworthy.

  “Every so often during the McCall days, Reg would expressly remind us that he was the client. I mean, he’d say it in those many words,” remembers Laurie Nelson, one of Lewis & Clarkson’s lawyers. “He’d say, ‘Laurie, right now I am the senior partner of this law firm and I am your client. And when I ask you certain questions, you’re going to report to me as the client first. When I am done listening as the client, I’ll put on my senior partner hat. And then we can analyze the work.’

  “Sometimes the demands he would make on people would seem unreasonable. The thing was, the demand was 300 percent of the expected result. So if you took the demand at face value, you’d go nuts. You needed to take the demand to mean, ‘I want the best you can give me, only I want it twice as fast as you’re capable of doing it,’” Nelson says.

  Lewis’s demanding attitude may have made him a difficult boss but it also enabled him to raise the level of everyone’s game.

  “One of his strongest traits or characteristics was his leadership ability,” says Everett L. Grant, III, whom Lewis hired in 1985 from the Price Waterhouse accounting firm to be a TLC Group vice president. Lewis had the ability to make people “achieve more than they ever thought they could,” Grant says.

  Under Lewis’s stewardship, McCall undertook a number of innovations that increased its profitability.

  IMPROVING CASH FLOW

  Under Norton Simon, McCall had focused on operating profits and market share. Because of the shrinking market for home sewing patterns, its former owners believed that operating profits and market share were critical to the company’s survival.

  However, under the Lewis regime, a new yardstick for measuring operations emerged: cash flow. Because of the highly leveraged nature of the acquisition, McCall had a sizable amount of debt to retire and thus Lewis devoted most of the company’s efforts to conserving and generating cash. That meant many things would be done differently than in the past. For example, whereas bills had always been paid when they came in the door under Norton Simon, Lewis decreed that they would be paid within 30 days, freeing up accounts payable money for an additional month.

  Under Lewis, McCall’s assets were always operated with an eye toward generating additional cash. He came up with the idea of using idle presses not grinding out sewing patterns to make greeting cards. As a result, greeting cards became an important profit center for the company and eventually McCall began to export these cards to overseas markets.

  Lewis also shelved McCall’s pension plan and instituted a 401k program, freeing up an additional $648,000 in cash that was used to pay down debt.

  Not all of Lewis’s McCall innovations were financial in nature. He set out to change the home sewing pattern industry’s less-than-glamorous image by having the company sign up celebrity licenses with, among others, Diahann Carroll, Shari Belafonte-Harper, and Brooke Shields. All three appeared in publicity photos wearing McCall designs.

  THE PRICE ISN’T RIGHT!

  One day Lewis was in his office at 99 Wall Street when Earle Angstadt called up and asked to see Lewis right away. Lewis rushed to Angstadt’s office to see what earth-shattering crisis was afoot. An executive with McCall for 14 years and 17 years Lewis’s senior, Angstadt tossed two huge bound catalogues on his desk, where they landed with a resounding thud. The catalogues had “Patterns at 89 Cents” stamped on their covers and were from Butterick, one of McCall’s main competitors.

  “They’re running a sale,” Angstadt said plaintively. “The last time this happened, we lost a fortune. We’ve got to meet their price.” The logic behind Angstadt’s argument hadn’t quite registered with Lewis.

  “Why?” Lewis asked. “Why do we have to meet their price?” Lewis and Angstadt argued heatedly over pricing, with Lewis adamantly opposed to meeting Butterick’s price and Angstadt all for it. Exasperated, Lewis decided to defer to Angstadt’s years of experience in the pattern business.

  “Okay,” he said. “I tried to talk you out of it and I don’t think it makes sense. But if you think this is the way to go, this is the first time I’ve been confronted with the issue. We’ll go with your judgment.”

  The move to match Butterick’s prices was a disaster. McCall lost $2 million during the course of the promotion. Lewis was livid. He gave McCall’s executives hell and vowed never to compete on price again.

  The next time the pattern industry became involved in a price war, Lewis stuck to his guns. “No, we will not go on sale with those discounts,” he said without hesitation. “I want to show these people that we’re not here to basically cannibalize the industry. I’m not going to meet their sales price—we might lose a little money or not make as much, but I’m not going to lose money every time I sell a pattern. The price of a pattern is such a small price, let’s raise prices some more.”

  Instead of lowering i
ts prices to meet the competition, McCall followed Lewis’s suggestion and raised its prices. The move led to a double-digit increase in net sales and a small drop in market share. Lewis was more than willing to accept the tradeoff.

  But then, I think the magic started to happen when I sold the organization on some key principles: The name of the game was to hold market share, not increase it at any expense. It was equally important to hold an increased price and moderate the level of increases, and to hold the line on expenses. The earnings started to pop.

  Lewis’s decision not to compete on the basis of price and to forsake market share for profit were key moves in increasing McCall’s profitability. And the impetus came not from the company’s seasoned executives but from his own instincts. It was a lesson he would always remember.

  FIGHTING THE COMPETITION

  When his competitors weren’t sniping away from a pricing standpoint, they were trying to spirit away McCall personnel. In a period of five weeks, Simplicity lured away the McCall vice president in charge of design, the executive to whom the design chief reported, and then the VP in charge of promotions. Lewis didn’t take kindly to the defections.

  “He had a fit,” Earle Angstadt says. “We said, ‘Settle down, they’ll be replaced by better people,’ and they were within a period of about two and a half weeks.”

  It was a good overall organization. And I had high hopes. We had a crisis early on when we suffered some losses as a result of a price action. It was very clear to me that this was not something that we should do, that is, reduce our prices. But things chugged along. We had four or five vice presidents walk out. Bob Hermann, I remember, went out and found replacements. He called me and said, “Reg, you know we’re going to have to pay a little bit more to get these people, but I think this is what we should do.” And I just said one word, “Go! Pay what you have to, shore up this organization. Make sure its tight.” What’s interesting is, they always appreciated that from me. That was one of the few times I dealt directly with Bob rather than Earle, but to Earle’s credit, he said, “This is so important, deal with Reg directly on this.”

  The chairman of McCall looked on with satisfaction as Bob Hermann filled two of the vacancies by stealing talented executives from Simplicity. Lewis briefly examined something that would bring the raiding to a close once and for all—he seriously considered acquiring Simplicity, the No. 1 company in the home sewing pattern industry. However, Lewis was advised that the Justice Department’s antitrust experts would have a field day with any merger between the No. 1 and No. 2 businesses in a four-company industry, so talks with Simplicity were never initiated.

  However, merger discussions did take place with Butterick and Vogue, which were both owned by American Can. With the market for home-sewing patterns steadily contracting, it made sense to try and eliminate some of the players from the field. However, Butterick and Vogue got cold feet and the talks never went anywhere.

  FOCUSING ON SHAREHOLDER RETURN

  Lewis had an uneasy relationship with many of his managers. One particular thorn in his side was Bob Hermann, McCall’s number two manager. A six-year veteran of McCall’s sewing pattern wars, Hermann crossed swords with Lewis regularly. They would go after each other during management committee meetings, arguing over such matters as product pricing and how aggressively McCall should go after customers. Hermann took the classic point of view that pricing promotions were a legitimate tool to increase market share while Lewis would argue that market share shouldn’t supersede cash flow concerns.

  “Plus, Bob, you really don’t understand the economics of what’s going on here, so this is the way it should be done,” Lewis would tell him.

  Lewis was “always there, trying to tell these managers what they needed to do to get this business running right,” Charles Clarkson says. A veteran of McCall with a retailing background and today the company’s president, Hermann didn’t cotton to some upstart lawyer-financier telling him how the pattern business should be run, even if Lewis did own the corporation.

  Lewis and Hermann would later face off in the lawsuit involving McCall. Ten years after Lewis’s 1984 purchase of McCall, Hermann’s only remark about Lewis for the record is “No comment.”

  Lewis viewed Hermann, Angstadt, and all of McCall’s executives as critical to his plans, but there was always a certain tension in the relationship. Lewis and his managers essentially had different mindsets, with the managers focusing on running the company while Lewis was looking at the big picture and at maximizing shareholder return.

  “He saw them as somebody you sort of had to have in order to get the thing operating. I mean, they were operating people and you had to have them, because he couldn’t operate the company himself. But there was always a tension between him and the operating people,” Clarkson says.

  However, Lewis always respected Earle Angstadt, McCall’s CEO. Later, when he was running Beatrice International, Lewis actually explored the idea of Angstadt’s coming out of retirement to run the company. “I would be much further along if I had an Earle Angstadt,” Lewis would say time and again.

  He paid his operating executives generously, using money as an incentive to spur on his team. He would rigorously review the financial plan for the coming year, then peg bonuses to that plan.

  “At the beginning of every year, management said, ‘The plan’s too aggressive, we’re not going to be able to meet it, etc., etc.’” Everett Grant remembers. “Then, they’d meet it and they’d far exceed it.” Under Lewis, McCall’s executives earned maximum bonuses, something they hadn’t received for a number of years before he bought McCall.

  While Lewis was generally always on guard when interacting with the operating people, he would sometimes allow himself to relax a little. “He was fun to be with when business was set aside,” Earle Angstadt says. “He and I spent a lot of hours on airplanes together. We enjoyed each other’s company and we shared many confidences at 40,000 feet. I found him a very companionable, very pleasant individual. Reg and I didn’t tell jokes to each other, but we had a good time.”

  There is no question that Lewis worked hard, but he also expected to be paid top dollar for his efforts. Lewis received various management and sponsor’s fees as his salary for running McCall, a common practice followed by financiers in the 1980s.

  “Reg played close to the line, no question about it,” Tom Lamia says. “But he wouldn’t do it recklessly. He’d get the best advice he could. Somebody unsophisticated might say, ‘My god, you can’t make money that easily unless you’re stealing it, right?’ Well, it all depends on how clever the plan is.”

  “Is it easy money if it takes an ingenious tax-planning stratagem to pull it off? Or a very high risk financial or tax strategy to pull it off? Some people would say that’s easy money,” Lamia adds.

  “McCall was a means to an end for Reg,” says Earle Angstadt, president and CEO of McCall under Lewis. “He didn’t give a damn about the pattern business. He wanted to use it for one purpose and one purpose only, which was to make a lot of money quickly. He always couched it in terms of shareholder interest—well, about 86 percent of the shareholder interest was in his pocket. It became obvious fairly quickly. I’m not saying that’s wrong as long as it didn’t destroy people and didn’t destroy the fabric of the company.”

  It should be noted that Angstadt himself, together with Bob Hermann, were among the shareholders enriched by Lewis. After the sale of the company in 1987, Angstadt retired from McCall a rich man.

  PAYING DOWN DEBT

  Lewis wanted a more permanent capital structure for McCall and had talked to a number of investment bankers about how to achieve that objective. Doing so would allow McCall to pay down some of its debt.

  Lewis was told that to access public debt and public equity markets, McCall would have to have more than $5 million in equity on its balance sheet. So, Lewis began to explore various ways to raise equity above $5 million.

  Selling the Manhattan, Kansas, facil
ity to a third party, then leasing it would put millions on McCall’s balance sheet. The problem was that a sale would lead to a significant capital gains tax, plus McCall would be subject to the whims of another entity. Lewis conceived of the idea of a sale-leaseback with himself as the other party. Why not sell the McCall plant to Reginald Lewis, then lease it back to the company? That’s exactly what Lewis did on June 18, 1985.

  The McCall plant was sold to newly created McCall Pattern Holdings for $2,426,000, the book value of the facility at the time of the transaction, which was slightly less than the orderly liquidation value. Lewis then had McCall lease the plant back from McCall Pattern Holdings under a 10-year lease, and had McCall issue $3 million in preferred stock to McCall Pattern Holdings, in return for the assumption by McCall Pattern Holdings of $5 million worth of debt that had belonged to McCall.

  Finally, Lewis had McCall Pattern Holdings borrow an additional $1 million from Bankers Trust and pay $426,000 in cash to McCall. The result of all this financial engineering was that McCall’s balance sheet was improved by $5.5 million. In addition, Lewis came away with a decade-long lease that paid him $1,152,000 a year along with an obligaton to repay a loan of $6 million to Bankers Trust. The sale-leaseback arrangement benefited both McCall and Lewis, but it would eventually come back to haunt him, playing an important part in a lawsuit against Lewis by the subsequent owners of McCall.

  In 1985, however, Lewis could only see positives flowing from the sale-leaseback arrangement. “The main benefit to Reg accrued to him through his then about 82 percent ownership of McCall,” Grant says. “Ultimately he did get to realize a significant appreciation on equity. The sale-leaseback strengthened McCall’s balance sheet by removing $5.5 million of debt and increasing the amount of equity on its books through the preferred stock. It left the company stronger economically and this in turn enabled it to do the debt offering.”