Why Should White Guys Have All the Fun?

by Reginald Lewis

  Wright closed the door gently and skulked next door to his office. The rush of anger that had emboldened him a moment earlier was quickly replaced by an acute sense of trepidation. After a few minutes that seemed like hours, Lewis knocked on the door to Wright’s office and came in. “I’m thinking, ‘Oh god, how do I play this now? Do I continue to stand for my rights, or do I capitulate?’” Wright remembers. He began to apologize, but Lewis cut him short.

  “Kevin, for me to engender that kind of response in you, I must be doing something wrong,” he said. And with that, Lewis formally apologized to Wright. The incident was quickly forgotten and the two men’s special mentor-protege relationship continued forth undamaged.

  If you were a buddy of Reginald Lewis’s back in the days when he was poor, usually you’d made yourself a friend for life. “If he had come from a pompous point of view, that wouldn’t have worked with us because that’s not what keeps a friendship alive,” says Ellis Goodman, who befriended Lewis when the two of them held down minimum-wage jobs in a Baltimore area country club. “He loved sharing his knowledge and having somebody around to enjoy it. I never found him in any way boastful, although he had plenty to be boastful about.”

  Lewis was the kind of wealthy relative anyone would love to have. He was generous with his family before he acquired McCall and became even more so afterward. He loved personally selecting gifts of clothes, jewelry, and fur coats for his wife and his mother. He lavished expensive gifts on everyone, particularly at Christmas time when he would load a car full of presents and then motor down Interstate 95 to Baltimore. Whenever he accompanied his relatives on an outing, Lewis would never allow them to pay for anything.

  One time, Uncle James and the Internal Revenue Service were having a $75,000 dispute. Lewis insisted on taking care of it, an offer Uncle James gratefully declined. Another time, Lewis asked Uncle James if there was anything he could do for him. Uncle James was quiet a moment, then impishly asked Lewis to give him a million dollars, so Uncle James could enjoy the life of a millionaire, too.

  “I ain’t giving you shit,” Lewis deadpanned. “I ain’t giving you no million dollars. Earn it!”

  If Lewis was magnanimous and big-hearted with his family, he didn’t like them approaching him with hat in hand, jokingly or otherwise. He gave on his terms and when he felt the time was right.

  HARNESSING THE PUBLIC MARKETS—THE McCALL IPO

  By the fall of 1986, Lewis had grown fond of the pattern business. He felt that McCall had an infrastructure that compared quite favorably with organizations of much greater size. During the early phases of his McCall stewardship, Lewis’s intention was to hold on to McCall and use it to acquire other companies. He decided that if a target business were related to McCall’s operations, he would use McCall to capture it. If not, then TLC Group would acquire the target.

  In the meantime, Lewis continued to search for a bigger acquisition. He was still an avid reader of prospectuses, leafing through them the way others might read a retail catalogue in search of interesting things to buy. He was constantly examining companies and brainstorming about what he could do with their proceeds after he got them. Although Lewis didn’t possess an MBA, unlike many financiers, he had developed an excellent grasp of how to get the most out of a company financially. His understanding of finance was developed by examining transactions and this gave Lewis a utilitarian take on the subject.

  By the summer of 1986, thanks in part to Lewis’s efforts, McCall had a strong balance sheet and much improved earnings. Lewis was now ready to lead McCall into another arena. He decided to take the company public, thereby generating cash for his acquisition plans.

  Lewis retained Bear, Stearns to handle the initial public offering, which aimed to put 2.2 million shares of the company on the American Stock Exchange. The estimated price range for a share of stock was $11 to $13, meaning that McCall stood to generate anywhere from $24.2 million to $28.6 million.

  Two obstacles stood in the path of a successful McCall IPO. First, potential investors would probably be quite leery of a company whose line of business had been shrinking steadily over the last decade. Second, Lewis was also worried about the fact that Bear, Stearns had a backlog of deals to introduce to public equity markets that summer. Bear, Stearns would not get to the McCall offering until August when many investors would be on vacation.

  Nevertheless, Lewis and his team embarked on a road show, the Wall Street equivalent of a Broadway road tour. Presentations about the company were held in different cities for the purpose of selling stock to investors. The group which included Lewis, Angstadt, and several Bear, Stearns executives headed first for Europe.

  One day Lewis had just completed a meeting in Switzerland that had gone particularly well, leaving him feeling positive and upbeat. He pushed Bear to increase the price for McCall’s stock from the planned $11 to $13 range to $14 a share.

  Then Lewis got a phone call from New York that brought his mood crashing back to earth. Alan Schwartz of Bear, Stearns was on the phone and informed Lewis that, in part because of a negative Wall Street Journal article on the IPO market, the market’s bottom had fallen out. The McCall public offering was dead.

  Within a few hours, Angstadt and a brooding Lewis were on a plane headed for New York. Alan Schwartz had a lot of explaining to do.

  After Lewis arrived in Manhattan, a meeting was arranged with Schwartz. Joining Lewis were the top managers of McCall, Earle Angstadt, Bob Hermann, and chief financial officer Craig Woods. Exactly what was the problem with McCall’s IPO, Lewis demanded to know? Schwartz began to outline the reasons why the McCall IPO would never fly, but that was the last thing Lewis wanted to hear after McCall had paid hundreds of thousands of dollars in advisory fees in order to go public.

  When the window of opportunity starts to come down on the IPO market, Schwartz explained, it doesn’t come down slowly. Bang! It just slams shut, and that’s what happened to McCall’s stock offering. A very angry Reginald Lewis listened skeptically. When Schwartz’s explanation was over, Lewis started asking some pointed questions. He didn’t totally buy Schwartz’s view of what was happening and expressed an opinion that McCall’s IPO might have gotten off the ground had Bear, Stearns not spent an inordinate amount of time working on the IPO of a clothing corporation, Leslie Fay. Lewis had a high degree of respect for Schwartz, but he was in no mood to hear Schwartz’s rationalizations.

  Schwartz suggested that the IPO might still be able to get off the ground if the price of McCall’s stock was knocked down to $9 or $8 a share, but Lewis would have none of it. It was his price or nothing.

  THE $19 MILLION RECAP

  By now, Lewis was beginning to feel it was time to get out of the pattern business. He would like to have continued on as the owner of McCall, but it was becoming clear he wouldn’t be able to access public equity markets. That in turn meant he wouldn’t be able to use McCall as a vehicle for acquiring other companies, which in turn meant it had limited empire-building capability. So Lewis came up with a new plan to capture some return on his and his shareholders’ investment in McCall before the tax laws changed at the end of 1986.

  Lewis initiated negotiations with Bankers Trust that would lead to a change in McCall’s financial structure through a recapitalization of the company. Under the plan, Bankers Trust would put a significant amount of money into the company, making it a 40 percent partner going forward, while Lewis and McCall’s shareholders would receive a large cash payout.

  The talks with Bankers Trust started toward the end of 1986. The negotiations dragged on almost up to New Year’s day, with Lewis and Bankers Trust paying hefty fees to financial advisers associated with the recap.

  Things appeared to be moving along smoothly until December 30, when Bankers Trust came up with a new and startling demand—in order to get the recap done Lewis would have to give Bankers Trust unfettered discretion with respect to the way McCall was to be run. Someone on the Bankers Trust team apparently felt that
the fees Lewis had run up and the imminent arrival of unfriendly new tax regulations had placed Lewis in a position where he had to capitulate.

  The bank had badly misread Lewis. “Okay, thanks,” he told the bank’s stunned executives who also had amassed considerable expenses up to that point. “I’m not interested,” he said, and walked out.

  This was an occasion where Lewis’s penchant for always having a Plan B proved invaluable. He didn’t have much time—one day, in fact—before 1987 and the new tax laws arrived. But he had a plan that might just work.

  Lewis first declared a dividend of $3.6 million that was distributed to McCall’s shareholders. Then he began repurchasing McCall subscription warrants—securities giving the holder an option to buy large amounts of common stock—that had been issued to Bankers Trust and Equico Capital Corp. Warrants essentially give a lender a chance to get in on the action if a firm starts to perform well, but at the same time don’t expose a lender to downside risk if the company performs poorly and its stock goes down.

  Bankers Trust and Equico were pleased to sell their McCall warrants to TLC Group: Each organization realized a handsome profit based on the increase in McCall’s worth under Lewis and a corresponding bump in the value of the warrants.

  Lewis had TLC Group, not McCall, repurchase the warrants for an aggregate price of $3.1 million. Had McCall bought the warrants back, the move would have significantly depleted the cash on McCall’s balance sheet. That would have wiped out the positives accomplished in the sale-leaseback and the bond sale. Plus it would have set back the improvement in McCall’s earnings Lewis had worked so hard to achieve.

  Only after he had sheltered McCall’s equity did he have McCall then purchase the warrants from TLC Group for $15.4 million, $12.3 million more than Equico and Bankers Trust had sold them for. The price was based on a valuation of the company of $70 to $90 million by First Boston as well as potential buyers. Lewis then divided the $15.4 million among himself, Earle Angstadt, Bob Hermann, Ricardo Olivarez, and Sam Peabody. Because Lewis owned 100 percent of TLC Group, he didn’t have to share the money with his associates, who owned shares in McCall, not TLC Group. But for Lewis, it was a point of honor to share the profits of his labors with those who supported him when he was trying to buy McCall. Lewis genuinely viewed the other men as his partners, even Hermann. By now, the McCall shareholders had reaped a total of $19 million from the company—the $15.4 million from the warrant repurchase plus the $3.6 million dividend.

  The chairman of McCall agreed to purchase the shares of his fellow shareholders, based on a company valuation of $55 million, with the understanding that if he sold the company for more, he would pay them the difference. In addition to rewarding those who had put their faith in him, Lewis had another objective in mind: He wanted the word to get out that if you did business with TLC, you were treated fairly and you got a superb return on your investment.

  TIME TO CASH OUT

  Buying back the shares from his fellow shareholders brought Lewis’s stake in McCall from 81.7 percent to about 88 percent. Despite his affection for the firm, Lewis realized that the only remaining way to realize a truly significant return on his investment was to sell the pattern company.

  “He clearly wanted to cash out,” Kevin Wright says. “If you’re a buyout group, you don’t fall in love with any business. When you’ve made enough, you cash out and let somebody else take the risks inherent with that business. So, toward the end of 1986, Reg was verbalizing that he felt it was time to go home on this one.”

  Along the way, we pursued a lot of different alternatives in terms of raising the equity. We did a sale-leaseback transaction. We also paid out our bank debt in less than 18 months. We brought in some equity at a reasonable price, but also gave our investors a tremendous return in an 18-month period. We pursued an acquisition of the Butterick Company. We pursued an acquisition of the Simplicity Company. We tried to take the company public. We talked about a recapitalization with Bankers Trust. None of those things worked—well, the sale-leaseback worked, but some of the other things didn’t work.

  I was reading Tom Wolfe’s The Right Stuff at the time and felt almost like a jet pilot: I’ve tried A. I’ve tried B. I’ve tried C. Well damn, maybe I should die like a man or something. In any case, business turned up and by December of 1986, two years after the deal, we had $23 million in cash on our balance sheet. That was about $20 million up from what we had when we acquired the company. And we had increased earnings from $6.5 million of operating to roughly $13 million or $14 million. The rest of fiscal year 1987 looked pretty good, also.

  At that point, Earle Angstadt came down to my office and we had kind of an interesting meeting. He said, “Reg, I just may not be able to be with you for the next few years.” He wanted to spend more time with his lovely wife, among other things. I said, “Okay, Earle, then in that case it’s time to go.” From there we did a $19-million recapitalization that resulted in impressive shareholder return in December of 1986.

  All these factors pushed Lewis in the direction of a sale. He decided that an auction would be the best way to sell McCall and retained First Boston to handle the auction. He then got together with McCall’s executives to prepare an offering document. It was completed in January 1987, and sent to about 80 prospective buyers.

  Lewis was leaving McCall a revitalized company. He had strengthened its balance sheet and led it to the two most profitable years in its history.

  “Reg comes in and extracts the highest profit margins they’ve ever had,” notes Howard Mackey, a client from Lewis’s attorney days. “I always wondered how he managed to do that from a law firm at 99 Wall Street. That is some testament to the way he managed things and managed people.”

  The auction ended in June 1987 when a British textile manufacturer, the John Crowther Group, bought McCall for $65 million, nearly three times what Lewis paid for the firm three years earlier.

  I signed the contract with Trevor Barker of Crowther to sell McCall for $65 million, right on the heels of our recapitalization for $19 million. I sold to the bidder we thought was best for the Company—a publicly-held British concern—at a price of roughly $63 million, plus $2 million for our expenses.

  TLC had also managed to keep the real estate, which was easily worth another $6 million to $10 million and we’d also gotten some other dividends, so all in all that was about $90 million on our original investment of $1 million, and it was all in cash. And not only that, we felt that we were leaving the Company in excellent shape because the new buyer was putting up $30 million and had some plans for what he wanted to do with it. I was feeling pretty good.

  The name of the game is return on investment. After three and a half years, an investor in a “TLC deal” could surely smile with justifiable satisfaction. The closing was consummated on June 30, 1987. We signed the contract about June 15th. Rather than try to take Crowther up from $65 million, I said, “Okay, close in two weeks.” I traded cash for speed and we got it done very fast.

  When Lewis told one of McCall’s directors, Lee Archer, about the price that had been paid for McCall, Archer actually laughed out loud. “What idiot would pay us $65 million for a company when it’s in the record that we only paid $22.5 million,” Archer asked incredulously. Lewis just smiled broadly.

  On June 30, 1987, Lewis was seated in a conference room with Earle Angstadt and about 20 other people when the voice of a female vice president at Bankers Trust came over the speaker phone, “The funds have been irrevocably transferred.” Angstadt sprang to his feet, uttered “Good night, gentlemen,” and bid Lewis and McCall adieu. Lewis had made Angstadt a wealthy man.

  “As far as his business acumen is concerned, if I had had his financial smarts, I would have taken over the company without him,” Angstadt says. “But I didn’t. I was never a student of the things he mastered.”

  An elated Lewis and his closest associates went to the Harvard Club where a party was held in his honor. Just the mention of the name
“McCall” was enough to make the jubilant Lewis break into a wide grin, but in a couple of years his sale of the sewing-pattern manufacturer would spawn a litigious nightmare that would keep a perpetual scowl on Lewis’s chiseled face.

  Lewis would emerge victorious from the litigation but the experience would not leave him unscarred. He would always look back on McCall and his 90-to-1 gain as his “best work.” Soon this feat would be much publicized—a development that benefited Lewis greatly in the long run.

  RIDING HERD ON THE MEDIA: THE ART OF SPIN CONTROL

  The financial media have the power to move markets, create fortunes, and make or break careers. Less than a year had passed since the abortive McCall IPO, and Lewis remembered well the cooling effect that a Wall Street Journal article had exerted not just on McCall but on the entire IPO market. Lewis read the financial press avidly and respected its influence, but he was no fan of the media, per se. Prior to acquiring Beatrice, Lewis had been content to operate in relative obscurity because he didn’t need the press to accomplish his objectives, nor did he feel any burning desire to be in the spotlight. And frankly, he wondered about the motives of the Fourth Estate.

  Lewis’s wariness of the press became even more pronounced after the sale of McCall. Not long afterward, Lewis was in the study of his home reading newspapers very early one morning. As he was flipping through The New York Times, a piece about the new McCall president and CEO, Bob Hermann, caught Lewis’s eye. The headline read, “McCall Pattern’s Head Pleased by New Owner.” The story opened by saying, “The McCall Pattern Company has been through several leadership changes that were not all good for its business. But being sold to its new owner, a British company called the John Crowther Group, ‘is probably the best thing that ever happened to us,’ said Robert L. Hermann.”

  Already Lewis’s trademark furrow was working its way across his brow. Here was Hermann trying to steal his thunder, and doing so in a newspaper distributed around the globe. Lewis didn’t know exactly how, but he intended to steal his thunder back.