Th e three auto industry veterans — novices when it came to high-finance pitches — were a bit anxious as they entered the sprawling, 42nd-floor conference room at the Carlyle Group’s Manhattan offices, with p olished cherry walls and a killer view of Central Park.
Armed with PowerPoint and their “thousand-page business plan,” the men were seeking expertise from Washington-based Carlyle, which had made a fortune for its founders and investors during 25 years of buying, improving and selling companies.
The would-be entrepreneurs were after some of Carlyle’s gilt-edged reputation as well as its partnership. Most of all, they wanted access to its deep pockets. If Carlyle was willing to put up the money, it would buy and revamp what had been a lethargic, cash-starved Michigan auto components manufacturer with the funny name of UniBoring. The company’s expertise, lightweight aluminum drivetrains, filled a niche in the industry, and the executives thought they could turn it around.
Bruce Swift, who led the auto group, knew the industry supply chain inside and out from two decades of working at places like Ford Motor and Honda. Steve Bay was an expert on the manufacturing side of auto components. And Shankar Kiru was a whiz at the financi al and technology side of automaking.
Their business plan was something out of “Moneyball”: Unleash data crunchers and turn an inefficient company into a streamlined marvel of efficiency.
This was the bet: Demand for better vehicle gas mileage would create huge and growing demand in the auto industry for lightweight aluminum parts.
“We were going to transition the business from a local manufacturer into a globally competitive enterprise,” Swift said. “We had to take it apart and put it together with the right people, right machines, right customers, right suppliers.”
Three partners from Carlyle’s special situations and distressed assets team listened for two hours, pushing back diplomatically, aware that their guests had never done this before.
Special situations teams like the ones at Carlyle hunt vulnerable, at-risk companies — often from old industries like coal or carpets. These dealmakers are hard-core, unsentimental capitalists. They might quickly fix the business and flip it for a fast profit. They might break it up and sell off the pieces. A third strategy is to turn it around and expand it for a big home run down the road.
This wasn’t going to be a breakup. It wasn’t going to be a flip job.
The auto guys were swinging for a home run. They wanted to turn around UniBoring. The family-owned company had a good product and customers, but it was hampered by poor financing and outdated equipment.
The auto executives thought that with the right management and Carlyle’s financing, there was a fortune to be made.
And Carlyle knows about making fortunes. The Washington-based firm is a paragon of private equity, an industry that puts investment money behind companies, revamps their operations and tries to sell at a profit. It is the world’s second-largest firm of its kind behind Blackstone, with $147 billion under management and more than 200 companies in its portfolio. Its co-founder David M. Rubenstein is an outspoken proponent of private equity, which in recent months has come to the forefront of the national economic debate over tax fairness and the more Darwinian aspects of business.
Private equity can be a blunt instrument to reorder unproductive businesses and create vast wealth. Its creative destruction has been defended by the likes of Mitt Romney, the presumed GOP presidential nominee who built his fortune at Bain Capital, a major private-equity firm.
Much of the public debate about private equity has focused on super-wealthy individuals like Romney and Rubenstein, with less attention on how the industry works. Carlyle took the unusual step of allowing access to its players behind the UniBoring deal, offering one window into the practices of private equity, from cost-cutting to layoffs, from its acquisitions to factory management.
This is how private equity is supposed to work: With UniBoring, Carlyle and its investor-managers would end up taking a money-losing local manufacturer with 465 employees and $100 million in revenue and within six years building it into a global firm with 2,365 employees and nearly $600 million in revenue. They sold it last December for more than $400 million, earning many times their investment, according to published reports and an analysis by The Washington Post. The bounty was shared by Carlyle and its investors, Swift and his auto team.
While most of Carlyle’s investments have achieved above-market returns for its investors, the firm has also had a few losers in its 25 years. In 2008 Carlyle launched Carlyle Capital, an offshore public company that invested in mortgage-related securities. The company’s business was to borrow money to buy the securities and to make money on the difference between the firm’s borrowing costs and what it earned on the interest paid on the bonds. But when the value of those securities dropped, lenders asked for more cash; they foreclosed when Carlyle refused. It lost $600 million.
It has had its share of corporate bankruptcies as well, including Hawaiian Telcom, the local phone company in Hawaii, and Oriental Trading Company, an Omaha distributor of low-cost party favors that Carlyle paid $1 billion for in 2006; it faltered in part under a heavy debt load and fell into bankruptcy. Carlyle bought Hawaiian Telcom in 2005 and put $425 million into the company. But the deal took a year to get approved by regulators, and the company began losing land-line telephone customers faster than anticipated. By 2008, it was bankrupt. In each case, Carlyle lost all its money, but the companies emerged from bankruptcy and are in business today.
Carlyle went public last week in a highly anticipated stock offering of $22 a share, which valued the firm at $6.7 billion. The stock closed Friday at $22.05.
When Swift and his team walked out into the streets of Midtown Manhattan that March day after the two-hour meeting, they weren’t sure whether they had a partner. They felt humbled and would look back on their presentation as undeserving of Carlyle’s attention.
As Swift put it, “We were guys with big dreams and very little money.”
Even before Carlyle had a chance to seal the deal and start turning UniBoring around, the deal began to unravel.
In May 2005, just two months after the meeting in New York, UniBoring declared bankruptcy — crushing the auto troika, who had quit their jobs to pursue their dream.
“That’s when the drama started,” Swift said. “We had one of those ‘Oh my God’ moments.”
On Sept. 23, 2005, they found themselves in downtown Detroit, squeezed into a sweaty, law office conference room, where 50 lawyers, accountants, auto industry executives, claimants, creditors and investment bankers were picking the bones of UniBoring, while its owner, an Argentine-born businessman, looked on.
The members of Carlyle’s distressed assets team, Ray Whiteman, Shary Moalemzadeh and Michael Stewart, were watching their plan for UniBoring evaporate during the tense, six-hour auction. A late-to-the-game rival private-equity firm from Dallas was swooping in to steal the prize.
The bidding rose in $100,000 increments.
“We would bid, then the Dallas guys would bid $100,000 more than us,” said Whiteman, 51. “Their strategy was Carlyle-plus-one.”
Carlyle had approval from its investment committee, the wise men back in Washington who have final say on where to put the firm’s billions, to bid up into the mid-20 millions. When Dallas pushed north of that, Carlyle backed off.
“We were going to have to invest millions more in the company after we bought it,” Whiteman said, “and the numbers the Dallas guys were offering just didn’t make sense.”
Swift and his nervous investors sat in a cold sweat. As the bidding tightened, Swift took Whiteman aside and said he and his partners would forgo their first year’s salary to help fund the purchase price. They had already cleaned out their savings and mortgaged their homes to become investors in the project. They might as well go all in.
“We wanted it that badly,” Kiru said.
At one point, a major carmaker stepped into a room where the Carlyle team was caucusing, offering to give Carlyle money to win; it couldn’t afford to lose UniBoring as a supplier, the automaker said.
When the bidding hit $27.3 million, Carlyle — and its three auto industry veterans — walked.
They headed out into downtown Detroit that September evening filled with dread.
“We had quit our jobs to do this,” Swift said. “We had no jobs and no businesses to buy. I didn’t know what I was going to tell my wife.”
Kiru had only one thought: “What am I going to do now?”
He didn’t have to wait long for an answer. Something nagged at Whiteman and Moalemzadeh. Buried in the UniBoring books was an equipment lease. Carlyle had seen the expense and factored it into its bid. They were betting the Dallas bidders had missed it.
“This isn’t over,” Whiteman said.
It was the sort of moment that makes deal guys giddy.
Two weeks after the auction of UniBoring, on Oct. 6, 2005, Moalemzadeh was at his computer in New York when an e-mail from Carlyle’s deal lawyers at Latham & Watkins fired across his screen. It was 3:44 p.m.
The Latham attorney had been told that the Dallas group might not close its deal to buy UniBoring. In that case, according to a copy of the e-mail, UniBoring wanted to know: Would Carlyle be willing to “stand there with a catcher’s mitt if they don’t?”
Within minutes, Moalemzadeh and Whiteman got on a conference call with Latham & Watkins. To this day, they believe it was the unforeseen lease expense that did in Dallas, but they are not sure.
Whatever it was, Carlyle bought UniBoring on Nov. 18, 2005, for $20.7 million — below what it had originally thought it would have to pay. Carlyle would eventually invest nearly $40 million in the company.
While most of the money came from Carlyle’s limited partners, which are the giant pension funds, sovereign wealth funds and wealthy individuals who give the company billions to invest, there was personal money involved, as well. Moalemzadeh and Whiteman put up their own cash, along with Swift, Kiru and Bay, who stripped their savings bare to get in on the deal.
“We wanted a philosophical alignment in ownership,” Swift said. Recalling the original pitch meeting at Carlyle’s New York offices, he said, “We looked them straight in the eye and said, ‘Are you going to back us or not? Are you going to stand with us?’ ”
They now owned a Howell, Mich.-based company with three factories, 465 employees and a reputation for high-quality aluminum components.
Swift described the deal closing as “one of the happiest days of our lives.”
The euphoria evaporated quickly.
Swift, Kiru and Bay were in the Howell headquarters, taking over offices the day before the deal even closed.
They stayed at the offices until 4 a.m., planning their next move. They quickly met with the former owner’s family members, about seven nieces, nephews, in-laws and others who worked at the company. UniBoring was under new management, they said.
The company was losing money. It needed to be run more efficiently, Kiru says.
“It clearly had all the hallmarks of a family-run company,” said one analyst familiar with the company. “There were family members involved in the company, and maybe they were not the best people for the right position. If you’re a family-run company, your issue is how many people I keep employed.”
The family members were soon let go. Thirty more employees followed them out the door. In the first year, about 200 of the 465 employees were replaced.
The more Carlyle’s acquisition team dug into the business, the more problems surfaced. Tools were missing. They thought the record-keeping was poor and the finances were a mess, with drawers full of unpaid bills. Suppliers, waiting for payments, would not deliver products until they they had their money. Equipment had not been maintained. Parts had been cannibalized from other machines.
“It was almost a ‘Chitty Chitty Bang Bang’ where you have to hit the machine on the side,” Swift said. “Customers were screaming. Suppliers hated us because they were hurt in the bankruptcy and couldn’t make money.”
The company was bleeding $500,000 a month.
By Christmas, UniBoring had lost $2 million.
“That was a low point,” Whiteman said.
Pulling from its private-equity playbook, Carlyle and Swift’s on-site team implemented a carefully scripted 100-day plan designed to turn the business around. One of the first items on the list: changing the name to Diversified Machine Inc. in an effort to remake the company’s image.
They bought software to track daily, weekly and monthly cash flow, which enabled them to anticipate financial problems. Managers were given goals and required to reach them.
Carlyle instituted Friday conference calls with Swift’s core team, asking detailed questions about every facet of the business. Swift and his team started holding small meetings with employees in the cafeteria, explaining who they were and their goals for the business.
They reduced job classifications from 30 to three. They plastered white boards around the factories, tracking progress toward productivity goals on a weekly, monthly and quarterly basis. The more widgets you produced, the better chance you had of getting your bonus.
Middle management was eliminated.
“Instead of walking around yelling at people, we had team leaders,” Kiru said.
As 2005 turned into 2006, cash on hand dwindled to $100,000, which is unheard of for a $100 million business.
“We had a couple of close weeks,” Moalemzadeh said.
Things were looking up by the end of 2006. Revenue started growing, hitting $130 million for the year. Three days before Christmas, the company reeled in its first new client since the takeover: International Truck and Engineering Corp. signed a multiyear contract for auto parts.
In February 2007, Diversified Machine bought an obscure suspension division from Hayes Lemmerz, a 104-year-old auto supplier, which gave the firm instant credibility. The acquisition included two aluminum castings plants — in Bristol, Ind., and Montague, Mich. This allowed Diversified Machine to add a new line of business, melting and casting its own aluminum. The maneuver allowed it to expand sales faster than costs.
“All of a sudden, we are a respected company in the industry,” he recalled.
By the middle of 2008, the manufacturer was sailing toward annual revenue of $320 million for the year, triple what the company had been generating when Carlyle bought it.
Then came the collapse of Lehman Brothers — and the Great Recession.
Toward the end of 2008, Kiru noticed something funny.
A weekly list of future orders from Diversified Machine customers showed demand for its components pushed out to a later date. Kiru at first thought it was the usual, end-of-year slowdown by businesses that didn’t want unused stuff on the factory floor when they closed out the books.
By early 2009, the demand kept dropping. The Carlyle team looked around. Credit markets were seizing. No one could borrow.
“We saw the tsunami was coming,” Whiteman said. “The question was how big that tsunami was going to be.”
Auto sales dropped from 14.8 million a year to 8 million. General Motors and Chrysler hovered near bankruptcy. Ford had mortgaged its assets, right down to its brand name, to stave off the abyss.
Sales at Diversified Machine plummeted by 40 percent. Profit margins dropped from double digits to low single digits. With $200 million in revenue, they’d missed their target by $100 million. At the rate they were going, they would have to shut down the business and write it all off. They had to move quickly.
“We had to make sure the enterprise survived,” Moalemzadeh said.
The biggest cost was labor, so they attacked that first, laying off 22 percent of their workforce, including engineers, purchasing people, managers and factory workers. Swift’s team took a 10 percent pay cut. Vacations were canceled.
“It was the scariest moment we faced,” Swift said.
Costs were cut by 25 percent, but Diversified Machine still lost money in the first quarter of 2009. As they foraged for breathing room, they put off paying bills as long as possible. They waited until the last minute to order supplies so they didn’t waste cash.
They took an ax to fixed costs. They lowered lease costs from $8 million a year to nothing, either through renegotiations or buying them out. They appealed for tax relief to local governments. Insurance was cut. By the second half of the year, they were breaking even.
They were also opportunistic, scooping up unemployed top engineers at bargain prices. When the economy started to recover at the end of 2009, “we were one of the few businesses that were viable and healthy,” Moalemzadeh said. “We were the beneficiary.”
With the business somewhat stabilized, the Diversified Machine team went hunting for an aluminum foundry. The idea was right out of business strategy 101: By owning the entire chain of manufacturing, starting with the aluminum in the ground, you can control costs and increase profits.
Each acquisition added more value to Diversified Machine than the price it paid. A strategy of “two plus two equals five,” as Swift had laid out in the plan to buy UniBoring.
The company piled on acquisitions — an aluminum casting plant in 2007, a chassis business in 2009, an aluminum foundry in France in 2011. Revenue soared, from $200 million in 2009 to $470 million in 2010 to $590 million in 2011.
They had gone global, with plants from China to France to North America, manufacturing aluminum parts deliverable to auto plants across the world.
The partners had owned the company for six years, about as long as private-equity firms take to rebuild a company. Bankers, other private-equity firms and corporations came calling: Is the company for sale?
“We knew now was the time,” Whiteman said. “We saw what the auto sales were doing. Automotive was not a bad word anymore.”
Carlyle hired Evercore Partners out of New York, headed by former deputy Treasury secretary Roger Altman, and sent summaries of Diversified Machine to 50 potential buyers.
By September 2011, Platinum Equity Partners of California bought the company for more than $400 million, according to published reports — nearly 10 times the investment Carlyle and the three partners from the auto industry made in the firm, a Post analysis shows.
Shankar Kiru could not stop refreshing his computer at Diversified Machine’s headquarters that Thursday, Dec. 1, 2011.
With each click, he waited for the sign from his bank that his share of the profit from the company’s sale had landed in his account. It was the reward for six years of nonstop work, when he spent more time with his partners than his children. The reward for walking away from a comfortable, six-figure job to help buy an aging auto supplier. Six years of sacrifice. He kept clicking.
“I was checking every hour, on the hour and was calling the guys,” he recalled. His wife kept calling.
He wondered if it would actually happen.
When the life-changing money came through, “it was very surreal,” he said. “I had never seen such an amount. We were all calling each other, listening to grown men cry.”
That night, Swift, Bay and Kiru went to their favorite Italian restaurant and splurged on a bottle of fine wine. The next day, with their millions in the bank, they reported to the plant at 7 a.m.
Within a week, Kiru had paid off the mortgage on his home, which he had borrowed against to get in on the deal.
He’s booked a six-week trek through the Himalayas to recharge and reconnect with his family.
Then it’s back to Michigan, eventually to show up somewhere else at 7 a.m. to rebuild another business.
Over at Carlyle, the unsentimental capitalists were hunting once again.