"Big companies don't breed entrepreneurs." said John Baker, president of America Safety Razor. "They don't encourage you to take risks."
After nine years with Philip Morris, Inc., and more years than what with General Electric, Baker an eight co-workers are learning to be entreprenuers.
They've taken a $16 million risk by buying the company they work for, American Safety Razor, from Philip Morris which decided there was more money to be made in cigarettes and beer than in razor blades.
The apprentice entrepreneurs, all former corporate climbers, bought out their old bosses effective Oct. 1, using a package of low-cost government financing, high-interest bank loans, and $600,000 of their own money.
"None of us is rich; we've worked for salaries all our lives," said Richard Bonin, vice president, operations. For Bonin, raising his investment "meant selling stock, selling out my interest in a partnership, and taking out a $25,000 second mortgage on my house - and I've got three kids in school."
That's typical of the way the members of the American Safety Razor management got their money, and American Safety Razor is typical of the trend toward employees buying their business, said John R. Davis, the San Francisco investment banker who put the deal together.
Davis is vice president of Bangert, Dawes. Reade, Davis and Thom. Inc. Since 1975 when they helped employees of South Bend Lathe Co. buy their firm from Amsted, Inc., the company has helped workers from half a dozen firms become their own bosses.
The companies, all of which were in danger of closing when the employees took over, have survived and prospered as employee-managed and crowd businesses, said Davis.
An employee takeover can work because the people who buy the company are the ones who run it, said Baker. "We've running for our selves," not for a big company that has a questionable commitment to the business, he explained.
Philip Morris once had hoped that its razor blade division could challenge Gillette and Shick for dominance in the $300-to $400-million-a-year shaving market with its Personna, Gem, Blue Star and the Flicker women's razor.
Investments in new machinery during the 1960s and early '70s enabled the plant in Verona, a suburb of Staunton, to turn out baldes as good as anybody's. American Safety Razor became the Number One supplier (annual sales were $10 million) of industrial cutting edges for clothing, carpet and other uses, the Number Two company ($1 million a year) in disposible surgical blades, and a major supplier of private-label razor blades.
But with an advertising budget one-tenth the size of Gillette's, the company never captured more than 12 or 14 per cent of the total market. Total sales last year hit $42 million and profits regularly ran in the range of $1 million to $1.5 million.
As Philip Morris grew, the razor blade business became less important, amounting to barely 1 per cent of corporate revenues. It was no secret the firm was looking for a buyer.
Last year a likely prospect came along. Bic, the French maker of cheap ballpoints and disposable lighters, wanted to market a throwaway razor in the United States.
"They came to us as a supplier of blades." recalled Bonin, head man at Staunton plant. "But we all suspected there was more to it than that." Baron Marcel Bich - whose hobbies included piloting the French America's Cup challenger - came to Staunton: Staunton staffers went to France and last December a marriage was proposed.
Philip Morris would sell for $16765 million and Bic would enter the American shaving market with its own plant a full product line and plenty of money."We finally had someone to compete with Gillette." said Bonin. Everyone was happy.
Everyone but the Federal Trade Commission As FIC lawyers saw it, the deal was not strengthening competition in the razor blade business, it was stifling it. The government contended the acquisition would reduce the number of blade makers from five - Gillette, Shick, Wilkinson Sword, American and Bic - to four.
Bic argued tht it couldn't be considered a part of the market because it had yet to sell its first razor in America and the acquisition would turn an alsoran in razor blades into the leading contender. Philip Morris lawyers said the company had been trying for years to unload the blades business; if Bic couldn't buy it, nobody else would either. If it couldn't be sold, the division sooner ot later would be liquidated, they warned.
The FTC was adament; the deal was off.
hat was in February, a bleak time in Staunton. The demoralized sales force - facing the likelihood of losing jobs if the company were sold to Bic and the certainty of losing them if it were liquidated - simply stopped selling.
Five consecutive years of profits melted into red ink. The layoffs were massive: Ninety-four salaried workers were permanently cut, 175 hourly workers were laid off indefintely, and the 100-man sales staff was slashed to 30.
Philip Morris made its threat to close the division an order, telling Baker to plan for an orderly run-through of inventories and termination of the business within three or four years unless another buyer could be found.
One competitor openly set up an interviewing office in a local motel; even Baker and Bonin were offered other jobs. "Knowing I was still marketable at 51 was about the only thing encouraging that happened," recalled Bonin.
Several potential purchasers said "no thanks," and efforts to find financing to allow the management to buy the company were fruitless until Baker got a phone call from Davis. The San Francisco investment banker had read about the company and thought it looked like a candidate for an employee buy-out.
When Philip Morris said it would sell, at the price offered by Bic, and gave the managers permission to pursue the deal on company time, a management team to buy and run the company was assembled.
Besides Baker and Bonin, the group includes J. Gray Ferguson, 39, vice president, manufacturing; Robert H. Ford, 48, vice president and field sales manager, Allan D. Goldenberg, 38, vice president and director of sales; Thomas W. Greene, 36, vice president and field sales manager, Paul H. Johnson, 49, vice president and director of field sales; Martin Lightsay, 34, vice president, engineering and Peter A. Milone, 56, vice president, marketing.
For Goldenberg, the opportunity meant becoming his own boss in the only job he'd ever had and a chance to own a piece of "the family firm."
"I'd worked here for 15 years. My father worked for the company for 42 years and my mother for 15 years. I only wish my father had lived long enough to see it," he said.
The nine men formed a company and called it CIB - the opposite of Bic - because at that time the name American Safety Razor belonged to Philip Morris. When the deal was signed on Oct. 1 and the name acquired, the lawyers began paperwork to change the name to American Safety Razor Co.
Davis arranged the financing on a contingency fee basis. He and his clients declined to discuss the amount.
In an interview last week when he was an in Staunton, Davis said his company usually is hired by firms that want to sell an underproductive operation or dispose of a line of business not closely related to other enterprises. This case was different because Philip Morris did not instigate the sale to the employees.
There are two ways to go with a company like American Safety Razor, he explained. A small management group can buy it, using some equity capital and a lot of loans, or the entire work force can acquire it through a trust and a federally guaranteed Employee Stock Ownership Plan.
In either case, relatively little "hard money" is required, Davis is said, though most deals do not match the 25-1 leverage of the American Safety Razor management buyers.
The nine men raised a total $600,000, and much of that had to be borrowed. Bonin declined to specify the size of the individual investments, but said no one owns more than 25 per cent of the company.
If the buyers' life savings were the conerstone of the deal, federal financing was the keystone - a $6 million loan through the Economic Development Authority, which finances business development in areas of high unemployment. The 450 layoffs at American Safety Razor and the threat of more lost jobs if the plant closed qualified the Staunton area for the money. The federal government granted funds to the state, which then made a 25'year loan at 3 per cent interest to the company. A similar program provided another loan of $250,000 at the same terms.
Private financing came dear - 3 3/4 per cent over prime for a 7 1/2 year loan of $3 million, plus a $6 million line of credit. Inventories were drawn down since the company was evaluated for the Bic sale, so little of the credit line has been needed, Baker said.
Because the interest charges are so high, Davis already is seeking new financing. "That's typical," he said. "You get the company going and showing some profits and then you look for a better deal."
Baker said the company is operating profitably. "We knew it would; we knew it had to or we would run through our money darn fast," he said.