William Farley started in business eight years ago with an investment of $25,000, less than most people his age were putting down to buy their homes.
But Farley bought a $1.7 million company. Since then, he has averaged at least one acquisition a year, and today, Farley Industries owns a collection of businesses with annual sales of $800 million, almost all of it controlled by Farley, a 42-year-old encyclopedia salesman from Pawtucket, R.I., turned lawyer and financier.
It is an empire built largely on borrowed money. Using a strategy called the leveraged buyout, Farley has persuaded banks and other institutions to lend him nearly a quarter of a billion dollars since 1976 to finance a succession of acquisitions and takeovers. Unlike other major dealmakers who move in and out of companies for profit, Farley has kept most of the acquisitions.
The process appears deceptively simple. Farley spots an underachieving company whose stock price has fallen well below its potential, in his judgment. He calls some major lenders, such as General Electric Credit Co., Manufacturers Hanover or the First National Bank of Boston, and borrows enough money to buy the company: The leverage comes from the use of others' money. It was several million dollars, for his first acquisition. For his latest, it was $160 million.
In the lexicon of the dealmakers, Farley is a "turnaround specialist" whose reputation is based on his success in boosting the performance of the companies he takes over. That means rearranging them to fit his strategic sense -- sometimes closing unpromising divisions or selling unwanted pieces. On one occasion, he dismissed the entire headquarters staff. And he institutes drastic changes in tax accounting and financial policies intended to cut the company's taxes as deeply as possible to generate the cash he needs to repay his debts.
The top management of publicly owned companies would cringe at the accounting steps Farley systematically takes to boost tax losses and deductions because of their impact on profits. But because his companies have no other major shareholders to please, Farley has no qualms.
"As a privately owned company, there are opportunities to lower your effective tax rate," he said in a recent interview. "We can do that because we're not concerned about the price of the stock, but we are concerned about the stability and cash flow. In the last five years, I've borrowed $400 million. I've paid off half of that" through selling some facilities and boosting cash flow from the remaining businesses. That reduction in debt has increased the value of those companies to Farley by a comparable amount, he added.
The LBO movement, which has worked so well for Farley and a handful of other dealmakers, has slowed down lately.
Banks and other lending institutions have become increasingly wary, reflecting their nervousness about their balance sheets and the economy's condition -- part of a general trend toward conservative lending in the banking business.
"The major lenders in the industry -- the General Electrics and the Manufacturers Hanovers -- are taking a more cautious approach to structuring these deals and the amounts they're willing to lend. In that sense, it is a pullback," Farley said. "For someone starting out, it's tougher now. But for someone with a track record, it's not too different."
"I don't know where the market is headed," said Michael R. Dabney, vice president for commercial financial services at General Electric Credit Co., a key Farley partner in his largest deals thus far.
"I do believe the LBO . . . is now a permanent part of the corporate arsenal. The market will ebb and flow, based on what's happening in the stock market," he said. "But it's not likely to go away."
Playing ball with Farley has meant some big payoffs for GECC, along with the risks, Dabney said.
In 1982, GECC helped Farley acquire a group of metal products companies from NL Industries, including Doehler-Jarvis, an automotive parts supplier in Toledo. Farley put up $3 million of his own and borrowed $100 million from GECC, which, in return, got rights to purchase one-quarter of the new companies.
Within 18 months, GECC had its $100 million back, plus $20 million for the warrants. The companies are Farley's now, and their performance can't be assessed independently because they no longer report financial results. But he said that the recovery, particularly in autos, has helped them prosper.
GECC was willing to go in with Farley in part because Farley had worked at NL Industries' metals operations and knew them well, Dabney said. "There are intangibles you end up betting on. For a variety of somewhat subtle reasons, we were convinced Bill understood those businesses very well," Dabney said.
"We also had evidence from Bill's history that he understood the difference between how public and private companies operate, and that he was smart enough and tough enough to make it work," Dabney said.
The leverage that can be applied by someone with a track record like Farley's is awesome. One example is his takeover this year of the $250 million Condec Corp., a Connecticut-based diversified manufacturer of precision valves, aircraft controls and heavy equipment.
Farley said he spotted Condec in the customary way, looking for companies whose stock was undervalued in comparison with their profit potential. "It's there on the computer screens. There are a whole series of formulas you run through. . . . The same names keep popping up."
Condec had lost $63 million in the three years before Farley made his move, and its stock had slumped to $12 a share. "It is a classic situation in which the values of the company exceed the market's perception of it," Condec's vice president, Richard M. Cion, said a year ago.
Farley began buying stock until he owned or controlled 600,000 shares at prices up to $20 a share. Then he boarded his corporate jet and flew from his home base in Chicago to Connecticut to propose a leveraged buyout to Norman I. Schafler, Condec's founder and chairman.
No way, said Schafler. He didn't need the money, he wasn't ready to retire -- and when he did, he intended to turn the business over to R. Scott Schafler, his son. The elder Schafler retaliated with a leveraged-buyout offer of his own, at $28.25 a share.
Farley, who is anxious to avoid the predatory reputation of the corporate raiders in his field, nevertheless knows the take-no-prisoners rules of financial warfare. Although he could have made a handsome profit selling his shares to Schafler at that price, he decided to top the offer.
That left him a few weeks to raise $160 million, and he got it easily. The First National Bank of Boston put up $60 million in a revolving credit, with a big balloon installment as the final payment, secured by Condec's assets on the assumption the takeover would occur.
Most of the rest of the money came from "high-yield junk bonds," as they are called, sold by Farley through Drexel Burnham Lambert Inc. to some big savings and loans and other financial institutions.
Faced with that war chest, Schafler gave in, and Farley won control of Condec.
He has begun restructuring the company: "We got rid of the headquarters staff," he said, giving them six months to a year to find other jobs. One of Condec's divisions was sold back to Schafler. As with his other companies, the goal is to find every legal way to reduce taxes and hold on to as much operating profit as possible, he said. "You always take the shortest depreciation. . . . It's the opposite of a public corporation.
"If you have a chance to spend $20 million to prefund a medical contribution and you're public, you worry about how it will look to investors ." If you're private, you don't care, he added.
Farley does this with a small staff of 15 at his headquarters in Chicago's Sears Building Tower (one-fifth (three of whom are tax lawyers), running Farley Industries with its 9,000 employes. He is conscious that his ability to raise money rests on investors' confidence in his management skills, and that most of that responsibility is his, alone. "It does rest on one or two key people. . . . We're all mortal, but I'm in good shape," said Farley, a minority owner of the Chicago White Sox who works out with the baseball team during spring training.
The Condec deal shows, though, that the investors have climbed out with him on his limb. The bonds investors bought are called "junk" because they are unregistered and unsecured -- except by the hope that Farley can boost Condec's earnings significantly.
"I think yes, there's a risk," said GE's Dabney (who passed up the Condec financing). But behind Farley are the companies and the 9,000 employes. "You have to realize that's part of the risk."