strategic restructuring in large management buyouts

Journal of Applied Corporate Finance S P R I N G 1 9 9 3 V O L U M E 6 . 1

Strategic Restructuring in Large Management Buyouts by John Easterwood,

Virginia Tech, and Anju Seth, University of Houston

VOLUME 6 NUMBER 1 SPRING 199325

STRATEGICRESTRUCTURING INLARGE MANAGEMENTBUYOUTS

by John Easterwood,Virginia Tech, andAnju Seth,University of Houston*

25JOURNAL OF APPLIED CORPORATE FINANCE

efficiency, many MBO companies were also drivento rethink their basic strategies. As a consequence,they often chose to sell off assets that other firms orindividuals could use more efficiently. In so doing,they narrowed their corporate focus to core activitiesthat reflected only their distinctive competencies.

Critics of LBOs have objected, however, thatleveraged restructuring has wrought profound dam-age on companies, their stakeholders, and thegeneral economy—and in five specific ways. First,managers have been forced to unload valuableassets at “firesale” prices to service the heavy debtloads. Second, such companies have been deprivedof access to public equity markets and thus forced toforgo profitable investment opportunities. Third, theheavy debt loads have reduced management’s flex-ibility to respond to changes in both the competitiveand general economic environment, thus raising thenumber of costly bankruptcies and reorganizations.Fourth, the restructuring process has transferredwealth from employees, bondholders and othercorporate stakeholders. Fifth, the asset sales accom-panying leveraged restructurings have ended upreallocating resources in a way that has increasedmarket power, thereby harming consumers.

In this article, we bring new evidence to bearon the debate by examining the strategic rationalefor divestitures and acquisitions undertaken afterthe buyouts. We also attempt to assess the economicviability of MBOs by examining various indicators ofperformance, such as their changes in ownershipstatus and their record in servicing debt. Brieflystated, our principal findings are that MBOs partici-pated in the general trend of the ’80s towardincreased corporation specialization and focus—and with relatively few and minor negative side-effects arising from financial difficulties.

*This article is a shorter, less technical version of “Strategic Redirection in LargeManagement Buyouts: The Evidence From Post-Buyout Restructuring Activity,”

Anju Seth and John Easterwood, originally published in Strategic ManagementJournal, May 1993. Copyright (c) 1993 by John Wiley & Sons, Ltd.

leveraged restructuring was the management buyout.MBOs convert publicly owned corporations intoprivate companies by using large amounts of debtto retire all outstanding shares. Stock ownership isconcentrated in the hands of incumbent top levelmanagers and a comparatively small number ofinvestors—a group which often includes a “buyoutspecialist” that organizes the transaction and moni-tors performance after the buyout. Such changes inownership and capital structure are likely to altermanagement’s incentives, and so lead to majorchanges in corporate objectives and performance.Changes in corporate objectives can in turn affectcorporate strategic decisions, leading to changes inasset and organizational structure.

The ultimate consequences of these changesare now the subject of intense debate. MBOs arealternately hailed as increasing efficiency by stream-lining bloated corporate bureaucracies and decriedas gutting America’s corporate sector while transfer-ring wealth to investment bankers and incumbentmanagers.

Advocates of restructuring have argued thattargets of restructuring were typically inefficientcompanies with excess capital in low-growth indus-tries—companies in need of the discipline thatcomes from replacing dispersed public shareholderswith the “incentive-intensive” organizational form ofthe MBO. In this view, concentrated equity owner-ship with significant management participation helpedto align managerial interests with those of stockhold-ers, while heavy debt loads forced management toincrease operating efficiency and pay out excesscapital. Faced with such increased pressure for

he 1980s witnessed a dramatic increase inthe number and size of debt-laden corpo-rate restructurings. One popular form of

T


SAMPLE SELECTION AND CHARACTERISTICS

The sample for our study consisted of 32 largemanagement buyouts between 1983 and 1989 ofentire companies trading on the New York orAmerican Stock Exchanges. By “large,” we meanthose with pre-buyout equity values greater than$500 million. In fact, the average pre-buyout equityvalue of the 32 firms, at $1.4 billion, was consider-ably larger. Given that larger companies tend to bemore diversified, we felt this sample of large firmswas particularly appropriate for an investigation ofstrategic refocusing.

Management participation varied widely in thesample. In some cases, management initiated theproposal and owned all or almost all of the post-buyout equity. In others, a buyout specialist initiatedthe proposal and included some or all incumbentmanagers as part owners of the post-buyout firm.Further, some buyouts included significant equityparticipation by employees through employee stockownership plans (ESOPs), while others limited equityownership to only the top incumbent managers.

In addition to the MBO proposal itself, abouttwo-thirds of the firms were the targets of hostiletakeover activity. Thirteen of the 32 firms receivedformal offers from outside acquirers. Six others eitherwere the subject of takeover rumors, experienced alarge-stake acquisition, or engaged in overt defensivetactics such as paying greenmail before initiating thebuyout proposal. Many if not most of these 19companies were likely motivated to pursue the MBOin large part as a means of escaping a hostile threat.

Industry Composition. Table 1 presents theindustry composition of the 32 MBO firms byprimary line of business prior to the buyout. Nine ofthe 32 (or 28%) were involved primarily in retailing.Of these nine, three were primarily operators ofgrocery stores, two specialized in drugstores, two ingeneral merchandising, one in convenience stores,and one in home improvement stores. Four firms(12%) were in the communications and entertain-ment industry, with each owning cable televisionfranchises. Five firms (16%) were classified as diver-sified conglomerates with no identifiable core busi-ness (although this classification procedure, as willbecome clear later, significantly understates the

extent of diversification among our sample firms).The remainder of the 32 firms were spread amongother mature, low-growth industries such as tires,publishing, glass and paper products, and textiles.

We followed these 32 MBO firms after thebuyouts to determine the pattern of strategic deci-sions, particularly divestitures. The firms were trackedfrom initiation of the buyout proposal until (theearliest of) their return to public ownership, theirliquidation through a series of asset sales, or Decem-ber 31, 1991 (the cutoff date of our study). We alsocompiled brief histories of the restructuring activi-ties for each of the 32 firms (brief summaries ofwhich are presented in the Appendix).

THE RATIONALE FOR MBOs: EFFICIENCYAND STRATEGIC REFOCUSING

Most of the evidence from existing research onLBOs indicates that buyouts lead to improvementsin operating performance and thus increases invalue.1 While divestiture of some assets followedsome buyouts examined in these studies, substantialbreak-ups appear to have been uncommon. Theseresults suggest that the primary underlying ailmentbeing cured by the MBO organizational form wasnot overdiversification, but rather operating ineffi-ciency. Another recent study, however, suggests that

1. See S. Kaplan, “The Effects of Management Buyouts on OperatingPerformance and Value,” Journal of Financial Economics (Oct. 1989); H. Singh,“Management Buyouts: Distinguishing Characteristics and Operating Changes

TABLE 1INDUSTRY COMPOSITION BY PRIMARY LINE OF BUSINESS

Frequency Core Industry

9 Retailing5 Diversifieda

4 Communications and entertainment3 Glass and paper products3 Construction materials and services2 Textiles and apparel2 Food services and restaurants2 Hospitals and health care1 Tires1 Publishing

a. Firms were reported as “diversified” in this table only in those cases where aprimary line of business could not be easily determined. Firms with unrelateddivisions, but an identifiable core business, were classified according to that core.

Prior to Public Offering,” Strategic Management Journal, 11 (1990). See also C.Muscarella and M. Vetsuypens. “Efficiency and Organizational Structure in ReverseLBOs,” Journal of Finance, December 1990, pp. 1389-1413.


MBOs during the 1980s were primarily vehicles forbreaking up conglomerates into component pieces tobe sold off to the highest bidders.2 The evidence fromour study will provide some support for both of thesearguments, suggesting that while overdiversificationwas clearly one problem MBOs were designed toaddress, it was not the sole source of inefficiencies.

Pre- and Post-buyout DiversificationStrategies

While both conglomerate and less diversifiedcompanies were represented among our buyouts,we would expect their prior diversification strate-gies to influence their post-buyout strategic deci-sions. Companies differ in the number of distinctbusinesses they operate (the degree of diversifica-tion) and in the separability of the different busi-nesses (the type of diversification). To the extenttwo businesses share common resources or capa-bilities (that is, in the presence of significant econo-mies of scale or scope), management may beprevented from selling assets associated with onebusiness by the negative consequences for thedivestiture on a related business. On the other hand,in the absence of significant economies of scope andunder the pressure of heavy debt load, highlydiversified firms can be expected to move theirstrategic position toward greater focus.

Based on this reasoning, we classified the firmsin our sample into the following four diversificationstrategy types prior to the buyout:3

1. Single business;2. Related business: some common skills or re-

sources are shared by the different businesses;

3. Unrelated business: the firm engages in two, butno more than two, distinct and unrelated lines ofbusiness;

4. Conglomerate: the firm engages in more thantwo unrelated lines of business.

To classify our 32 firms in one of these fourcategories, we first obtained a listing of the identi-fiable businesses of the firm as well as the relativeimportance of the different lines of business to thefirm’s overall operations. We used company de-scriptions of their business activities along with salesdata by different lines of business (when available).As part of this analysis, we also examined the linkagebetween the different lines of business to determinewhether (and how) groups of businesses within afirm were related. While we relied on the SIC codesto help assess degrees of “relatedness,” we supple-mented this SIC information with our own judge-ments as to the extent to which the differentbusinesses shared common assets or resources suchas distribution channels, purchasing economies,and technology.

After so classifying the pre-buyout diversifica-tion strategy for the 32 firms, we then classified thepost-buyout strategies of the 27 MBO firms that werestill operating independently (whether as private orpublic companies) at the end of 1991. The results ofthese classification procedures are presented inTable 2.

The Findings. Prior to their buyouts, 14 of the32 MBO firms followed “single-business” or “relateddiversification” strategies, and the other 18 followedan “unrelated diversification” or “conglomerate”strategy. This roughly even distribution of diversi-fied and undiversified firms suggests, once again,

2. Bhagat, S., A. Shleifer and R. Vishny. “Hostile Takeovers in the 1980s: TheReturn to Corporate Specialization,” Brookings Papers on Economic Activity:Microeconomics, ed. Martin N. Baily & Clifford Winston, Brookings Institution,Washington, D.C., 1990, pp. 1-84.

TABLE 2PRE- AND POST-BUYOUTDIVERSIFICATION TYPE

3. Our classification scheme follows that of Richard Rumelt in Strategy,Structure and Economic Performance (Harvard University Press, Cambridge, MA,1974).

Pre-buyout Post-buyout Diversification TypeDiversification Single Line Related UnrelatedType of business Diversity Diversity Conglomerate Bustup Total

Single Business 1 1 0 0 0 2Related Diversity 3 7 0 0 2 12Unrelated Diversity 3 4 1 0 1 9Conglomerate 0 1 3 3 2 9

Total 7 13 4 3 5 32

In the absence of significant economies of scope and under the pressure of heavydebt load, highly diversified firms can be expected to move their strategic position

toward greater focus.


that although overdiversification may have been thecore problem for many MBO targets, there wereclearly many other cases in which it was not theprimary problem.

After the buyouts, 14 of the 32 firms consid-erably focused their activities by moving from ahigher to a lower diversification type (see Table2). Not surprisingly, 11 of these 14 firms wereinitially classified as “conglomerate” or “unrelated-diversified.”

In addition to these 14 firms, there were alsofive other cases in which all of the assets of the MBOfirm were sold in a series of transactions to publicor private buyers. Such transactions also arguablyrepresented moves away from diversification andtoward greater corporate focus. Two of these “busted-up” firms, Beatrice and Wometco, were classified as“conglomerates” prior to their buyouts; and another,Uniroyal, was viewed as “unrelated.” The other twoliquidated firms, Denny’s and Storer, were consid-ered “related-diversified” firms.

Only one firm, Macy’s, moved toward greaterdiversification after the buyout. Prior to its MBO,Macy’s was classified as a single-business firm (de-partment store retailing). After the MBO, it consider-ably expanded its specialty store retailing operationsand was accordingly classified as related-diversified.

THE ROLE OF THE BUYOUT SPECIALIST

Twenty of the 32 firms in our sample undertookthe MBO with the assistance of a buyout specialist.Some well-known buyout specialists includeKohlberg, Kravis & Roberts (KKR), Forstmann Little,Clayton & Dubilier, and Kelso & Co. A buyoutspecialist derives its ability to be in the MBO businessfrom the buyout fund it raises, which is used tofinance equity purchases in the buyout target, andfrom its effectiveness in securing commitments fromlenders. These buyout specialists are importantstakeholders in the post-buyout firm by virtue oftheir equity ownership and their control over the

debt and equity funds used to finance the buyout.They have strong reputational as well as financialstakes in the success of the post-buyout firm. Theremaining 12 firms in the sample executed theirMBOs without the participation of a buyout special-ist (the “independent” MBOs).

One question of interest is whether there wasa systematic difference between the targets ofspecialist-associated and independent MBOs. In a1989 “Presentation on Leveraged Buyouts,” KKRlisted the following criteria for buyout candidates:(1) a history of demonstrated profitability, (2) strongand stable cash flows, and (3) readily separableassets or businesses for sale, if necessary. Both typesof targets, specialist-associated and independent,would likely require stable cash flows to meet thehigh level of debt service obligations of the post-buyout firms. But the two groups may well havediffered in their relative emphasis on the separabilityof the target’s businesses, with the buyout specialistsseeking out inefficient conglomerates to exploittheir comparative advantage in selling assets.

Our findings (presented in Table 3) providestrong support for this argument. Fourteen of the 18MBOs earlier classified as “unrelated” or “conglom-erate” had buyout specialist participation, includingall five firms that underwent bustups. Nevertheless,15 of the 20 specialist-associated MBOs continued tooperate some of the original businesses of the pre-buyout firm, suggesting that the LBO specialist’s rolegoes well beyond simply the buying and selling ofassets.

DIVESTMENT STRATEGIES

The analysis thus far summarizes the broadchanges in corporate strategy achieved by largeMBO firms. To further understand how the buyoutfirms achieved these changes, we also attempted aconsiderably more detailed analysis of the specifictypes of divestment strategies. For each of the 32MBOs in our sample, we attempted to classify each

TABLE 3PRE-BUYOUTDIVERSIFICATION TYPEAND PARTICIPATION BY ABUYOUT SPECIALIST

Pre-buyout diversification type

Single Line of Business Unrelated DiversityMBO type and Related Diversity and Conglomerate Total

Independent 8 4 12Specialist 6 14 20

Total 14 18 32


individual divestment into one of the four followingcategories:4

1. No identifiable divestiture activity following thebuyout;

2. “Market focus” strategy—in which restructuringconsisted of a reduction of geographical coverage;

3. “Business focus” strategy—in which divestedlines of business were related to those retained;

4. “Corporate focus” strategy—in which divestedlines of business were unrelated to those retained.

To illustrate our procedure, consider the caseof the conglomerate American Standard. Followingits buyout in 1988, the company sold, in five separatetransactions, its rail braking, railway switch andsignal, metal doors and frames, and a portion of itsrefrigeration businesses. As of the end of 1991,American Standard continued to produce automo-tive braking equipment, air-conditioning and refrig-eration products, and building products.

We classified the railway equipment transac-tions as “corporate focus” strategies, because as aconsequence of these transactions the firm exitedthese related lines of business altogether. The lattertwo divestitures were classified as “business focus”strategies, since the company continued to operatein related lines of business. (As this case is meant toillustrate, companies can pursue different divest-ment strategies at the same time. Indeed, 23 of the32 MBOs pursued two or more different divestmentstrategies following the buyout.)

In Table 4, we present the types of divestmentstrategies followed by the 32 firms classified accord-ing to their pre-buyout diversification strategy. Aswould be expected, the two most diversified groupsof companies (“conglomerate” and “unrelated di-versity”) pursued a broader variety of divestmentstrategies, since they were already competing in a

broader range of businesses to begin with. Somefirms divested entire lines of business. For example,Borg-Warner completely exited its industrial prod-ucts, financial services, and chemical products busi-nesses, while narrowing its focus to automobilecomponents and protective services. Other firms,however, chose to divest assets related to their corebusinesses as well those unrelated to the core. Forexample, Bell & Howell divested not only itsunrelated career education business, but also itsMerrill publishing unit.

Among the 12 related-diversified and the twosingle-business firms in the sample, two firms,Parsons and Payless Cashways, made no divest-ments at all in the post-buyout period. Indeed, thereis no evidence that these firms made any significantchanges in strategic direction. Both firms weretargets of hostile bids immediately preceding theMBO, which suggests the buyouts may have beenmotivated primarily by management’s desire toretain control.

The other “related-diversified” industrial firmspursued a business focus divestment strategy byexiting certain businesses related to their corebusinesses. Although each of these firms narrowedtheir operations, the extent of the refocusing was, asone would expect, considerably less than thataccomplished by the more diversified firms. As oneexample of a divestiture by a related-diversifiedcompany, Levi Strauss sold its hats and Koretleisurewear business while retaining a substantialpresence in the branded leisure apparel business.

Of particular interest were the divestiture pro-grams of the nine retailers. Some of them entered theMBO with a related-diversification strategy. Safeway,for example, was primarily a food retailer, but hadsome discount wine retailing operations that were

TABLE 4DIVESTMENT STRATEGY

4. The typology constructed for divestment strategy mirrors the growthstrategy typologies in H. Igor Ansoff, Corporate Strategy (McGraw Hill, 1968).

Divestment strategy

Pre-buyout No Market Business Corporatediversification type Divestments Focus Focus Focus Bustup

Single Business 1 1 1 N/A 0Related Diversity 1 3 8 N/A 2Unrelated Diversity 0 3 7 7 1Conglomerate 0 2 5 7 2

Total 2 9 21 14 5

Fourteen of the 18 MBOs earlier classified as “unrelated” or “conglomerate” hadbuyout specialist participation, including all five firms that underwent bustups.

Nevertheless, 15 of the 20 specialist-associated MBOs continued to operate some ofthe original businesses of the pre-buyout firm.


sold after the buyout. Others pursued an unrelateddiversification strategy prior to the buyout. Revcocombined its large drug-store operations with close-out merchandise stores and a variety of other small,unrelated businesses—most of which were soldafter the MBO.

Five of the nine retailers pursued a market focusstrategy. Safeway, for instance, exited the U.K.market and withdrew from certain regional marketswithin the U.S. to narrow its geographic coverage.This strategy on the part of food retailers wasinfluenced by the existence of significant regionaleconomies of scale rather than economies at thenational level. Furthermore, the more diversifiedretailers exited from entire lines of retail operations:Revco, as just mentioned, from its discount storeoperations, Eckerd from clothing, department stores,and videos, and Southland from auto parts retailing.All these divested operations shared the commonfeature of having no appreciable economies of scaleor scope across the different retail operations.

In sum, the pattern of our results suggests thatstrategic refocusing was an important aspect of post-buyout restructuring activity.

Acquisition Strategies InThe Post-Buyout Period

The evidence regarding acquisition and facili-ties expansion suggests that MBO firms typicallypursue limited growth opportunities in their corebusinesses after MBOs. Fourteen of the 32 firms inthe sample reported expansion activity in the post-buyout period.

Although all but three of these post-MBOacquisitions were a relatively small fraction of thesize of the MBO firm, there was a clear strategicpattern to all the transactions. The overwhelmingmajority of the expansion moves represented growthprospects related to the core business of the firm. Forexample, ARA Services made seven acquisitionssince its MBO in 1984, all of which were related tothe firm’s pre-existing core service businesses (food,laundry, family and health care, and transportationservices). Four retailers took steps to achieve thebenefits of regional economies of scale. Another

retailer, Macy’s, acquired two divisions from Feder-ated in a move to expand its primary departmentstore business. Three firms in the communications/broadcasting industry made acquisitions of facilitieswithin their primary regions of operation.

Interestingly, three firms in our sample buckedthe general trend toward specialization and acquiredunrelated businesses in the post-buyout period. Butall three of these acquisitions were subsequentlyreversed during the post-buyout period.

THE LONGEVITY OF MBOs

We also compiled evidence on the economicviability of the MBO organizational form by exam-ining the eventual ownership status and debt repay-ment record of our 32 MBOs.

There are three distinct perspectives on thefundamental economic role of MBOs, each of whichmakes a prediction about their longevity and even-tual ownership status. In one view, the buyout groupis seen primarily as just an efficient seller of detach-able corporate assets. According to this view, buyoutorganizations play no role in managing assets andshould last only long enough to dispose of all thefirm’s assets. In a second view, MBOs are seen as ameans of conversion to an inherently more efficient,relatively permanent form of corporate organization.Michael Jensen, one of the principal advocates ofLBOs, maintains that private firms should be moreefficient than public corporations in managing enter-prises in low-growth or declining industries.5 Third,there is a “shock therapy” view that suggests buyoutsare intended to accomplish major shifts in strategythat are largely one-time events. This view sees thebuyout form of organization as inherently inferior tothat of the public corporation once these fundamen-tal changes in the firm have occurred. Accordingly,most MBOs that successfully restructure the firm andrestore profitability will return to public ownership.6

Ownership Status and Time Spent Private

We investigated the extent to which our sampleof MBOs provides support for each of these threeviews. At the end of 1991, 22 (or 68%) of the 32 MBO

5. See Michael Jensen, “Eclipse of the Public Corporation,” Harvard BusinessReview (Sept.-Oct. 1989).

6. See John Easterwood, Anju Seth, and R. F. Singer, “The Impact of LBOs onStrategic Direction,” California Management Review, Fall 1989; and Alfred Rappaport,

“The Staying Power of the Public Corporation,” Harvard Business Review, (Jan-Febr. 1991).


firms were still private (see Table 5), while five MBOs(16%) had returned to public ownership through aninitial public offering (IPO) and another five (16%)were completely liquidated in a series of sales.7

A closer look at these results led us to threeobservations. First, bust-up liquidations were notthe dominant outcome of MBOs. Even most MBOsassociated with buyout specialists, as noted earlier,continued to operate a significant portion of theassets acquired. Second, although there was a smallproportion of firms that returned to public owner-ship, not all of these IPOs represented successfuloutcomes. One of them, Southland, returned topublic ownership following a Chapter 11 reorgani-zation. We refer to such cases as “financial” IPOs. Inaddition, two of the 22 firms that were still privateat the end of 1991 returned to public ownership bymeans of financial IPOs in the first seven months of1992. The IPO of one of these firms, Burlington,followed a voluntary restructuring of debt to avoida Chapter 11 filing. The IPO of the other, CharterMedical, followed a prepackaged Chapter 11 filing.

The third major conclusion that emerged fromour analysis of organizational form was that themajority of the firms in our sample continued to beprivately owned. But does this necessarily imply thatthe MBO represented a superior alternative to thepublic corporation? To address this question, wenext attempted to examine the underlying reasonsfor the continuation of private ownership.

The top management of five MBO firms in oursample have made public statements indicating thattheir firms are likely to remain in private ownershipindefinitely. We refer to these as “permanentlyprivate” firms. They include such family-managedfirms as Levi Strauss and Cox Communications aswell as professionally managed firms such as ARA

Services, Parsons, and Metromedia. Cox and ARAgrew in the post-buyout period through acquisitionsof businesses related to their core, and Levi Straussexperienced strong sales growth from its existingproduct lines.

We also calculated the length of time oursample of firms spent private. We began with thesupposition that greater pre-buyout diversificationwould be associated with longer time periods underthe MBO organizational form—simply because themagnitude of the restructuring task confrontingmanagement presumably increases with the num-ber of independent businesses to be divested.

Our findings support this hypothesis. For theconglomerate and unrelated-diversified firms in oursample, the average length of time under privateownership was 56 months. By comparison, theaverage duration of private ownership for the singleand related-diversified firms was 51 months. More-over, of the 16 firms that had remained private formore than the sample median of 45 months, fivewere unrelated-diversified or conglomerate firms,five were the “permanently private” firms citedabove, and six were having difficulty meeting theirdebt obligations.

Overall, our evidence suggests that greaterlongevity is associated with a number of complexfactors, including the scope of the restructuring task,financial distress (though even Chapter 11 companiesre-emerge as public companies through IPOs), andthe relative efficiency issues raised by Jensen andothers. Moreover, our test of 32 MBOs is far fromconclusive. It takes time for the effects of the strategicdecisions in post-buyout firms to materialize into awell-defined strategy and outcome. The still-privatefirms in our sample have had different windows ofopportunity to implement their strategies, ranging

Pre-buyout Final Outcome of BuyoutDiversification Type Still Private IPO Sold in Bustup

Single Business 2 0 0Related Diversity 7 3 2Unrelated Diversity 7 1 1Conglomerate 6 1 2

Total 22 5 5

TABLE 5FINAL OUTCOME

7. These figures are similar to those reported by Steven Kaplan’s study of 183large LBOs. See “The Staying Power of Leveraged Buyouts,” Journal of FinancialEconomics, October 1991, pp. 287-313.

Three firms in our sample bucked the general trend toward specialization andacquired unrelated businesses in the post-buyout period. But all three of these

acquisitions were subsequently reversed during the post-buyout period.


from 2 3/4 to 8 1/2 years. Whereas the strategicoutcomes of the older MBOs are now relativelyclear, those of the latest ones are still unfolding.

Debt Repayment

Measuring the economic success of a buyout is,of course, a decidedly more complex problem thansimply examining the payment record of debt issuedto finance the buyout.8 But even if default is at besta noisy indicator of success, the debt service recordof a sample of buyouts nevertheless contains someuseful information.

By the end of 1991, five of the sample of 32MBOs had renegotiated the terms of their debt orexchanged debt to obtain more flexibility in makingpayments one or more times,9 and four others hadfiled under Chapter 11 of the bankruptcy code.Thus, at most nine firms (or 28%) had experienceddifficulties servicing their debt. (And two of thesefour Chapter 11 filings, Jim Walter’s and NationalGypsum’s, were prompted by asbestos-related claimsrather than inability to service debt.) The other 23firms—and thus the vast majority of the sample—had no apparent problem servicing debt over thetime period we examined.

In view of news reports of the catastrophicconsequences of financial distress at firms like Revcoand Macy’s, the positive repayment experiences ofthe majority of the sample firms may seem surpris-ing. But the experiences of the firms in our sampleare very much in line with the findings of the mostwidely cited studies of default rates on junk bonds.10

Aside from the two cases of asbestos-relatedclaims, what were the most prominent causes ofdefault?

The most common source of financial difficultyappears to have been regional or national economicdownturn. Four firms in the sample—Macy’s,Burlington Industries, Southland, and Supermarkets

General—had problems with debt service related toregional or national recession. (And the asbestosproblems of National Gypsum cited above were alsocompounded by recession in the construction in-dustry.) High debt levels, of course, greatly magnifythe effects of economic contraction or strategicerror, leaving little room for bad luck or mistakes.

In three of the nine cases, financial difficulty canbe attributed in large part to overexpansion. Revco,for example, decided within a year of going privateto embark on a capital-intensive program to expandtheir product offerings to include televisions, furni-ture, and VCRs.11 Similarly, Macy’s acquired the I.Magnin and Bullock’s divisions of Federated for $1.1billion two years after its buyout, adding to itsalready substantial debt burden. The third firm,Charter Medical, set out on an ambitious expansionof its psychiatric hospital business at a time whendemand for these services was declining.

Two trends in capital markets may have mag-nified the consequences of economic downturn andstrategic error: namely, the possibly systematicoverpricing of buyouts and the clear displacementof private subordinated debt by junk bond financingin the latter years of the buyout market (1986-1988).12

Paying too much for a company and then funding thepurchase with 90% debt is certainly a prescription forcostly financial problems. Such overpayments werereportedly a major source of difficulty in the buyoutof Revco,13 the leveraged recapitalization of Interco,and the Campeau acquisitions of Federated andAllied.14 When combined with this overpricing, thewidespread substitution of public junk bonds forprivate, subordinated debt in buyout financing in thelatter ’80s reduced the ability of firms experiencingfinancial trouble to restructure their debt voluntarilyrather than file for Chapter 11.15

Finally, the financial troubles of two firms,Supermarkets General and Bell & Howell, wereaggravated by their failure to make investments

8. For example, it now appears that Campeau’s leveraged acquisition ofFederated Department Stores, while filing for Chapter 11 and imposing large losseson junior bondholders, has resulted in a $1.6 billion increase in the total operatingvalue of the company (that is, the market value of debt plus equity).See Steven N.Kaplan, “Campeau’s Acquisition of Federated: A Post-Petition Post-Mortem,”University of Chicago and NBER working paper (1992).

9. Two of these five firms, Macy’s and Charter Medical, filed for bankruptcyduring the first six months of 1992.

10. For example, Asquith, Mullins and Wolff (1989) report that one-third ofall junk bond issues between 1977 and 1982 resulted in default or exchange byDecember 31, 1988.those reported by Asquith, P., D. Mullins and E. Wolff,“Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, andCalls,” Journal of Finance, Vol. 49, September 1989, pp. 923-952.

11. See Karen Wruck, “What Really Went Wrong at Revco,”Journal of AppliedCorporate Finance, (Summer 1991).

12. See in this issue Steven Kaplan and Jeremy Stein, “The Evolution of BuyoutPricing and Financial Structure (Or, What Went Wrong) in the 1980s,” Journal ofApplied Corporate Finance, (Spring 1993).

13. Ibid.14. See Kaplan’s study cited in note 8, which estimates that Campeau overpaid

for Federated’s assets by at least $2 billion and funded the purchase with 97% debt.15. A small number of large creditors holding private placements will likely

be more willing and able to renegotiate debt contracts to avoid Chapter 11 thandispersed public debtholders. See Paul Asquith, Robert Gertner, and DavidSharfstein, “Anatomy of Financial Distress: An Examination of Junk Bond Issuers,”mimeo, MIT, 1992.


necessary to maintain their market position, profit-ability, and value. Soon after their buyouts weretransacted in the late ’80s, both firms reported cashflow problems arising from negative economic andindustry conditions. Given these initial problems,both were later reported to have been unable tomake necessary investments in their operating busi-nesses. For example, while its competitors werereported to have spent 2% of revenues in refurbish-ing and opening new stores, Supermarkets Generalspent only 1%, with negative consequences for laterrevenues and market share. In both these cases, theonset of financial distress appears to have com-pounded the possible tendency of highly leveragedfirms to underinvest.

THE ACQUIRERS OF DIVESTED ASSETS

Some observers have suggested that the princi-pal source of gains from asset sales that accompa-nied MBOs and other leveraged restructurings wasindustry consolidation and the resulting increases inthe market power of the remaining firms—a move-ment encouraged by the relaxed antitrust enforce-ment in the 1980s. Defenders of asset sales argue,however, that the primary aim of such massive assettransfers was to reverse the inefficiencies created bythe conglomerate movement of the late ’60s and’70s, and to bring about consolidation within indus-tries with excess capacity.

In a preliminary attempt to decide betweenthese two hypotheses, we identified a total of 144different divested assets for our sample of 32 firms.In 124 of those cases, we were also able to identifythe acquirer of those assets. And, in an attempt toassess the potential importance of increased market

power in those 144 divestitures, we classified theacquirer of each divested asset into one of thefollowing seven categories:

1. Horizontal—if the selling and acquiring firmscompeted against each other in a local market forretailers or in a national or international market forfirms not involved in retailing;

2. Vertical—if the acquirer purchased a divisioninvolved in either an earlier or later stage of theproduction process;

3. Market extension—if the acquirer purchased adivision that sold in a market that the acquirer hadnot previously participated;

4. Product extension—if the acquirer purchased adivision that made a product that was related to theacquirer’s existing product mix, but in which theacquirer had not been previously involved;

5. Unrelated—if no similarities could be foundbetween the divested asset and the existing activitiesof the acquirer;

6. Divisional buyout—if division managers, possi-bly with the aid of a buyout specialist, purchased thedivested asset or the asset was spun-off to publicownership under the existing divisional managers;

7. Unknown—if the identity or business of theacquirer could not be determined.Our findings, as summarized in Table 6, revealedthat 86 (or almost 60%) of the 144 divested assets fellinto one of the first four categories, thus represent-ing related acquisitions for the purchaser.

We next attempted to offer a preliminaryassessment of the relative importance of efficiencyand market power as motives in these 86 relatedacquisitions by making comparisons among each ofthese four categories. Although horizontal acquisi-tions could be motivated by either efficiency or

Pre-buyout diversification type

Firms with Single Firms with Unrelated PercentageAcquirer Type Line of Business Lines of Business of Columnfor Divested Assets or Related Diversity or Conglomerates Total Total

Horizontal 12 22 34 23.6Vertical 0 5 5 3.5Market extension 9 18 27 18.7Product extension 4 16 20 13.9Unrelated 0 4 4 2.8Divisional buyouts 8 26 34 23.6Unknown 4 16 20 13.9

Total 37 107 144 100.0

TABLE 6ACQUIRER TYPE FORDIVESTED ASSETS

Our evidence on the acquirers of divested units confirms the argument that therestructuring of the ’80s led to increased corporate specialization and sharpening of

focus. Some 97% (120 of 124) of the divestitures following MBOs representedtransfers to specialized, or at least relatively undiversified, acquirers. Conversely,

only 4 (or 3%) of 124 divested assets were sold to unrelated acquirers.


market power considerations, we assumed that theother three categories—vertical, market extension,and product extension acquisitions—could be at-tributed only to perceived economies of scale orscope in production, distribution, or management.

On this basis, it appears that at most 34, or only40%, of the 86 related acquisitions could conceiv-ably have been motivated by market power consid-erations. And, no doubt many of these 34 horizontalacquisitions—which also constitute less than 25% ofthe total of 144 acquisitions—were motivated byeconomies of scale or scope. For example, many ofthe retailing divestitures were clearly motivated byeconomies of distribution expected by the subse-quent buyers of the assets. Thus, the case forincreased market power as the predominant expla-nation for asset sales seems tentative at best.

Perhaps the most interesting aspect, however,of our evidence on the acquirers of divested units isthe extent to which it confirms our argument that therestructuring of the ’80s led to increased corporatespecialization and sharpening of focus. To presentthe above results in a slightly different way, of the124 acquirers we were able to identify, 86 (or almost70%) were in businesses related to that of thedivested operations. Moreover, when you add tothose 86 cases the 34 divisions of MBOs sold to theirown managers in subsequent MBOs (see Table 6),our results imply that some 97% (120 of 124) of thedivestitures following MBOs represented transfersto specialized, or at least relatively undiversified,acquirers. Conversely, only 4 (or 3%) of 124 divestedassets were sold to unrelated acquirers.

CONCLUSION

Our analysis of 32 large management buyoutsin the 1980s comes to three main conclusions. First,MBOs were a means for refocusing the strategicactivities of the firm towards its core business. To theextent that the pursuit of unrelated lines of businessdetracted from a company’s competitive advantagein its core business, this strategic redirection contrib-uted to improved corporate performance and gen-eral economic efficiency.

Second, MBOs seem to be a relatively durableform, with even specialist-governed LBOs continu-ing to operate significant portions of the originalassets. The majority of the MBOs in our samplecontinue to operate as private firms, though inseveral cases at reduced scale and scope. It is alsoclear that the very high levels of leverage in MBOsleft little room for strategic error and increased theirvulnerability to economic downturns. Some MBOshave, of course, experienced difficulties in meetingtheir debt obligations, especially during the 1989-91years of sluggish growth and recessionary condi-tions in the U.S. But the relatively modest percentageof financially troubled MBOs suggests suprisinglylittle economic damage from overleveraging.

Finally, our evidence on the buyers of assetslater divested by MBO firms calls into questionprevious assertions about the motives of buyers.Such post-MBO asset sales appear to have beenmotivated primarily not by a quest for marketpower, but rather by the pursuit of strategic goals ofgreater specialization and corporate focus.

JOHN EASTERWOOD

is Assistant Professor of Finance at the R. B. Pamplin College ofBusiness at Virginia Polytechnic Institute & State University.

ANJU SETH

is Assistant Professor of Strategy at the College of BusinessAdministration at the University of Houston.


AFG INDUSTRIES, INC. 1988 buyout by team headed by AFGChairman Randall Hubbard. The company was an integratedmanufacturer and fabricator of flat glass products, emphasizingvalue-added, specialty products. In the year prior to the buyout,the company entered the automobile replacement glass busi-ness, which was divested in the post-buyout period. Private asof December 1991.

ARA SERVICES, INC. 1984 buyout by team of 70 seniormanagers led by ARA Chairman Joseph Neubauer. The companyprovided or managed services in food and refreshment, healthand family care, transportation, textile rental and maintenance,and magazine and book distribution. Divested transportation unitjust prior to buyout. Post-buyout, sold airline services subsidiary,marginally profitable small vending operations, and Smith Trans-fer trucking unit. Made several horizontal/product extensionacquisitions. Private as of December 1991.

AMERICAN STANDARD INC. 1988 buyout led by Kelso & Co.The company was a diversified manufacturer of air-condition-ing products, transportation products including automobilebraking and railroad equipment, and building/plumbing prod-ucts. In the post-buyout period, the company sold its headquar-ters property, Steelcraft Division (steel doors and architecturalproducts), railroad equipment divisions, and one of its refrigera-tion units. Private as of December 1991.

BEATRICE COMPANIES, INC. 1986 buyout led by Kohlberg,Kravis & Roberts. The company’s businesses included process-ing and distributing food products, consumer products, and carrental. Within 2 years of the completion of the buyout, the firmhad sold its car rental, soft drink bottling, personal products,cosmetics, dairy products, refrigerated warehousing, printing,lamps, luggage and bottled water businesses. The internationalfood units were sold soon after, as were the Tropicana Juice andFisher Nuts businesses. The sale of the remaining branded foodproducts businesses was accomplished by mid-1990.

BELL & HOWELL CO. 1988 buyout led by investor Robert Bass.The company was involved in career education (electronics andcomputer science schools), publishing (textbooks and micro-publishing), visual communications systems, information stor-age and retrieval and document/mailing processing. In the post-buyout period, the company exited the career educationbusiness, divested its holdings in Bell & Howell/ColumbiaParamount Video Services, and sold various non-core busi-nesses. Sold the core publishing unit (Merrill Publishing) in1989. Private as of December 1991.

BORG-WARNER CORPORATION 1987 buyout led by MerrillLynch. This conglomerate operated in four business segments:chemicals & plastics, financial services, protective services andtransportation equipment. Post-buyout, the company sold itschemicals & plastics and financial services units to focus on theautomotive parts and protective businesses. Private at end 1991.

BURLINGTON INDUSTRIES, INC. 1987 buyout led by MorganStanley. The company was a vertically-integrated manufacturerof yarn, textiles, carpets and related products for apparel, homeand industry. In the post-buyout period the company sold 10of its businesses including automobile interior products, glassfabrics and industrial fabrics, to focus on apparel and interiorfurnishings. Also sold 8 manufacturing and other facilitiesincluding its largest denim factory, one of its core activities.Private as of December 1991.

CHARTER MEDICAL CORPORATION 1988 buyout led byChairman, President and founder, William A. Fickling. Thecompany primarily owned and operated psychiatric hospitals.Also owned acute care general hospitals and provided variousmedically-oriented services. Post-buyout, sold or closed anumber of psychiatric hospitals and one acute care generalhospital. In the same time period, substantially expanded in thepsychiatric hospital sector. Private as of December 1991.

COX COMMUNICATIONS, INC. 1985 buyout by the Coxfamily, which previously owned 40% of the company. Thecompany owned and operated television and radio stations andcable television systems; produced motion pictures; operatedautomobile auctions; and owned and operated data service andpaging services businesses. Post-buyout, the company divestedcertain of its television, radio, and cable system properties whileacquiring other properties in the same lines of business.Divested its data services and paging services businesses.Substantially expanded its automobile auction business. Privateas of December 1991.

DENNY’S, INC. 1985 buyout led by Merrill Lynch. The com-pany was engaged in the foodservice business mainly throughDenny’s restaurants, Winchell’s Donut Houses, and El PolloLoco restaurants. In the post-buyout period, the companyspun off a 58% interest in Winchell’s to public shareholders.The company expanded its chain of Denny’s and El PolloLoco restaurants. In July 1987, the company was sold to TWServices.

JACK ECKERD CORPORATION 1986 buyout led by MerrillLynch. The company focused its retailing activities considerablyin the six months prior to the buyout, divesting its J. Byronsdepartment stores, casual wear clothing stores, & AmericanHome Video specialty stores. At the time of the buyout it ownedand operated drug stores in Sunbelt markets and optical storesin 5 states. Post-buyout strategy of related diversification intophoto stores, expansion of its core drug store business, anddownsizing its optical store operations. Private as of December1991.

FORT HOWARD CORPORATION 1988 buyout led by MorganStanley. The Company manufactured disposable paper prod-ucts, including napkins, towels, toilet tissue, and boxed facialtissue; food and beverage service products of plastic, paper and

APPENDIX

This appendix provides information about the strategic restructuring activities of the sample firms. For each firm, we identify theyear of completion of the buyout and the name of the affiliated buyout specialist, if any. Each case briefly lists the businesses thefirm was engaged in prior to the buyout, the changes that occurred after the buyout, and the ownership status as of year end 1991.


foam including tableware and containers, and packaging andlabeling products. Post-buyout, sold its paper cup operations,launched a line of bathroom tissues and paper towels of fully-recycled fibers, and planned to expand capacity at its Green Bayplant by 20%. Private as of December 1991.

GAF CORPORATION 1989 buyout led by Chairman, Samuel J.Heyman. The company was engaged in the manufacture andsale of specialty chemicals and building materials. Shortly afterthe buyout, added a subsidiary to its Chemicals Division. Withina year of the buyout, the company sold its surfactant unit toRhone-Poulenc. Took its International Specialty Products sub-sidiary, which contained the remaining specialty chemicalbusinesses, public in June 1991. GAF Corporation, with fullownership of the building products businesses, continued to beprivately held as of December 1991.

HOSPITAL CORPORATION OF AMERICA 1989 buyout led byChairman T.F. Frist, Jr. In the year prior to the buyout, thecompany sold 104 hospitals to a new employee-owned com-pany, called Health Trust Inc., in which it retained a sizeablestake. The remaining larger hospitals (including psychiatric andacute care facilities in the U.S. and overseas) provided moresophisticated medical services. Also had management contractsand consulting agreements with other health care facilities.Post-buyout, sold its hospital management subsidiary andclinical laboratory unit to units’ senior managers, and divestedAustralian operations as well as the bulk of its Health Trust Inc.stake. Private as of December 1991.

LEAR SIEGLER INC. 1987 buyout led by Forstmann Little. Thisconglomerate produced aircraft and aerospace systems, auto-motive products, material handling systems, boats, handguns,telecommunications equipment and furniture components. Inthe post-buyout period, sold most of its businesses to focusprimarily on automotive glass products, with some othersmaller operations. Private as of December 1991.

R.H. MACY & CO., INC. 1986 buyout led by Chairman & CEOEdward S. Finkelstein. The company owned and operatedmedium-to-high price department stores in 14 states, andshopping centers in 4 states. Shortly prior to the buyout, thecompany sold Missouri & Kansas stores. Post-buyout, thecompany divested its shopping center businesses and creditcard business. Purchased the I. Magnin and Bullocks Wilshiredivisions of Federated Department Stores Inc. and entered thespecialty stores field. Private as of December 1991.

METROMEDIA, INC. 1984 buyout led by Chairman JohnKluge. The company consisted of four operating groups ofcompanies: 1) Television and Radio Broadcasting; 2) OutdoorAdvertising; 3) Entertainment (production and distribution oftelevision programs, video tape production services, touringteams providing basketball entertainment, touring ice shows,indoor ice skating rinks); (4) TeleCommunications (cellularphone and radio paging). Post-buyout, sold all of the abovebusinesses. Acquired a substantial stake in Orion Pictures,and entered the long-distance telephone services industry.Reorganized under the name Metromedia Co., which is pri-vate as of December 1991.

NATIONAL GYPSUM COMPANY 1986 buyout led by GoldmanSachs. The company was an integrated, diversified manufacturerof products for the building construction industry and provideddesign, engineering and construction services for industrial andcommercial markets. Post-buyout, the company sold its decora-tive products division, cement distribution facilities, ceramicfloor/ wall tiles division, glass products division, and windows/doors division. It focused on its gypsum wallboard business anddesign/engineering services. Private as of December 1991.

OWENS-ILLINOIS, INC. 1987 buyout by Kohlberg, Kravis &Roberts. The company was a diversified manufacturer of glasscontainers, specialized glass products, plastic containers andmultipack carriers, metal and plastic closures, pharmaceuticalpackaging, paperboard & containers, and plywood and dimen-sion lumber. It also owned nursing/ retirement homes. Post-buyout, the company sold its forest products division and spunoff its nursing homes to public shareholders. Acquired BrockwayInc, a glass and plastic container manufacturer, to become theleading glass container maker in the U.S., Set up a joint venturefor manufacture of television screens. Returned to publicownership in December 1991.

PARSONS CORPORATION 1984 buyout by company’s em-ployee stock ownership plan, spearheaded by Chairman & CEOWilliam E. Leonhard. The company provided design, engineer-ing, procurement, and construction services in industry world-wide. No apparent changes in strategy in the post-buyoutperiod. Private as of December 1991.

PAYLESS CASHWAYS INC. 1988 buyout led by David Stanley,Chairman & CEO. The company and its subsidiaries operateda chain of retail stores in 26 states located primarily in theMidwest, Southwest, Pacific Coast and New England areaswhich sold extensive lines of building and home improvementproducts. Post-buyout, closed two stores and opened two newstores. Private as of December 1991.

REVCO DRUG STORES, INC. 1986 buyout led by Transconti-nental Services. The company owned and operated retail drugstores and close-out merchandise stores. It also owned a liquidgeneric drug manufacturer and a vitamin manufacturer, acomputer software company, an insurance agency, and variousother businesses. Post-buyout, the company sold its Odd-Lot off-price retail operations and some of its non-drugstore businesses.Tried unsuccessfully to pursue a strategy of upgrading its drugstores to department stores. Subsequently downsized its drugstore operations considerably. Private as of December 1991.

SAFEWAY STORES, INC. 1986 buyout led by Kohlberg, Kravis& Roberts. The company owned and operated conventionalsupermarkets, “Food Barn” warehouse-type food stores, super-warehouse stores, and “Liquor Barn” discount liquor stores; alsoowned and operated distribution, manufacturing and process-ing operations in support of its retail operations. Post-buyout,sold its U.K. and Australian operations, discount liquor andwarehouse food stores, and exited a number of regional grocerymarkets to focus primarily on the northwestern U.S., RockyMountain, and Canadian markets. Returned to public owner-ship in April 1990.

APPENDIX (Cont.)


SCOA INDUSTRIES, INC. 1985 buyout led by Thomas H. Lee,a Boston buyout specialist, and Drexel Burnham Lambert Inc.Company was engaged in general merchandise discount retail-ing (primarily Hills Department Stores) in the East and Midwestand footwear operations throughout the U.S. Sold footwearretailing operations to focus on discount department stores. Thecompany returned to public ownership in 1987.

SOUTHLAND CORPORATION 1987 buyout by the Thompsonfamily including John P. Thompson & Jere W. Thompson,Southland’s two top executives. The company operated andfranchised convenience stores doing business principally underthe name 7-Eleven, and owned 50% of Citgo Petroleum. Otherbusinesses included processed dairy products; fast food prod-ucts primarily for intracompany sale, and auto parts retailing.Post-buyout, sold its dairy product groups, auto parts retailbusiness, some fast-food manufacturing operations and hold-ings in Citgo. Also downsized convenience store operations. InMarch 19991, after bankruptcy reorganization, control of thecompany was transferred to Ito-Yokada Group, operator ofSouthland’s stores in Japan and public trading of new equity wasresumed.

THE STOP & SHOP COMPANIES, INC. 1988 buyout led byKohlberg, Kravis & Roberts. The company owned and operatedBradlees discount department stores and Stop & Shop super-markets in Northeast and Mid-Atlantic states; also owned andoperated manufacturing and distribution operations in supportof its retailing businesses. Sold a number of Mid-AtlanticBradlees stores to focus on Northeast markets. Returned topublic ownership in 1991.

STORER COMMUNICATIONS, INC. 1985 buyout led byKohlberg Kravis Roberts. The company owned and operatedseven television stations, and cable systems in 18 states. Post-buyout, divested some cable properties. Sold its broadcastproperties in 1987, the majority to a joint venture of KKR andGeorge Gillett (“SCI Television Inc.”). In 1988, sold the remain-ing cable assets (“SCI Holdings Inc.”) to Comcast and Tele-Communications Inc.

LEVI STRAUSS & CO. 1985 buyout by the Haas family. Thecompany was the world’s largest producer of branded apparel,marketing a broad range of leisure-oriented clothing through-out the world. Post-buyout, reversed earlier diversification

moves by selling Koret, a woman’s sportswear company, andits Resistol Hats division. Continued to expand in its basicjeanswear product line. Private as of December 1991.

SUPERMARKETS GENERAL CORPORATION 1987 buyoutled by Merrill Lynch. The company was a diversified retaileroperating “Pathmark” supermarkets and drug stores in north-east and mid-Atlantic states, and “Rickel Home Center” homeimprovement stores. The company also owned and operatedthe Purity Supreme chain of supermarkets in New England.Post-buyout, the company shut down 8 of the company’sstruggling Rickel stores, and sold its Purity Supreme chain tofocus on the Pathmark chain. Private as of December 1991.

UNIROYAL, INC. 1985 buyout led by Clayton & Dubilier. Thecompany manufactured and sold tire and related products;chemicals, rubber and plastic materials; and engineered prod-ucts and services. Post-buyout, formed a 50-50 joint venturewith Goodrich to combine the two companies’ tire operations(“Uniroyal Goodrich Tire Co.”). Sold its chemicals unit, plasticsunit and power transmission unit to focus on tire operations.Bought out the Goodrich half interest in the joint venture in1987. Sale of the tire company to Groupe Michelin in 1990.

JIM WALTER CORPORATION 1988 buyout led by Kohlberg,Kravis & Roberts. The company was engaged in construction/sales/ financing of shell-type homes; manufacture and distri-bution of building materials including asbestos insulationproducts, aluminum products, window components and marbleproducts; coal & gas mining and transportation; pipe &foundry products; production of coke and industrial chemi-cals; jewelry wholesaling and retailing; and paper distributionand office supply. Post-buyout, sold the paper operations,Georgia Marble subsidiary, jewelry operations, and CelotexCorp (asbestos insulation products). Hillsborough HoldingsCorporation, which owns the remaining assets, was privatelyheld as of December 1991.

WOMETCO ENTERPRISES, INC. 1984 buyout led by Kohlberg,Kravis & Roberts. The company’s businesses included televisionand radio broadcasting; cable television systems; entertainment(motion picture theaters, the Miami Seaquarium, guided tourservices and other entertainment ventures); and soft drinkbottling and vending. Within three years of the buyout, thedifferent businesses were sold to various acquirers.

APPENDIX (Cont..)

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