Leading Companies Online Magazine Archives
Everybody Wins! A Life in Free Enterprise
By Gordon Cain
Reviewed by David Binns, Beyster Institute Staff
“My last and most successful career began when I was eighty-two.”
So begins, "Everybody Wins!," the inspiring story of Gordon Cain whose astonishing successes in restructuring a series of chemical commodity businesses took place after he turned 70, an age when most people are well into retirement. In addition to a “low threshold for boredom,” Cain offers another explanation for what motivates him to create successful companies. “In creating these companies, I made a lot of money,” he writes, but as the book’s title shows, Cain wasn’t looking to simply feather his own nest. “Over a hundred of my associates became millionaires [and] about five thousand employees made from three to five times their annual salary from profit sharing and ESOPs.” In most cases, those results were realized in less than 10 years’ time.
Cain not only was an expert at friendly leveraged buy outs, but he was also a pioneer in using employee ownership, profit sharing and total quality management to transform a series of companies in the 1980s and 1990s. “My interest in employee stock ownership and profit sharing does not spring from altruism,” he emphasizes, “but rather from the conviction that my chances for success are better if all my associates have a stake in the business. Nor does my interest in employee participation come from any social theory but rather from the conviction that the combined knowledge of all the people involved will give a better result than relying only on the skills of a few people at the top.”
A chemical engineer by training, Gordon Cain was a decorated battalion commander for his service in the Philippines during World War II. Following the war he had a successful career as a manager and as a consultant for a number of major chemical companies where he developed valuable experience in helping to turn around troubled companies. Starting in 1982, at the age of 72, he agreed to finance the startup of the Sterling Group, a partnership formed to broker the sale of oil field-related businesses. Over the course of the next decade, the Sterling Group structured 40 LBO transactions, with Cain concentrating on chemical and related businesses.
In a typical leveraged buyout, secured lenders will provide 65 percent of the purchase price. To provide a return commensurate with the risk, equity is usually kept low at about 10 percent. The other 25 percent usually comes from preferred stock or, more typically, from subordinated debt, often referred to as “junk bonds.” In the Sterling Group’s first LBO, a $560 million acquisition of Vista Chemical, 39 managers invested $5.5 million for 10.7 percent of the company’s shares and received options and warrants for an additional 10 percent. When the company did an initial public offering four years later, the managers’ stock and options were worth over $50 million. Cain himself made $5 million on the Vista deal (which he subsequently invested in the company’s next LBO). Though Cain wanted to include an ESOP as part of the initial capitalization, skepticism on the part of the lenders, the managers and the employees' union blocked the creation of an ESOP until a subsequent recapitalization of Vista Chemical in 1989 when an ESOP bought 6.3 percent of the company’s stock. When Vista was sold one year later, ESOP participants netted an average benefit of $47,000.
The formula that Cain eventually worked out for all the subsequent LBOs he structured incorporated broad-based incentives for all of the company’s participants. “I wanted to operate with minimum overhead, not only to save money but to shorten lines of communication and give the management less time to think about anything but the business. All the key people would buy stock with their own money. In addition there would be an ESOP, a conventional stock option plan, and a profit-sharing plan that covered everyone.” Cain’s strategy was to ensure that “each key person had a greater stake in the success of the enterprise than in his or her own job, and all employees were owners.”
Cain’s next big LBO, a $225 million purchase of the Monsanto Corporation’s chemical commodities business, illustrates his approach to broad-based equity participation. At the closing of the transaction that created Sterling Chemicals Corporation, “we established a leveraged ESOP that borrowed $1.2 million and bought 24 percent of the initial common stock offering (15 percent on a fully-diluted basis). The five officers. . . bought 10.3 percent of the stock and got options on 8.2 percent, and eleven senior management people bought 4.5 percent and got options on 6.0 percent. . . Stock was offered to forty-three middle managers, and all but one bought it. This group bought 3.6 percent of the common equity.” In all, total employee ownership amounted to 47.6 percent of the company’s stock.
Sterling Chemical also implemented a quarterly cash profit sharing plan that paid all company employees an equal percentage of salary. The profit sharing payments were based on cash flow in excess of projected earnings used in structuring the original deal. In addition, Vista management implemented a total quality management (TQM) program throughout the organization, another strategy that Cain implemented in all his subsequent buyout companies. “I thought that making all of the employees stockholders through an ESOP would make them involved and motivated, but I was wrong,” Cain writes. “The announcement of the ESOP made hardly a ripple of interest. The change came when we started involving employees with the [TQM] program.”
Sterling Chemical performed so well over the next four years that they were able to buy back their subordinated debt. They paid an $80 million dividend ($100 per share on stock that had cost $10) and later that same year a $100 million dividend ($125 per share). When the company went public soon thereafter, the five top officers sold 25 percent of their stock for an aggregate $33 million and still owned stock worth $86 million. The stock at the next level of eleven managers was worth $60 million. In addition, they had received tens of millions in dividends and profit sharing and still had over $2.5 million in the ESOP. The author notes, “A typical craftsman or operator who earned about $40,000 a year received $35,000 at the IPO, had collected $52,000 in dividends and $17,000 in profit sharing, and had $120,000 worth of stock in the ESOP.” These returns were realized over a period of 12 years.
Astonishingly, Sterling Chemical wasn’t Gordon Cain’s most successful LBO. That distinction went to the $1 billion buyout of five ethylene plants from DuPont and another company that resulted in the creation of Cain Chemical. Using the same formula in which all the key people bought stock, management was provided with incentive stock options, and an ESOP was established to benefit all employees. The Cain Chemical employees acquired 44 percent of the initial equity. Less than one year later, Occidental Petroleum paid $1.2 billion in cash for all of Cain Chemical’s operations. Through the magic of leverage, "each share of common stock that initially cost $1 was worth $44 at closing. I came out with about $100 million,” Cain reports. Cain Chemical’s 1,337 employees divided $535 million between them. “This total was divided about equally among the ESOP, the seventy-seven managers who received options, and the key people who bought stock. An operator or craftsman in the plant who had the full amount in the ESOP received $112,000. These employees had already collected [an average of] $24,000 as part of the profit-sharing program.”
These and other successful LBOs structured by Gordon Cain benefited from sound business strategies, good management, the availability of easy credit, good timing in regard to commodity prices, and good luck – not to mention a lot of hard work. The point is that a savvy LBO manager proved that corporate restructuring transactions can benefit more than just the top managers and financiers. The thousands of employees who benefited from Gordon Cain’s commitment to making sure that when he wins, everybody wins, shows the promise of what employee ownership can deliver in the billions and billions of dollars worth of future corporate restructuring transactions still to take place. It simply requires the commitment of business leaders to give employees an opportunity to participate as owners in the transactions.
As for Gordon Cain’s “last and most successful career,” after several investments in the airline industry (some successful, others less so), Cain invested in three biotechnology companies. One of those companies, Lexicon Genetics, has already gone public and has a market capitalization of more than $1 billion (and presumably, some wealthy employees). The other two companies are moving ahead with plans to gain FDA approval for their products.
As for Cain himself, he writes that he feels “young at heart as I approach my ninetieth year.” Would that more business leaders follow Gordon Cain’s example of combining brains and heart to create companies whereby everybody wins.
"Everybody Wins! A Life in Free Enterprise" is available on amazon.com
©2007 The Beyster Institute and its authors and their entities. All rights reserved.
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