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Supply Chain Management of Great American Management and Investment, Inc. -
January 8th, 2011
A cursory look at Great American Management and Investment, Inc. (GAMI), may indicate that the company's primary function is as a manufacturer of electrical equipment. In fact, GAMI is a holding company, a type of investment trust, that buys underperforming companies, shores them up, and either pulls in revenue from the firms or sells them at a profit. The driving force behind GAMI is Samuel Zell, a celebrated Chicago financier. Zell, who also controls companies such as Itel and Nucorp, is responsible for transforming GAMI from a bankrupt real estate company into a small conglomerate.
Great American Management and Investment's origin ultimately stems from a piece of tax legislation enacted in 1960. This law exempted certain types of real estate trusts from taxation and created an entirely new market for so-called corporate "shelter brokers." One of the financial instruments that got its start from this legislation was the REIT, or real estate investment trust. Many banks established subsidiaries and joint ventures with real estate experts during this period, offering financing in exchange for the management expertise needed to administer a real estate investment.
As the industry built around this type of investment trust began to take off in the late 1960s, an Atlanta-based financial holding company called UniCorp began laying the foundation of a REIT business through its consulting subsidiary, the Great American Management Corp. The subsidiary staffed a separate unit, called Great American Mortgage and Investment, and began to build a portfolio of lending operations throughout the southern United States.
Great American Mortgage and Investment opened for business in August 1969, concentrating its business in the economically vibrant states of Georgia, Florida, and Texas. The group's primary trustee, James P. Furniss, was well-connected in the regional lending industry, having previously served with the Citizens & Southern National Bank in Atlanta.
GAMI restricted its lending primarily to short term construction projects and development loans, secured by first mortgages. It distinguished itself immediately through its approaches to loan origination and asset and liability management. The company pioneered real estate profit participation agreements with banks. These agreements gave GAMI access to real estate development in hundreds of small markets, while local banks gained access to funding and the talent to administer a tax-exempt real estate investment. The benefits of the loan, as well as its risks, were shared by GAMI and its partner banks. The proximity of the participating banks to the developments also enabled them to keep a close eye on the loans for GAMI.
GAMI also conducted equity participation agreements directly with developers. GAMI provided all the funding necessary for a project, while the builder contributed construction know-how and services. Because they invested jointly, the risks were distributed evenly between the builder and GAMI.
At the end of GAMI's first year in operation, the company had amassed more than $43 million in net invested assets. A year later, this number grew to nearly $240 million. Earnings remained stable, generating a healthy income for GAMI and its investors. By 1973 GAMI was the sixth-largest REIT enterprise in the country. About 80 percent of its lending was concentrated in construction lending, 13 percent in land loans, and six percent in junior mortgage loans.
Hoping to expand on this impressive record of growth, GAMI floated $25 million in senior subordinated debentures. This enabled the company to build a tiered debt structure similar to those maintained by major industrial corporations. The flotation expanded GAMI's borrowing base from $80 million to about $105 million, and ballooned its total leveraged debt reserve from $238 million to more than $313 million.
GAMI had the funds and reputation necessary to maintain its exponential growth rates, and a vibrant economic environment in which to operate. Only a crisis of the greatest magnitude could threaten the complex web of investments GAMI had constructed. The crisis of great magnitude erupted only months later, when Arab forces launched an attack on Israel. In retribution for American support for Israel during the war, Arabian oil exporters arranged to withhold shipments of crude oil to the United States and its allies.
The effect was immediate and devastating. Virtually every domestic economic indicator plunged. Oil prices surged and the American economy fell into a deep recession. This caused interest rates to rise dramatically, drying up whatever investment capital had existed. GAMI, with tremendous debt obligations and a rising number of defaults on its hands, was destroyed. The company became the target of numerous lawsuits--including one from the Teachers Retirement System of Georgia--that sought the return of investors' principal and immediate redemption of accrued interest.
During 1975, GAMI changed its name to resemble that of the UniCorp unit that created it: Great American Management and Investment. The company continued to be known as GAMI. The oil embargo ended in 1974, but left intact an emboldened oil cartel and an enduring cycle of inflationary pressures. GAMI had hoped to wait out the storm and return to profitability when the economy settled down. Unfortunately, the company proved unable to regain stable financial footing. GAMI's directors scrambled to refinance debt and delay debenture payments to avoid default. The directors settled with groups when necessary and continued their furious efforts to get the company back on its feet. The claims caught up with GAMI in March 1977, when the company finally filed for chapter 11 bankruptcy protection.
The following September, GAMI's management was attacked by the Securities and Exchange Commission, which petitioned the bankruptcy court to convert the proceedings to chapter 10. This would have allowed the court to dismiss the company's management and appoint its own trustee. In January, ten days before the court could exercise such authority, GAMI's directors presented the court with another plan of reorganization. This alternative would have paid down senior creditors, mostly banks, at 90 cents on the dollar and given them 50 percent ownership of GAMI.
A major shareholder of GAMI was Samuel Zell, whose interest in the company resided in a paper company called SZRL Investments. Zell was distinguished by his penchant for conducting high finance in blue jeans and riding a motorcycle to work. Zell entered the real estate trade while a law student at the University of Michigan during the mid-1960s. There, he and a classmate named Robert Lurie began taking contracts to manage student housing, earning $50,000 a year as graduate students. After graduation, Zell and Lurie established Equity Financial & Management to buy run-down properties, repair them, and sell at a profit. During the 1980s, changes in the tax code made it more difficult to locate and profit from undervalued properties.
They turned instead to making small corporate investments, beginning in 1980 with a 3.5 percent stake in GAMI. Specifically alluring to Zell and Lurie was GAMI's $110 million tax loss carry forwards. With profitability restored, the pair stood to shelter profits from taxes for several years. In 1980, SZRL and another creditor, Morgens, Waterfall & Company, began negotiations with GAMI's chairman, Carl W. Knobloch, and his board to substantially reduce the company's blistering $142 million bank debt. The two companies, which controlled 46 percent of GAMI, offered to provide capital liquidity in return for three board seats, including one for Sam Zell. With no other alternatives available, Knobloch embraced the offer.
Zell quickly became deeply involved in GAMI's affairs, regularly eclipsing the chairman's authority and preparing his own directives. Zell proved highly effective in winning new debt covenants and resolving claims against the company. After winning additional financing, Zell began an acquisition campaign. Zell failed in his first acquisition attempt, a bid for the Angeles Corporation, a Los Angeles-based real estate syndication firm. As a major--but still minority&mdash⁄areholder, Zell lacked the unquestioned authority he wanted to close other types of deals. This changed in December 1982 when Zell bought out Morgens-Waterfall's 27-percent share of GAMI for $24 million. With small additions that both companies had made over the years, this left Sam Zell personally in control of 51 percent of GAMI.
As Zell was based in Chicago, he decided to move GAMI's headquarters to his existing office at Riverside Plaza. Most of the company's existing staff in Atlanta, however, was allowed to stay in that city. The next large opportunity that presented itself to Sam Zell was First Capital Financial, a real estate and property concern based in Coral Gables, Florida. GAMI acquired this company in September 1983 for $60 million. Some years later, First Capital headquarters also was relocated to Chicago, while property management functions were centralized in Atlanta.
In 1984, Zell privately--that is, with no involvement from GAMI--gained control of another failing firm called Itel. Over the next four years, Zell transformed Itel from a bankrupt equipment lessor into a large transportation company, operating seven small railroads, leasing rail cars and containers, dredging harbors, and manufacturing wiring products. In February 1985, Zell began building what would later become a major line of business for GAMI when he engineered the company's purchase of the Lapp Insulator division of the Clevepak Corporation. Lapp was acquired through a GAMI subsidiary called Jefferson Management for $31.5 million.
Lapp was a leading producer of porcelain-based insulating devices, such as those that hold power lines to utility poles. Established in LeRoy, New York, in 1917, Lapp had grown up with the electric power industry in the United States, and was a major supplier of insulators and other products primarily designed to power utilities. Another of the many acquisitions carried out by GAMI occurred only days later, when the company bought the Commodore Corporation for $5 million. This company, based in Syracuse, Indiana, built mobile homes.
Days after that, another GAMI subsidiary called S&P Investments negotiated the acquisition of the domestic agricultural business of Kayser Aluminum & Chemicals for $105 million, including $98 million in debt. S&P held 80 percent of the venture, while a partnership of managers retained the balance. S&P subsequently changed its name to Kayser Agricultural Chemicals. Unlike the other companies, Kayser, with 450 employees, remained at its headquarters in Savannah, Georgia.
In December 1985, Robert Lurie joined GAMI's management as a director. Lurie, president of Zell's Equity Financial Management Company, was subsequently appointed president of GAMI, succeeding Zell in the day-to-day management of the company.
On April 2, 1986, GAMI acquired the remaining operations of the Clevepak Corporation. Based in Purchase, New York, Clevepak was a leading manufacturer of building products, process equipment, specialty packaging, and technical ceramic products. The acquisition also ended a legal battle brought by Clevepak shareowners over compensation for preferred shares in the company. GAMI's rapid expansion in the industrial building products business, largely through the takeover of Clevepak, necessitated the creation of a new business unit within GAMI. This new subsidiary, called Eagle Industries, was created with a $125 million line of credit from Heller Financial, Inc. Eagle thus became the parent company of eight GAMI operating units, including Lapp Insulator; electrical products manufacturer Hart & Cooley; Mansfield Plumbing Products; Chemineer, a manufacturer of waste products devices; a pumping products company called Pulsafeeder; the ceramic seal company Ceramx; Equality Specialties, a maker of ribbons and specialty packaging; and Clevaflex, a manufacturer of flexible carburetor air ducts.
Zell was closely tied to numerous financial analysis groups in Chicago. In addition, he served as head of numerous other venture capital concerns, including Itel and Equity. It was through these contacts that he assembled GAMI's complex hodgepodge of businesses. And as a result of these contacts and Zell's acquisitions, GAMI became almost completely divorced from its origin as a real estate investment trust. As a small scale industrial combine, GAMI succeeded in centralizing many of the administrative functions of the companies it acquired. Having reduced or eliminated the administrative costs involved in running these companies, GAMI was able to greatly improve its operating efficiency and profitability.
A number of companies were regarded as beyond salvaging, and these were sold off or written down. By and large, however, it was not GAMI's style to impose a rigid system of management on its subsidiaries. Particularly under Lurie, GAMI treated each of its divisions as autonomous business units whose managements were individually responsible for performance. This acquisition and management philosophy was extended to the DeVilbiss Company, which GAMI acquired from the Champion Spark Plug Company in March 1988 for $95 million. DeVilbiss manufactured coatings, consumer compressors, and mechanical health care products, and was added to the Eagle division.
A month later, Zell fought a small battle with the Allen Group, a venture capital firm not unlike GAMI. Zell was unhappy with a change in management at Allen and fought, successfully, to gain recognition on the board. During 1988 Zell's Itel company purchased a 17 percent stake in Santa Fe Southern Pacific, a large railroad holding company. While investigating ways to boost share value, Zell was suspected by other shareholders of Santa Fe Southern Pacific of trying to take over the railroad and marry its operations with those of Itel. Such a scheme, if true, never materialized.
In 1989 GAMI completed a takeover of the Jepson Corporation, a conglomerate of ten manufacturing companies, for $222 million. Through Eagle, GAMI also took over Amerace, a manufacturer of electrical cable connectors and components and highway safety devices, for $134.5 million. The two deals left GAMI highly leveraged. GAMI's percentage of capital funded by debt climbed from 24 percent in 1983 to 92 percent after the Jepson and Amerace deals. This placed GAMI in a fragile position, particularly in light of a mild but prolonged recession. Zell and Lurie, however, remained convinced that they could extract new operating economies and synergies from their new companies. As long as cash flow remained at current levels, they were safe.
Only 48 years old, Lurie died of cancer in June 1990. His death was not unexpected, but it deeply shook Zell, who had depended greatly on his partner. Zell assumed Lurie's position as president of GAMI, and led the board's decision to elevate several other managers from the company's operating units onto the board of GAMI.
In need of a new partner to oversee the daily operations of GAMI's sprawling empire, Zell told Forbes "I only made one phone call." He offered an associate in the investment banking community, Warren Hellman, an 18 percent share of GAMI for $50 million. Hellman refused to bite unless Zell spun off GAMI's Firstate Saving & Loan, a healthy Orlando-based S&L that Hellman considered a political liability. Zell balked, but later sold Firstate to himself.
Hoping to pare down GAMI's high debt, Zell began spinning off units he considered to be at the top of the recovery cycle. First to go was Eagle's pump maker, Pulsafeeder, which he sold to the Idex Corporation for $50 million. Next, Zell proposed spinning off Eagle Industries itself, but only to GAMI shareholders. He planned to distribute one share of Eagle Industries for each share of GAMI as a special dividend. This would allow Eagle to be publicly traded on the NASDAQ. The distribution, planned for November 1992, was halted only a week before it was to be carried out. Citing deteriorating capital markets, Zell postponed the distribution until better access to debt funding could be established.
Great American Management and Investment remains essentially what Zell made it: a diversified holding company. Controlled in large part by Zell and Equity Financial, its association with operating units such as Eagle is likely to remain close even if the unit is sold to GAMI investors. GAMI seems certain, however, to remain the primary investment and venture capital instrument of Zell and his partners for the foreseeable future.
Principal Subsidiaries: Eagle Industries, Inc.; First Capital Financial Corporation; Equality Specialties Division; Vigoro Corporation (46%).