Should black businesses be sold to whites? Sure - if the price is right. How else can black entrepreneurs raise the capital to finance expansions and acquisitions?

Depending on who you talk to, it was either the deal - or the disaster - of the year for black business. In a one-for-one stock swap valued at $67 million, Johnson Products Co. Inc., the legendary Chicago-based hair care products company known for its Ultra Sheen and Gentle Treatment brands, became a wholly owned subsidiary of IVAX Corp., a Miami-based holding company for several cosmetics and pharmaceutical firms. To the executives of these companies, the transaction, approved by Johnson Products shareholders on August 31, was a true win-win deal.

"IVAX has an international distribution network that will help us increase both sales and profits," says Johnson Products chairman and CEO Joan B. Johnson, who controlled more than 58% of the stock in Johnson Products before the merger. "Another advantage is that we'll now manufacture and distribute IVAX's Flori Roberts cosmetics line, which is targeted to black women. This deal creates synergies for marketing opportunities with our hair care products."

IVAX chairman and CEO Dr. Phillip Frost concurs, "Johnson Products complements several of the businesses that IVAX is pursuing. IVAX is committed to the markets served by Johnson Products." (Both companies are traded on the American Stock Exchange.)

However, outsiders only saw a $46-million black-owned company with 39-year-old roots in Chicago being swallowed up by a $451-million, white-owned conglomerate. Chicago's black community leaders were appalled at the thought of Johnson Products falling into white hands. "A lot of community leaders felt betrayed because we would have liked to check the resources in our own community first," declares Mark Allen, president of the Black Leadership Development Institute, a local nonprofit leadership training group.

It didn't help that, a month after the merger was announced, news surfaced that board members of Indecorp, the holding company of Independence Bank of Chicago and Drexel National Bank, were considering selling the black financial institutions to white-owned South Shore Bank. By then, Operation PUSH national executive director Janette C. Wilson was calling for a boycott of IVAX. "We object to the purchase and sale of Johnson Products to white-owned IVAX," Wilson protested at the close of the civil rights organization's 1993 convention, "because of the wreckage the potential acquisition would leave in our community in terms of loss of jobs and to the decreased commitment to our economic empowerment." Wilson later stated that the statements were her personal opinion and that PUSH has taken no position on the merger.

A Question Of Commitment

Meanwhile, no one has been more vehemently against IVAX acquiring Johnson Products than the hair care company's founder, George E. Johnson. Johnson gave up controlling interest in the company to his former wife, Joan, as part of a 1989 divorce settlement. "You can't tell me anything that can justify what is happening," says Johnson, who dismisses the idea that Johnson Products' commitment to the black community can be maintained under the IVAX umbrella, even though the company and its jobs are to remain in Chicago. "From the time that the deal is consummated, money made at Johnson Products will no longer remain in the black community. Whenever we were profitable, the company, the employees and the community benefited from those profits. That now ceases to be. It's that simple."

Or is it? Many observers thought it hypocritical of George Johnson to protest the Johnson Products/IVAX merger. As chairman of Indecorp, Johnson led discussions about the sale of Chicago's two largest black banks to a white institution. in August, Johnson signed a letter of intent for the purchase of Indecorp by a black investor group led by William T. Johnson, chairman of Detroit-based OmniBanc.

However, Johnson defends the idea of selling to South Shore Bank because of its track record financing the building of low-income housing in Chicago. "It's not a black-white thing," he says. "It's a question of commitment to our communities."

Mergers & Acquisitions: A Love/hate Relationship

The sale of Johnson Products to IVAX challenges our understanding of economic empowerment Are blacks who sell their businesses to whites savvy entrepreneurs or sell-outs? African-American response to this question has been as varied as the companies that have been the objects of such deals.

For example, when the late Reginald F. Lewis sold McCall Pattern Co. to John Crowther Group of Britain in a deal valued at $90 million in the summer of 1987,the deal was universally celebrated. Lewis, who led the $23-million buyout of McCall in 1983 with a personal stake of $1 million, realized a personal profit of $50 million on the sale. Only months later, Lewis' TLC Group brilliantly leveraged that capital into the deal of a lifetime: the $985-million acquisition of Beatrice International Foods. At the time of the sale, McCall was a $63-million company, ranked No. 6 on the BLACK ENTERPRISE 100s. The deal led to the creation of the nation's largest black-owned company, TLC Beatrice International Holdings, the only $1-billion-plus company controlled by African-Americans. The two deals established Lewis (who died at age 50 of brain cancer in January) as an entrepreneurial role model for blacks. (Jean S. Fugett Jr., Lewis' brother, is now CEO of TLC Beatrice.)

In contrast, the 1988 sale of Motown Records for $61 million to an investment group led by Boston Ventures and MCA Records was greeted by most blacks with a mixture of sadness and resignation. Founder and CEO Berry Gordy had single-handedly built Motown into a landmark institution and the dominant sound in black popular music. However, by the '80s, after more than a decade as the nation's largest black-owned company, Motown was on the skids. According to record industry power broker Clarence Avant, Gordy's losses amounted to more than $1 million a month. By the mid-'80s, Motown was no longer producing a roster of artists capable of dominating black music charts. Sales were generated largely by its catalog of recordings of the legendary Motown artists of the '60s and '70s. When the sale took place, former MCA black music vice president Jheryl Busby was named president and CEO of Motown. During the past five years, Busby has revitalized the company as a force in black music by making stars of such acts as Boyz II Men, Johnny Gill and Shanice Wilson. But a dispute over the promotion of Motown artists led to a break with MCA in 1990.

In August, the company was acquired by Polygram Records, a $1.67-billion Netherlands-based conglomerate, in a deal valued at $325 million. Under Polygram, Motown has the capital and distribution outlets to effectively compete as a multimedia entertainment company in a global market. "Polygram's management team, particularly president and CEO Alain Levy, not only understands the importance of the Motown legacy," says Busby, "but has the vision to secure Motown's success into the 21st century."

However, when Busby took over Motown upon its sale in 1988, he promised to return it to black ownership. (Busby and Diana Ross were among those with stakes in the company.) Motown, led by Busby and Avant, continues to be black-run. However, Busby, the chairman of Motown's newly created management board, now concedes that Motown may again never be black-owned.

Symbols of Economic Empowerment

It's easy to look at the Johnson Products/IVAX deal and Polygram's acquisition of Motown as setbacks in the long struggle for black economic empowerment. However, the sale of McCall Pattern would have been celebrated even if the Beatrice International acquisition never happened. That's because there is an important difference between McCall Pattern and companies like Johnson Products and Motown. McCall spent only four years of its 119-year history as a black-owned company and, neither its customers nor its workforce were predominantly black.

Meanwhile, Motown (founded in 1958) and Johnson Products (1954) had always been black companies, with black workers producing black products for black consumers. Motown was the No. 1 company on the BE 100s for the first 11 years of the list. Prior to its merger with IVAX, Johnson Products was one of only seven companies to make all 21 of BE's annual list of the nation's largest black-owned businesses - and one of only three publicly traded BE 100s companies. Critics have said that Reginald Lewis sold a business, whereas Joan Johnson and Berry Gordy sold symbols of hope for black economic empowerment.

That view, while understandable, does not take into account the importance for black businesses of being able to:

* rapidly raise capital to finance expansion and acquisitions and retire debt;

* secure resources through mergers with larger, better capitalized companies;

* liquefy holdings in order to leave a company with enough personal wealth to possibly launch or invest in other ventures.

According to several BE 100s CEOs and members of the BE Board of Economists, the symbols of black business achievement are not vanishing; they're merely changing to reflect the '90s definition of American business success. For example, Parks Sausage Co. CEO Raymond V. Haysbert Sr. has seen it all. One of the first black-owned companies to go public, Baltimore-based Parks was taken private by a white investment group in 1977, then reacquired in 1980 by Haysbert and other black investors in the first leveraged buyout of a historically black-owned company. "If you accumulate value in your company, you can't use it to raise capital if you're going to keep 100% control," he asserts. "If you want to expand, you have to have capital. A lot of companies get into trouble when they expand faster than their financial resources will permit them."

Preparing For The Heavyweights

The sales of Johnson Products and Motown are a necessary outgrowth of the increasing diversity and capital requirements of the nation's largest black-owned businesses. These businesses, as represented by the BE 100s, are now operating at a level where access to capital and strategic alliances are crucial to survival. Black companies have evolved from being primarily small businesses targeting black consumers to emerging companies competing in the mainstream. They've become like cruiserweights moving up to fight in the heavyweight division: As soon as they became more competitive, the competition got bigger. And the arena is no longer just local, regional or even national - it's global.

Thanks to the growing value of black spending power, even black companies that target African-American consumers must compete against white-owned industry giants. Today, African-Americans are just as likely to buy hair care products from Revlon as from Johnson Products (see "Redefining Beauty," June 1993). "In a competitive global environment nobody's market is sacred," explains Robert Johnson, CEO of BET Holdings, a Washington, D.C.-based BE 100s company with black-oriented cable programming and magazine publishing subsidiaries. "Unless black businesses can get public equity capital, they can't grow," he warns.

The fact that more African-American entrepreneurs are buying and selling companies is both a cause and an effect of the increasingly global reach of black business. The BE 100s have grown at a tremendous rate over the past decade, routinely outpacing the growth of the nation's largest industrial companies. On the heels of a recession, 1992 sales for the nation's largest black-owned businesses increased by more than 14% to more than $9 billion, compared with 4.4% for the Fortune 500. That growth simply would not have happened if African-American entrepreneurs, solely out of a desire to maintain 100% black ownership, refused to allow their companies to merge with or be acquired by others.

But do our companies have to be sold to white businesses? No, but it's hard to exclude nonblacks from the pool of potential buyers. Even if black business owners made the race of potential buyers a No. 1 priority, economists agree that there is not enough money in the black community alone to satisfy the expanding capital demands of the nation's black-owned businesses.

A closer look at why entrepreneurs give up equity in their companies provides a much better measure of whether the sale of such companies as Johnson Products and Motown is a net gain or loss for black business.

Despite the emotional and economic issues involved, the only way to quickly raise significant amounts of capital, whether for personal wealth, company expansion or future acquisitions, is to sell all or part of a business of proven value. Black entrepreneurs, who still see lack of access to sufficient capital as the biggest barrier to growing their businesses, may find this especially true. Many of the BE 100s companies have evolved to the point where they can no longer rely on borrowed money and operating revenues to fuel the growth and investment needed to remain competitive. Canny black entrepreneurs know that borrowing money is easier for well-capitalized businesses.

Strategic Partners Are Key

Mergers and acquisitions are often the best way for smaller companies to gain the resources needed to compete against the giants of industry. Both Johnson Products and Motown lost chunks of market share to white-owned conglomerates in their respective industries during the past decade. Key motivations in both their deals: gaining access to wider distribution, greater production capacity, better technologies and larger budgets for marketing and product development. In fact, Johnson Products initially approached IVAX to pitch a joint marketing effort tying their products to Flori Roberts cosmetics.

"When I look at Motown, I see we have better opportunities than some big companies," Busby explains. "What we didn't have was capital, and what we didn't have was a partner. The entertainment industry is consolidating, and everyone is looking for strategic partners. Time Warner and AT&T are doing deals together. Southern Bell is doing deals with Microsoft. It's a time for companies to evaluate their strategies and look for partners that can give a realistic twist to it."

Accumulating Capital For Future Acquisitions

Selling an established business is a major source of the capital needed to acquire or invest in even larger businesses. A recent example is AT&T's acquisition of McCaw Cellular Communications at about the same time the JPC/IVAX deal was announced.

Like the JPC/IVAX merger, initial discussions between AT&T and McCaw centered on establishing a strategic partnership, not a merger. AT&T's goal is to establish the first coast-to-coast cellular communications network. To achieve this, it gave McCaw Cellular CEO Craig O. McCaw and his three brothers more than $12.6 billion for a company that, while the largest of its kind, had never turned a profit and was burdened with $4.9 billion in long-term debt. The McCaw brothers got into the wireless communications business after selling a small cable television system (inherited from their father in 1969) for $755 million in 1987. Now, the 44-year-old McCaw is poised to acquire or launch another venture.

More black entrepreneurs are following this path. For example, if Reginald F. Lewis had not sold McCall Pattern, he would not have been able to acquire TLC Beatrice International Foods. By selling shares of his $61.7-million company via a 1991 public offering on the New York Stock Exchange, BET Holding CEO Robert Johnson was able to acquire Mile-Hi Cablevision and Action Pay Per View. The acquisition of Pepsi-Cola of Washington, D.C. LP, by BE publisher Earl G. Graves (CEO of Earl G. Graves Ltd.) was also made possible by the sale of his Texas radio properties.

Even more significantly, revenue gains by the BE 100s due to acquisitions of companies by black entrepreneurs have easily outpaced revenue losses due to the sale of companies to nonblack owners (including former top 10 BE 100s companies Motown industries and McCall Patterns). As BE Board of Economist member Bernard E. Anderson explained in a 20-year overview of the BE 100s: "To a considerable degree, the list demonstrates the coming of age of black entrepreneurship. Especially during the last decade, companies added to the list were formed through skillful dealmaking, acquisitions and the opportunistic successes of market-wise risk-takers."

Whose Business is This Anyway?

Whether the buyer is the general public (via a public offering) or an M&A-minded conglomerate, equity financing almost always necessitates a shift in the way a company is managed - away from 100% entrepreneurial or family control. Publicly held companies, such as Johnson Products and BET Holdings, must answer to shareholders. Venture capitalists want a seat on the corporate board and a vote in the management of the companies they invest in. Smaller companies usually become divisions of - and subject to the business plans of - the larger, acquiring company. While blood is thicker than water, additional investors can dilute the blood to the point that a family business can become a company where some of the shareholders and managers merely happen to be related.

Keeping Johnson Products in the Johnson family control was a priority for George Johnson ever since he took the company public nearly 25 years ago - a decision he still regrets. Now, his biggest disappointment may be that, in the aftermath of the IVAX merger, the company he founded nearly four decades ago is no longer a family business. However, other entrepreneurs, including Busby and Bob Johnson, say that it's time for African-Americans to think of company control in terms other than just percentage of black ownership - especially if business growth is a priority.

One important way for African-Americans to exert influence on a company is to become active investors. Ultimately, businesses must answer to shareholders. "Blacks interested in what's happening to Motown should buy stock in Polygram," Busby asserts.

"If I see an opportunity to take BET to $2 billion in sales, and as a consequence of doing it, my ownership falls to 15%, I've got 15% of a $2-billion company," says BET's Johnson. "I'm just as happy as if I had 56% of a $400-million company. If I'm the management, I still exercise control. Other shareholders aren't going to get together against you unless you're running the business into the ground. If you're doing that, they should be against you, whether you're black or white. We should start thinking of control through the creation of value. If I'm the guy who can create shareholder wealth, then I'm the guy who should be in control. My orientation is maximizing shareholder value, not walking around saying, |I'm Bob Johnson, I own BET.'"

In their own ways, this is the conclusion that Joan Johnson and Jheryl Busby arrived at when deciding the futures of two of the most important symbols of black business success. They believe that as more black entrepreneurs build wealth through mergers and acquisitions, black businesses will continue to lift all African-Americans to greater participation - as consumers, investors, executives and business owners - in the global economy. And that's what black economic empowerment is all about.