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The employee buy-out experience.

A born-again company. That's the feeling I got when I visited the Scully-Jones Corp, Chicago, IL, in early May. Everyone was smiling after four full months under new management--themselves. They had just saved 50 years of toolmaking experience from being thrown on the scrap heap.

"Still on their honeymoon," a cynic would say, "but wait 'til they have to face the harsh reality of the metalworking marketplace." True, only time will tell. These guys and gals have bet both their jobs and their assets.

After talking at length with their new president, Cyrus T Wax, and with two shop-floor employee/owners, I found they have a lot going for them. It was hard not to share their optimism. Running in the red in '83, they're already showing a profit for '84. Obviously, they love working for themselves. Prelude to a takeover

Founded in 1910 by James Scully, the company moved into toolholders in the '30s, making Morse-taper drill chucks, and by the '40s had a broad line of tool-holding equipment that was the standard for the industry. They were known for quality and breadth; their catalog was the bible for the industry.

When Bendix bought this company in 1966 (for $11 million), it was very profitable and quite large--about 500 people. Soon all of their subsidiaries and foreign relationships were dissolved. This was before Cy Wax joined the company (in 1980 as supervisor of product development), and he will never understand why this was done. "They even tried to eliminate the Scully-Jones name, but the catalog still said 'Makers of Scully-Jones products.' We were part of Bendix's Industrial Tools Div, headquartered in South Beloit, IL. We were never really aware of all of the parts of Bendix, only our own segment of the business.

"Paul McCormick was plant manager in the late '70s and early '80s, and he saw bad times coming. We all knew we were going to have to reduce forces. The two options were to eliminate the newest people, and thereby eliminate the future of the company, or to encourage the older people to retire who were qualified to do so. So we chose the latter course, and Bendix gave them over 10 months pay. We lost 23 of our most experienced people, including Paul himself, in April of '82. That left a huge gap."

In 1980, Bendix had bought Warner & Swasey, and Scully-Jones had become part of the Industrial Group, the Industrial Tools Div. This new group's management had decided almost from the start, Cy learned later, that Scully was an unprofitable organization to be divested. They did not fit into Bendix's plans. "But they didn't tell us this," Cy reports. "We should have seen what was going on when they started moving things out of here. We were simply naive, no question about it.

"In mid 1982, they removed our most profitable product, a linear recirculating roller bearing that was about a third of our business. They took it out for two reasons: It was very profitable, and it was not toolholding. They created a new division to manufacture it in a town just west of Charlotte, NC. This loss left quite a void. The people here loved that product, and it left a bad feeling." Filling the gap

After the retirement of Paul McCormick and the others, nobody was named general manager from within Scully-Jones. A part-time manager was brought in fromanother Bendix plant--Bill Elias, plant manager of their Greenfield, MA, tap and drill plant.

"He commuted here three days a week," Cy recalls. "He was very important to us. I was promoted to engineering manager, so we had a basic management team, but nobody was heading it. We were just holding things together. Bill came in and not only ran things, but taught us how to run things."

Accounting, marketing, data processing, and personnel functions were still headquartered in South Beloit. "In early '83, we saw a lot of people coming through the plant--tire kickers. Then, we saw the handwriting on the wall. But Bendix (which became part of Allied Corp in January, '83) never formally told us we were for sale.

"Between 15 and 20 groups came through, one of which was a compatitor who returned for two more visits. The manager of their operation told me that his plan was to gradually bring machines out, people out, and close this place down. He was after the designs, the engineering department, a few of the machines and processes, and the name. That's all he wanted to buy." The turning point

With a twinkle in his eye, Cy explains how nthey seized the opportunity. "Following that visit Marsh Miller, our manufacturing superintendent, came into my office, and plunked himself down. He's a big man from Arkansas and proud that his southern twang is still intact after 20 years in the Windy City. He said, 'cy, we gotta buy this place!'

"I looked at him and said, 'Marsh, you may have money, but I sure as hell don't! Do you mean you, me, and the managers, or what?'

"And Marsh replied, 'What do you say we do it with everybody?'

"We called a meeting with the other managers and they agreed. So we got on the paging system, and called a meeting in the cafeteria. Everybody put down their tools, shut off their machines, and came up to the cafeteria.

"About 60 of our total employment of 80 people were there. We told them what the competitor's plans were and that Marsh and I though that we should buy the company instead of letting it be eventually shut down. We said that here was an opportunity to buy your job -- for a little while at least -- and we asked how many were interested in going in with us.

"Their response was immediate. They stood up, applauded, yelled, and waved their arms. When we got them calmed down, we asked for a show of hands. At this point, we had no idea of what it would cost or what anybody would be willing to put in, but we saw about 50 hands raised in the room." Making a deal

"We considered that to be a mandate, and retired to our offices to figure out what the heck to do with it. We had no idea how to go about it, or where to get the financing. We didn't even know the asking price.

"We thrashed around then, each going to a banker or advisor. Three days later we found that nobody had come up with anything. Local banks couldn't handle loans over $400,000. We didn't have any connections with any downtown Chicago banks, or know how to make them.

"So I picked up the phone and called my brother-in-law, Jerome Marks, an attorney with Friedman & Koven, who has done mergers and acquisitions for years. HE agreed to take it on. He said the first thing we needed was a financial advisor to put together a suitable package to talk to the parent corporation, Allied. He recommended Jim Tyree, with Mesirow Financial Services.

"Jim came out the next morning, gathered some figures from Loretta Reed, our materials manager, or where we stood, what money we were making (actually losing something like $2 million/year according to Bendix), our financial history, etc. Marsch gave him a copy of the prospectus Allied had prepared on us. From that first day to the time he had negotiated a handshake deal with Allied--was a mere three weeks!

"It wasn't until then that we knew the price--$2.5 million--and the conditions of sale. Jim felt that if the employees put up 10 percent--$250,00--he could get the remainder. He had also negotiated for Allied to give us a note for $800,000, with $200,000 of this due at year end.

"We got the financing the first week in January, and closed the deal on Jan 26. This was preceded by five or six negotiating sessions with Allied attorney Leonard Cass, and Jerry Marks did a heckuva job working out the contracts. The final selling price turned out to be $2,055,000, so we think we got a pretty good deal. It is extremely well collateralized. The building, land, machinery, and equipment are worth more than that, even at a distree sale. Also we bought only receivables and assets, not liabilities." Stockholder democracy

Illinois law for a closely held corporation restricts them to 60 stockholders (Illinois resident), which they quickly got.

The total employee contribution was over $300,000, and no individual has over 12 percent ownership, or any great deal of power. The employees have direct control of the company, and the right to throw management out at any time they so choose. There is no funnelling of power through f fund like there is with an employee stock ownership plan (ESOP).

The first stockholder meeting elected nine for the board of directors in October of '83. The board then elected officers. As Cy explains, "That first board consisted of four from management, four from the office salaried people, and one from the factory." They later added two more factory people to the board, so that it is now proportional to the investment by each group within the company. "All board members are employees; we chose not to bring in any outside people." Negotiating with yourself?

"The union was the next hurdle," Cy recalls. "All our factory people are members of the International Union of Electrical & MAchine Workers of IUE, and they needed a new contract (our changeover had dissolved the old one). We in management sat down and figured out what wage structure we would need to survive. The union cooperated very well, and we now have a contract we can live with. One board member, by the way, is the union steward."

Yet the question must come up, "Why pay a union to represent yourself against yourself?" According to Cy Wax, "It depends on whether or not the employees fell the union is doing them any good. No one really knows yet, bnut we all should have some idea by the end of this contract, June of '85. We feel we can work things out with just about any reasonable group.

"But the union doesn't represent a polarity anymore. The confrontational relationships are gone. We have cooperation, and we exchange information. Our sales and shipments are posted each day, showing a comparison with our plans so that everyone knows exactly where we stand.

"Wages are frozen under the union contract. Salaried wages, including my own, have been frozen for over two years. "I'm still earning what I made as engineering manager.

"All company benefits of any kind are identical for everybody. There are no percs! This is a family operation. WE get together on weekends to clean the place up. We're refurbishing the lobby right now, and we'll be doing the cafeteria next. The money for materials is coming from the profits that didn't exist under Bendix." Business is boomin

Loretta Reed, now chief financial officer, is installing a data-processing system, and negotiating with South Beloit on what they should be charged for all the Bendix accounting functions performed for them in the past. "Depending on thos ediscussion," Cy reports, "we will end up with anywhere from a first quarter loss of $2000 to a profit of $180,000. Business has been very good. Our timing was certainly lucky!

"Sales hit bottom in February of '83, and since then deliveries hav ebecome much more responsive under Bill Elias's tutelage. Now, sales are averaging over $500,000/month. All our predictions were based on a $5-million year, but so far it looks like it will be much closer to $6 million.

"Our distributors are very comfortable about what we're doing, and some are so enthusiastic, they've asked to buy in. We've agreed for the first year to have Bendix's (S Beloit Drill-and-Tap) sales organization continue to help the distributors sell our products. They need us to support their efforts, just as we need them.

"We have two house accounts--Kearney & Trecker and Caterpillar. We just got word that Caterpillar, up until the time we took over, really hadno idea who to talk to, who was in charge here. Now, we are not only delivering to their satisfaction, but they know who to talk to when they a problem. As a result, we expect sales to them to double this year." Measuring productivity

So how does this all affect the man on the shop floor? "We've been rearranging the shop from the old one-man, one-machine routine," Cy replies. "We have now set up eight work cells, where one man operates anywhere from two to five machines. The people like this because it means they can make a wonderful rate (20 percent of the difference from this improvement), and we like it because the company gets the 80 percent. The union has not objected because the people love it. Their piecework payoffs of 10 to 40 percent extra incentive pay are very significant to them.

"The other way to measure productivity is the scrap pile. We have two large scrap bins that used to get filled up every two weeks. Right now, they're a little over half full and it's been six weeks since they were emptied, and most of this is unavoidable: bar ends. Where'd it go? I don't know, maybe they're hiding scrap in their lunch pails!

"Office productivity has improved too. WE have seen a noticeable drop in lost orders, delayed request for quotes, and the level of complaints from the field in those areas. WE've increased our manpower in our engineering department to keep up with the workload.

"Another measure is turnaround time. Shipments used to be quoted at 16 weeks for items not in stock. Now we routinely quote nine-week turnarounds, and can do many jobs in as little as a week and a half when it's really needed.

"Everybody is customer oriented. It used to be, 'What can I do for myself?' People just worked for the company, now they work for the customer. People are directly involved in keeping our customers happy." RApping owner-to-owner

The challenge now is to maintain this same feeling as they come out of the honeymoon stage. "Hopefully, the honeymoon won't be over for quite a while," Cy predicts. "The key is maintaining good communications. Anybody can walk in my office at any time and say what he wants or ask what he wants.

"We have plenty of feedback now. There are no communication barriers because the people in the shop know I'm a shop man, I've been cutting metal since I was 17. So has Marsh. We had a strike about three years ago, and we took over and ran the machines. They know that we are the same people they are. We have regular quarterly meetings for everyone to learn how much profit or loss we've made, what we plan to do, and ask for feedback."

They are now in the process of cutting all remaining data-processing and accounting cords with the Bendix organization. "We want to get out of the S Beloit computer by the end of July. It's costing us a lot of money. We're installing an IBM System 36, which I've been told can handle a company four times our size. We're also bringing in a computer for NC programming to reduce our time-sharing costs by 25 percent.

"We're purchasing our phone system, installing 800-numbers for our distributors to call us, and will be starting telemarketing to work on our less active distributors.

"Our objective is to build this company into a $10-million-gross operation in the next four or five years. So far, our sales have been greater than anticipated, and so our expenses have been greater as well. We've had to bring on more people, both factory and office (evely split). We started with 80 and have 97 now. Our market strengths are quality, that's Number One. Even when we were doing badly, the word in the marketplace was 'Scully-Jones' stuff is great if you can get it.' But we couldn't deliver. Now we can, and the quality has not changed. So delivery is Number Two. The third market strength is that we are willing and capable of doing specials--custom designs. The fourth thing is the breadth of our line. Very few of our competitors cover as much of the toolholding business as we do. We have no radical changes planned, just re-establishing ourselves and trying to gain market share." Teamwork is the key

So what do you worry about? "Other than outside economic forces beyond our control," Cy replies, "our biggest worry would be to lose our ability to operate as a team. The team spirit engendered by employee ownership is vital to our success. Losing it would bring us down very quickly. A squabbling family instead of a happy family would be deadly. A drop in our quality standards would also bring us down. But I'm frankly not worried about those things nearly as much as the outside economic influences such as the prime interest rate.

"Some parts of this building are over 100 years old. Obviously we'll need to spend some money making repairs. But we see it as part of our investment. The work environment here in Chicago is not a problem. This area has, in the past, been referred to as a combat zone. Yet, there are some nice homes here, and we've just got a new shopping center more like what you would expect to see in suburbia. There are several new fastfood franchises. They're coming in because this area is growing.

"We're putting money into the community, we let the neighborhood kids play on our empty lot, and we donate money, time, and effort to the neighborhood Boys' Club. I think it's a dammed nice neighborhood!" Feedback from the floor

A large number of Scully-Jones people were laid off by Bendix in 1983, so their work-force is largely gray-haired--highly experienced old-timers who have been there an average of 28 years.

To see what the shop-floor people felt about all these changes, I talked to Ancil Barke and Walter Pigmon, both with over 20 years service, including some tough times.

Says Pigmon, "I was the first one who hollered when we voted. I was 100 percent for buying the company, and I've seen quite a few good changes just in the past four months. The biggest is that Miller and Cy don't have to get an okay from Bendix whenever they want to do something."

"Our work's picked up and that means a heckuva lot," adds Barker. "We're getting bigger orders now. I loved this buy-out idea too, but we really had no choice, to tell you the truth. It was either that or go out the door."

"I could've got another job," Pigmon feels. "I work downstairs and my wife works upstairs. So we had two jobs at stake."

"Well, I'll tell you, the jobs are not out there like they used to be!" Barker admits. "Four or five years ago, you could go out anywhere and get a job. But you won't just grab one now, except at $3.50 an hour!"

A bigger question was whether they agreed that the company should put all its profit for the next five years back into the company. Could they wait that long?

Barker thought so. "Sure. I'd rather it went back into the company and have a job here and keep on working."

Pigmon agreed, but added, "I don't believe, though, that some of our people can wait that long. Somewone who had to borrow $10,000 to buy stock, and has to make those payments for five years, it's going to be rough on him. I think they thought they would be getting something back a lot sooner."

Adds Barker, "I guess there were some who did that. But neither of us borrowed anything."

"Most of the younger people didn't sign up," Pigmon explains. "The way things are going right now, if they asked me to put in another $10,000 or $15,000, I'd do it. That money won't do me any good, but it might do my kids some good. You take a chance, it's like playing the horses, it's the same thing."

Adds Barker, "You didn't know from one day to the next whether you had a job or not. It was like that for a long time. They were laying people off every day, and I figured they would be coming to tell me at any time. That went on for 2-1/2 years."

"We got a couple of pretty good heads running things now--Miller and Wax," offers Pigmon. "If you've got any kind of a problem, you can go talk to them. That means a lot. Marsh has worked with us all over the shop. Somebody like that is much easier to get along with. He can really help you.

"I was laid off for almost two months last year. I have a couple of side jobs--that's my insurance plan. But I've made more money the first four months of this year than I made all last year."

Just before leaving, I concluded, "When Cy was talking, it seemed he was spreading the bull pretty thick, but after talking to you men, I can see now that it's all true."

So that's the people side of the Scully-Jones story. If you would like some information on the toolholders these people make, circle E8.
COPYRIGHT 1984 Nelson Publishing
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Author:Sprow, Eugene E.
Publication:Tooling & Production
Date:Jul 1, 1984
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