Gulf & Western Inc.
Gulf & Western Inc.
After years of conducting operations in everything from auto parts to zinc, Gulf & Western has recently narrowed its focus. Today, its primary businesses are in entertainment, financial services, and consumer products. While the company perhaps no longer lives up to the acquisitive image sometimes attributed to it, Gulf & Western nonetheless remains a large conglomerate with nearly $3 billion in revenue and nearly 20,000 employees. All that for a company whose first business in auto parts, the company founder admitted years later, “never mounted to a hill of beans.”
Charles George Bluhdorn had emigrated to the United States from Austria in 1942. After experimenting with some disappointing commodities import-export businesses, he found success importing coffee from Brazil and Africa through his Fortuna Coffee Company. However, the coffee business fluctuated wildly, and Bluhdorn was searching for an acquisition in an industry offering greater security.
The large, rapidly growing auto parts business seemed to offer that security, since auto parts sales volume is nominally affected by economic downturns. During times when car production decreases, drivers run their cars longer and thus use more replacement parts. When car sales increase, auto parts sales to new cars also rise, and there are more cars on the road that will eventually need replacement parts.
Bluhdorn also wanted a publicly traded company whose stock he could use to buy other companies. Michigan Plating & Stamping Company fit both criteria. The Grand Rapids based company, with sales of $8.4 million, had an almost worthless contract to supply rear bumpers to Studebakers and an American Stock Exchange listing.
In 1956 Bluhdorn secured a controlling interest in Michigan Plating and joined its board of directors. The next year Bluhdorn merged Michigan Plating with Beard & Stone Electric Company, a Houston-based auto parts distributor. Later, in 1958 Bluhdorn renamed the company Gulf & Western Corporation, because of the company’s location on the Gulf of Mexico and his belief that most of its growth would come in the Western United States, where automobile sales were increasing rapidly.
With Detroit setting postwar production records and the number of cares on the road increasing steadily, Gulf & Western acquired a number of private auto-parts warehouses and distributors.
In 1965, as Gulf & Western’s annual sales approached $200 million, Bluhdorn decided the time had come for the company to diversify. He began searching for a company with large cash reserves which he could use to purchase still more companies. Harold U. Zerbe, a Pennsylvania business man who had joined Gulf & Western’s board when Bluhdorn bought his regional auto parts distributorship, knew of a company with such assets. New Jersey Zinc, a large mining and chemical company on whose board Zerbe was also a member, had acquired a large amount of cash that management didn’t know what to do with. Managers wanted to use the money to expand operations, while the group of controlling owners wanted to enlarge the company’s investment portfolio.
In a matter of days Bluhdorn arranged an $84 million loan from Chase Manhattan Bank, and Gulf & Western acquired a large amount of the company’s stock. Gulf & Western sided with the company management in the financial dispute, and by early 1966 the conglomerate Gulf & Western was born. The acquisition helped to improve Gulf & Western’s total sales from about $180 million to almost $300 million, and almost to triple the company’s earnings to $17 million.
Now that Gulf & Western had entered into a field beyond the business of automotive parts, Bluhdorn began looking for companies in any industry whose undervalued assets he could use to borrow against heavily and purchase more companies. In 1966 Paramount Pictures Corporation became his next target.
Like most large movie companies at that time, Paramount was suffering heavy losses on its feature film productions. It had discontinued producing television programs, and it was leasing old movies on poor terms. The company, however, had hidden assets, especially its extensive real estate, including the downtown movie theaters of Famous Players in Canada, and also its old movies which, if negotiated properly, could be sold to television for large profits.
Gulf & Western paid $125 million for Paramount and, in return, Gulf & Western’s sales were improved to $450 million, ranking the company in the top 110 U.S. manufacturing companies. Bluhdorn made himself president of Paramount and promoted Martin S. Davis, a Paramount vice president, to executive vice president.
In the meantime, Gulf & Western hadn’t neglected its primary business of auto parts. Its operations had grown to 33 auto parts warehouses and 150 auto parts distribution outlets in 28 states by 1966. It also had a franchise operation in Mexico and operations in Nassau. Even as the Paramount negotiations were proceeding, Gulf & Western had acquired a European auto parts distributor in an attempt to gain a large share of that market.
In 1967 Bluhdorn’s fondness for commodities again surfaced when Gulf & Western paid $54 million for South Puerto Rico Sugar Company. Most of the company’s operations were in the Dominican Republic, where it owned the extensive Romana sugar mill and 300,000 acres of land. Nearly half of the land was used to produce sugar cane and, at the peak of the cane-cutting season, the company employed 19,000 people, making it the country’s largest private employer as well as the largest taxpayer and landowner.
The next year Gulf & Western purchased 23 companies, including Consolidated Cigar, its first venture into the consumer products field, E.W. Bliss, Universal American, Brown Company, and Associates Investment Company. With one billion in assets, the Associates Investment Company, in the consumer financing field, became the largest single contributor to Gulf & Western’s earnings. Those acquisitions brought the total number of companies that Gulf & Western had acquired since its formation to 130.
In 1968 Gulf & Western’s sales surpassed the one billion mark for the first time, reaching $1.3 billion and producing a net income of $69.8 million. Bluhdorn, the company’s largest shareholder, watched the value of his one million shares climb to $22 million. Due to its accelerated acquisition program, Gulf & Western’s annual sales gains and earnings were much better than other conglomerates, though the price earnings ratio of its securities remained among the lowest.
That year Fortune magazine attributed much of Gulf & Western’s success to its good management and conservative acquisition strategy. Only 95 people worked at company headquarters, with control resting in the hands of approximately six or eight officers. To manage the large conglomerate, Bluhdorn divided the company into profit centers, and made the vice presidents of each group part of the corporate staff. Bluhdorn financed most of the acquisitions with company securities, believing that “the best buy you can make today is to put out paper and know that twenty years from now you can put out the same amount of money.” However, because the company’s securities were selling at low price to earnings ratios, it was forced to buy small companies (usually family run) in noncyclic industries and rely on Bluhdorn’s business acumen to increase their sales.
Gulf & Western even profited from most of its unsuccessful takeover attempts. In 1968, for instance, the company purchased 8% of Pan Am stock, hoping to exploit the airline’s new 747 airplane and its extensive routes, and develop resort complexes around the world. Yet Pan Am chairman and chief executive officer Harold Gray was uninterested. A House Judiciary Subcommittee, however, was interested and within a month announced it was investigating the purchase. Gulf & Western quickly got rid of the Pan Am stock, selling the largest share to Resorts International Inc., while making a significant profit.
During that same year, Gulf & Western attempted to buy Armour Company, whose sales were three times its own. Bluhdorn figured that Armour’s non-meatpacking assets were worth more than the market’s valuation of the company even if he bought nearly 100% of stock. After being discouraged by the Justice Department and watching Gulf & Western’s stock plummet 13 points in three weeks, Bluhdorn dropped the bid and sold the stock at a $16.5 million profit.
Similarly, when Gulf & Western was forced to sell the shares it had purchased in Sinclair because its management resisted the move, Gulf & Western nonetheless profited by selling its interest to Atlantic Richfield for $145 a share when it had originally paid $72.
In the meantime, Gulf & Western had built up a $244 million stock portfolio, which was unusually large for an industrial company. Besides receiving dividends, Gulf & Western benefited from the right to include on its balance sheets a percentage of the profits of any company in which it held more than a 20% stake.
In 1969 Wall Street analysts, congressmen and the media charged that conglomerates inflated their earnings by promotional tricks with their accounting procedures. As a result of this anti-conglomerate sentiment, Gulf & Western’s stock dropped 30 points in a short period, costing shareholders $500 million and lowering the company’s already dismal price earnings ratio to less than eight times earnings. The combination of depressed stock and the climate in Washington brought Gulf & Western’s fast-paced acquisition phase to an end, forcing the company to rely on internal growth, which had been running at 18%.
However, there was also some good news. In 1972 Paramount, which was close to bankruptcy when acquired, recorded its highest box-offices revenues in history. And, generally speaking, during the mid-1970’s Gulf & Western managed to keep its earnings mounting when Litton, Fuqua, Bangor Punta, and other conglomerates had fallen on hard times.
In 1975 the company’s operations in the Dominican Republic became a source of trouble. The U.S. Securities and Exchange Commission charged the company with illegally withholding more than $38 million in profits owed to the government of the Dominican Republic. The following year, the National Council of Churches proposed unsuccessfully that Gulf & Western disclose detailed data on payrates for sugar workers and relationships with union and government officials. Gulf & Western defeated this proposal, while Bluhdorn said that Gulf & Western paid the highest wages of any U.S. concern with facilities in Latin America.
In 1977 Gulf & Western bought Madison Square Garden for double market price. Bluhdorn was after the company’s vastly undervalued real estate, including a Manhattan office building, land around New York’s Roosevelt Raceway and Chicago’s Washington Park.
Public image problems continued to plague Gulf & Western. In 1978 the company spent $3.3 million to print its annual report in Time magazine, hoping to raise its price earnings ratio from a low multiple of four. However, this strategy didn’t work. One year later, Forbes magazine reported on Bluhdorn’s “$400 million credibility gap.” According to Forbes, due to the fact that Wall Street didn’t trust Bluhdorn, the company’s stock was probably trading at a price/earnings ratio two points less than it would have under other management, costing shareholders $400 million.
Later that year the SEC mounted a second investigation, accusing Bluhdorn and Don F. Gaston, an executive vice president, of a wide range of misconduct, including charges that the two executives had the company’s pension fund make “inappropriate” investments in companies where they had a personal investment. The agency charged that the trading benefited Gulf & Western and its executive officers, but hurt the pension fund.
In 1980 the SEC and management at Gulf & Western reached a settlement in the investigation of the company’s Dominican Republic operations originally started in 1975. Gulf & Western agreed to spend $39 million over seven years in order to fund a social and economic development program in the Dominican Republic. The second SEC investigation was settled in 1981. No restitution was called for under the terms of the agreement.
In early 1983 Bluhdorn died of a heart attack at the age of 56 while flying back from a business trip to the Dominican Republic. Martin S. Davis then became Gulf & Western’s vice chairman and chief executive officer. Davis immediately set out to streamline the company’s operations from seven operating groups into three units, focused on the areas of entertainment, financial services, and consumer products. To accomplish this, he restructured the company’s management and sold the company’s stock portfolio, bringing in $750 million. At the same time he began selling businesses that didn’t fit into the three main units. Within months Gulf & Western sold Consolidated Cigar Company and put up for sale fifty other units representing 20% of sales and assets, including chemicals, concrete equipment, mechanical presses and racetrack operations, resulting in $359 million in cash and notes.
With its cash reserve rapidly increasing, the company had become an attractive takeover target. Consequently, later that year the company’s directors authorized a stock repurchase of up to 10 million shares. The company quickly bought back seven million shares from financier Carl Lindner for $29.95 a share, and purchased an additional one million shares off the market.
In 1984 Gulf & Western continued its highly-focused acquisition program, paying $180 million for the remaining 73% of Esquire, Inc. that it didn’t already own. The company also acquired Prentice-Hall, Inc. for $710 million and Glen & Company, a publisher, for $100 million. Also that year, Gulf & Western sold its sugar and related holdings in the Dominican Republic and Florida for $200 million, and agreed to sell the site of old Madison Square Gardens for $100 million.
Gulf & Western completed its transformation into a tightly focused company during 1985 by selling its consumer and industrial products group to Wickes Company for $1 billion in cash. The sale left Gulf & Western producing a company with $3.7 billion in entertainment and communication assets and $7 billion in financial service assets. As a result, in a short period of time the company’s stock price more than doubled from $18 a share to $41.25.
With the company’s operations strictly defined, Gulf & Western’s future looks more secure than ever. Davis is said to be interested in acquiring broadcasting and publishing companies. And with more than $3 billion in sales and $400 million in profits, he clearly has a solid base on which to expand.
Allyn & Bacon, Inc.; G & W Canada, Inc.; G & W Holding Corp.; Prentice-Hall, Inc.; Gulf & Western Realty Corp.; Madison Square Garden Corp.; Modern Curriculum Press, Inc.; Paramount Pictures Corp.; Simon & Schuster, Inc.; Thirtieth Century Corp.; Esquire, Inc.
The Gulf & Western Story by Charles G. Bluhdorn, New York, Newcomen Society, 1973.