Made in WNY: Houdaille, Wall Street and the dawn of the LBO

Houdaille smokestack at 537 East Delevan Avenue

Houdaille smokestack at 537 East Delevan Avenue

Today, the abandoned factory parcel at 537 East Delevan Avenue is in the midst of a transformation as part of the redevelopment of the Northland corridor.  But 40 years ago, it was home to Houdaille Industries, a Buffalo manufacturer, that was “taken private” in May 1979 in a then-unusual deal called a “leveraged buyout” (LBO) by little-known Kohlberg Kravis Roberts & Co. (KKR).  The Houdaille Deal kicked-off a decade-long buyout frenzy on Wall Street during the 1980s that saw the rise of junk bonds and Drexel, Burnham, Lambert before the insider trading scandals of Michael Milken¸ Ivan Boesky and others cooled things down.

Houdaille (pronounced WHO-die) was founded in 1925 in Buffalo, NY and over the next 50 years it grew into a diversified conglomerate manufacturing everything from car bumpers to sophisticated machine tools.  But it’s stock price was languishing below book value by the late 1970s when it was rumored to be a takeover target.  Enter KKR which suggested that a LBO could solve all of Houdaille’s problems.  KKR would partner with Houdaille management to buyout all of the company’s public shareholders at a price more than double the current share value.  The money for the buyout would come from borrowing heavily against Houdaille’s assets.  But the LBO would work because the company could write-off its interest payments on that debt and re-depreciate its assets, resulting in zero taxes.  Houdaille could then use the money that formerly went to taxes to pay down its debt.  It would be risky for a few years until that debt load could be reduced, but if all went well, Houdaille would have avoided a takeover and its management team could reap huge profits by either selling or taking the company public again.

Interior of the abandoned Houdaille plant

Interior of the abandoned Houdaille plant

Unfortunately, Houdaille ran into a perfect storm: the 1981-1982 recession combined with unfair international competition from Japanese machine tool makers like Yamazaki (aka Mazak) that copied patent-protected American designs.  Houdaille appealed to the U.S. government for import protections, setting off a ferocious free trade debate before the Reagan Administration declined the petition in 1983, sealing the company’s fate.  Houdaille was forced to restructure, selling off business lines to service its debt before finally selling itself to a British conglomerate and disappearing in 1986.

KKR’s business and reputation took off after the Houdaille deal, peaking with the $25+ billion 1988 LBO of RJR Nabisco chronicled in the critically-acclaimed, best-seller “Barbarians at the Gate.”  Other Wall Street firms profited from the LBO boom by copying KKR’s model or by deploying so-called “Junk Bonds” to help finance buyouts.  Today, remnants of Houdaille can be found in companies like LVD Strippit in Akron, NY, IDEX Corporation, TI Group and other companies scattered around the world, and in the lonely smokestack that still stands at 537 East Delevan and carries the Houdaille name.

 

NOTE:  Insyte Consulting will be moving to the Northland Workforce Training Center, just across the street from the old Houdaille Plant, this Summer.


 

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