Chemical Heritage Press • 1997 • 342 pages • $24.95
Mr. Bradley is president of the Institute for Energy Research in Houston, Texas.
On the surface, this autobiography describes how an individual well past retirement age restructured major assets in the domestic chemical/petrochemical industry through leveraged buyouts (LBOs) to create several billion dollars of wealth for himself and many associates. This interesting and unique business history aside, Gordon Cain’s story has a much deeper message—how a “captain of industry” working in a market setting where political barriers and patronage do not apply can create great wealth and opportunities for thousands of people.
As Cain notes in his introduction, the book was inspired by the need to defend his honor against the commonly portrayed notion that debt-financed buyouts in the 1980s benefited a few quick-buck artists at the expense of displaced workers and the general good. He argues that the failure behind massive business restructuring is prior management, not new management. Draconian layoffs and abrupt change could have been mitigated by better managerial decisions and, in turn, more accountable boards of directors. It is passive boards, Cain contends, that can create the “Imperial CEO,” an example of that rare species called market failure. But even when the dirty work must be done, Cain explains, a sound entrepreneurial vision can more than offset the transition costs by empowering remaining workers, freeing marginal workers and other nonspecific assets to find more productive employment, and increasing output and lowering prices to benefit consumers.
Cain orchestrated five major business restructurings in the 1980s, all of them LBOs, that handsomely benefited himself, the institutional investors, over 100 key managers, and some 5,000 employees who received several times their salary in stock participation. His largest deal, circa 1989, was his best. Cain Chemical increased 44 times in value for shareholders in the nine months between when Cain put the company together and Occidental bought it. (Cain did not want to sell, but too many people stood to make significant wealth for the first time.) Soon after, Cain opened up his copy of the Wall Street Journal to find a full-page advertisement with a “thank you, Gordon Cain” surrounded by signatures from all 1,337 employees, the lowest paid of whom had received a six-figure payout.
While returns of this magnitude always reflect fortuitous circumstances, Cain clearly was doing some highly innovative things that the incumbents (the asset sellers) were not. One innovation that simultaneously cut costs and enhanced corporate decision-making was to increase the involvement of rank-and-file employees. This was accomplished using Edward Deming’s “total quality control” concepts and setting up employee stock ownership and profit-sharing plans. By betting on the collective wisdom and drive of the on-the-spot employees rather than intermediate management, Cain had tapped into the same knowledge dynamo that “Austrian School” economists such as Ludwig von Mises and F. A. Hayek had conclusively shown make market economics inherently more wealth-creating than centrally planned ones.
The double win of reduced management costs and improved decision-making allowed Cain to slash overhead from 15-20 percent of sales to around 5 percent of sales and make innumerable process improvements. This endogenous improvement, leveraged by debt financing, was powerfully joined by improved external factors driving the highly cyclic businesses he invested in. Cain repeatedly demonstrated that he understood where he was in the chemical-petrochemical price cycle better than the prevailing view. It is surprising, in retrospect, that so many companies would sell their assets to Gordon Cain.
The crucial element that put Cain’s entrepreneurial vision into play was debt financing—and hence his inspiration to offer a revisionist view of the social beneficence of LBOs. Cain had very limited venture capital but a proven management record. Before, this would not have been enough to compete for corporate control. But in the early 1980s a new investment vehicle came of age—high- risk, high-return “junk” bonds to finance leveraged buyouts. Cain’s success belies the widespread idea that “junk bonds” and LBOs were evil and fraudulent.
As unique as Cain’s late success in business life was his appreciation and support for consistent free-market public policies. While many business executives typically are strong supporters of the free-market economy in the abstract, very few resist the temptation to actively court government favor as short-run business interests dictate. The widely recognized “forest problem” of pervasive special-interest interferences with the market is really a “trees” problem of political opportunities to individual businesses. Cain, a man “not comfortable in either political party,” never found himself in a business predicament of having to exercise the political means to get ahead. And he never forgot the lessons from a slim book he read when it was published in 1944: Hayek’s Road to Serfdom. Now, with his newfound fortune, a personal lifestyle that has remained unchanged (except for a private plane that he apologizes for in the book), and a quest to improve society in the near term, he scoured the think-tank spectrum for foundations supporting limited government and libertarian ideals.
Cain’s story offers much useful insight and experience about business restructuring, management philosophy, and public policy. Cain’s revisionism casts fourth-and-long business restructuring in new light. Debt financing is shown to have a human face after all. And thanks in part to Cain’s new competitive standard, America’s chemical/petrochemical industry remains a world leader today. Everybody Wins! is thus a powerful antidote to many poisonous myths about capitalism.