LESSONS FROM A MIDDLE MARKET LBO: THE CASE OF O.M. SCOTT

In 1986 The O.M. Scott & Sons Company, the largest producer of lawn care products in the U.S., was sold by the ITT Corporation in a divisional leveraged buyout. The company was founded in Marysville, Ohio in 1870 by Orlando McLean Scott to sell farm crop seed. In 1900, the company began to sell weedfree lawn seed through the mail. In the 1920s, the company introduced the first home lawn fertilizer, the first lawn spreader, and the first patented bluegrass seed. Today, Scott is the acknowledged leader in the “do-it-yourself” lawn care market, with sales of over $300 million and over 1500 employees. Scott remained closely held until 1971, when it was purchased by ITT. The company then became a part of the consumer products division of the huge conglomerate, and operated as a wholly-owned subsidiary for 14 years. In 1984, prompted by a decline in financial performance and rumors of takeover and liquidation, ITT began a series of divestitures. Over the next two years, total divestitures exceeded $2 billion and, after years of substandard performance, ITT's stock price significantly outperformed the market. On November 26, 1986, in the midst of this divestiture activity, ITT announced that the managers of Scott, along with Clayton & Dubilier (C & D), a private firm specializing in leveraged buyouts, had agreed to purchase the stock of Scott and another ITT subsidiary, the W. Atlee Burpee Company. The deal closed on December 30. Clayton & Dubilier raised roughly $211 million to finance the purchase of the two companies. Of that $211 million, almost $191 milion, or 91% of the total, was debt: bank loans, subordinated notes, and subordinated debentures. The $20 million of new equity was distributed as follows: roughly 62% of the shares were held by a C & D partnership, 21% by Scott's new subordinated debtholders, and 17.5% by Scott management and employees. After this radical change in financial structure and concentration of equity ownership, Scott's operating performance improved dramatically. Between the end of December 1986 and the end of September 1988, sales were up 25% and earnings before interest and taxes (EBIT) increased by 56%. As shown in Table 1, this increase in operating earnings was not achieved by cutting back on marketing and distribution or R & D. In fact, spending on marketing and distribution increased by 21% and R & D spending went up by 7%. Capital spending also increased by 23%.     

The local economic impact of construction projects in a small and relatively self-contained economy: The case of Lancaster University

Whilst the local multiplier impacts of the annual operation of universities has been the subject of intensive research, the economic impacts of capital construction projects have been almost completely ignored. This paper presents the results of detailed analysis of capital projects at Lancaster University in 1993-The reasons for the radically different annual operation and construction multipliers estimated in the Lancaster study are examined. Despite the smaller size of construction multipliers it is argued that it is a serious mistake to estimate local construction multipliers by making simplifying assumptions on the size of the key parameters in the multiplier equations.     

Mortgage-Backed Futures and Options

This paper empirically tests valuation models for the mortgage-backed futures-options contracts that traded on the Chicago Board of Trade (CBOT) from June of 1989 until March of 1992. A simple contingent-claim model is shown to produce call option values on mortgage-backed futures (MBF) contracts that are unbiased estimates of actual futures-options prices. The ability of the MBF contract to hedge positions in current coupon Government National Mortgage Association (GNMA) securities relative to the effectiveness of cross-hedging GNMA positions with T-note and T-bond futures contracts is also examined.     

Nash equilibrium reconsidered and an option for maximin

In this paper we will discuss some peculiarities of the Nash equilibrium which are at odds with its standard applications: (a) the underlying dynamic interpretation, (b) the incentive independency if equilibria are mixed, and (c) the unprofitability if equilibrium and maximin are mixed and the game is 2-by-2. Maximin is proposed as an alternative solution concept in “relevant situations”.     

Two-Part Trade Policy under Imperfect Competition

In this paper we consider the potential gain of a government pursuing a two-part trade policy: an import license for entry, along with a per-unit tariff on imports. The model is a two-stage game of complete but imperfect information. In the first stage, the domestic government sets trade policy, while in the second stage the home and foreign producers behave as Cournot competitors. The paper demonstrates that the optimal trade policy depends upon the number of firms, the degree of heterogeneity in cost functions, and the degree of convexity in cost functions.     

Net foreign assets of Dutch commercial banks: A comment

Conclusion The article provides a contribution to the discussion on the net foreign assets of the commerical banks, by drawing renewed attention to the possible passivity of the banking sector, which has gained topicality with the striking developments of 1989. Indeed, the banking sector may be considerably more reactive in regards to net foreign assets formation than has been assumed by various authors and in macroeconometric models on the basis of portfolio optimizing behaviour. However, due to the above-mentioned methodological and empirical shortcomings, Bakkers's study certainly does not provide the final answer to this question.