INTERCO Incorporated

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INTERCO Incorporated

101 South Hanley Road
Saint Louis, Missouri 63105
(314) 863-1100
Fax: (314) 863-5306

Public Company
Incorporated: 1911 as International Shoe Company
Employees: 28,800
Sales: $1.77 billion
Stock Exchanges: New York Midwest

INTERCO is a major manufacturer of furniture and home furnishings and a manufacturer, distributor, and retailer of men’s footwear and athletic footwear. The corporate name was changed from International Shoe Company in 1966. In 1990 the corporation consisted of four core companies in two operating groups: Broyhill and Lane in furniture and home furnishings, and Florsheim and Converse in footwear manufacturing and retailing.

The corporation was organized in 1911 as the International Shoe Company (ISC) by the consolidation of Roberts, Johnson & Rand Shoe Company and the Peters Shoe Company, both of Saint Louis, Missouri. The company built a reputation for manufacturing quality footwear in basic styles in the low-to-medium price range.

The early years of ISC were under the direction of the Johnson brothers, Jackson and Oscar, and their cousin, Frank C. Rand, son of Henry O. Rand, one of the two financial backers of the firm. John C. Roberts was the other backer. The Johnsons and the Rands, from Mississippi, had moved to Memphis, Tennessee, in 1892 to organize the Johnson, Carruthers & Rand Shoe Company. They sold out in 1898 and moved to Saint Louis to organize a new shoe concern. Jackson Johnson served as president of the newly formed company, then as president of ISC until 1915, and finally as chairman until his death in 1929. It was his vision and entrepreneurial drive that led to the formation of the International Shoe Company. He was succeeded briefly as president of ISC by his younger brother, Oscar Johnson, who died suddenly in 1916. Frank C. Rand guided the company as president from 1916 to 1930, and as chairman from 1930 to 1949. He joined the firm as a stock clerk after graduating from Vanderbilt University in 1898, and rose to vice president ten years later. Rand was the guiding force behind the tremendous growth of the corporation during the 1920s, and in the survival of the company during the difficult years of the Great Depression.

The corporation benefited from production demands that came with the outbreak of war in Europe. In 1916 orders came from the War Department as the United States prepared for its involvement in the war. Military orders placed with the shoe industry in general were huge. The importance of shoes as war material was demonstrated when, in 1917, the War Department was forced to takeover the Hamilton Brown Shoe Company of Saint Louis when it was idled by a strike.

In 1921 ISC was restructured and chartered in Delaware. At that time it had 32 shoe factories in Missouri, Illinois, and Kentucky, and had recently acquired the three tanneries of Kistler, Lesh & Co. as part of the long-range goal to achieve full vertical integration. In May 1921 ISC acquired W.H. McElwain Company of Boston, with ten shoe factories, two tanneries, and four shoe-material factories, all in New Hampshire. It was a profitable manufacturer that was experiencing serious labor problems. The company had approximately 5,000 workers and in the previous year had raised wages by 10% and reduced the workweek to 48 hours. McElwain’s factories had been organized by the United Shoe Workers. The company experienced some difficulties in the recession of 1920-1921 and proposed a wage reduction of 22%, which was unacceptable to the union. A strike of all McElwain plants was called in January 1921. The sale of the company to non-unionized International Shoe in the spring of 1921 was, in part, a means of resolving this labor dispute.

The merger of ISC and McElwain was challenged by the Federal Trade Commission as a violation of the Clayton Antitrust Act. The commission argued that the combined companies would lessen competition and create a monopoly in shoe manufacturing. The company’s position was that no substantial competition had existed between the two companies, and that the McElwain Company was in such financial straits that sale or liquidation were the only options. The commission’s order that ISC divest itself of its McElwain holding was, in 1930, reversed by the Supreme Court. The newly merged companies had combined annual sales of $130 million and could produce 120,000 pairs of shoes daily.

During the 1920s, with minor exceptions, sales and profits increased regularly. In 1927 the corporation increased its authorized common stock in order to provide its stockholders with a four-for-one split. A dividend of $2.00 was declared on the new stock, and by January 1928 the corporation was reporting a net income of $4.55 per share.

Profitability was achieved in part at the cost of good labor relations. ISC was not unionized. It tended to control production by means of layoffs of workers. The company also attempted to reduce wages periodically, proposed by management as a means of lowering shoe prices and thereby gaining steady employment for its workers. Although unorganized, workers in the factories did resist this strategy but with limited success.

The year 1929 was ISC’s best to that date. Sales and profits reached new highs, and dividends were increased by 50% to $3.00 per share. That year it produced 54.73 million pairs of shoes, the largest output ever by a single firm. ISC had not missed a dividend payment from its founding 17 years earlier, and by 1929 it had made millionaires of 38 members of the firm. The economic collapse that came at the end of the 1920s would affect the business, but ISC was a well-managed firm, and it was to remain profitable through most of the Depression years. During those difficult years ISC did as most others; it periodically laid off workers and cut wages and salaries when necessary. It also cut the price of its product line, and kept most of its factories operating, although at a reduced level. In 1932 the corporation reported a 9.72% rate of return on investment, as compared to 19.29% in 1929. The rate of return rose to 13.53% by 1935. On occasion the corporation found it necessary to increase production, as it did in mid-1931. Some of the New Hampshire plants were placed on an overtime schedule. The spurt in demand was attributed to lower priced footwear, and the relative absence of labor problems was the reason for increasing production at the New Hampshire factories.

The most difficult times for ISC came in the late years of the Depression. In 1937 ISC raised worker’s wages twice for a total of 10%, only to be forced to rescind the increase the following April, of 1938, when the economy again declined. In July of that year ISC reported six-month earnings of 19¢ per share—the lowest earnings of the Depression era. Nonetheless, it had survived the worst of the Great Depression and had emerged as a strong company and a major force in the shoe industry. ISC did well enough in 1939 to divide $600,000 in bonus money among workers earnings less than $50 per week. In the final report for fiscal 1939, ISC reported that sales in dollars were the highest since 1930, and that production and shipments surpassed any year since 1929.

Management of ISC remained rather stable throughout these years. In 1939 William H. Moulton, who had assumed the office in 1930, retired as president of ISC and was succeeded by Byron A. Gray. Both had joined the corporation in the days of the Roberts, Johnson & Rand Shoe Company, Moulton in 1908 and Gray in 1909. Frank Rand continued as chairman and remained the dominant force in management.

Production by ISC for World War II began in the first half of 1940 as preparedness gained momentum. In July 1940 the U.S. Army let out for bid a contract for 452,028 pairs of service shoes. Of the 13 companies that bid, only ISC had the production capacity to bid on the entire order and came in with a low bid of $2.48 per pair. By the end of 1940 ISC had approximately 30,000 employees, primarily in the Midwest and New England. Contracts throughout the war kept the company’s plants operating at close to full capacity. In 1943 the Boston Quartermaster Depot awarded contracts for 7.2 million pairs of service shoes—the largest single order—1.34 million pairs to be manufactured by ISC. From early 1940 to January 1945, ISC supplied the government with 33 million pairs of shoes.

Government contracts were awarded to ISC despite opposition from organized labor. The company was not highly regarded among labor organizers or sympathizers, dating back to 1913, when it was accused by the Illinois Vice Commission of encouraging vice among its women employees because of ISC’s unwillingness to pay decent wages. Until the labor legislation of the New Deal era made such practices illegal, ISC used a variety of strategies to prevent its workers from organizing unions. By 1940 a number of ISC’s plants had been organized, but the company was involved in litigation with the National Labor Relations Board over its non-compliance with an order to allow workers in the Hannibal, Missouri, plant to organize. In late 1940 labor representatives objected to ISC receiving a War Department contract for 620,000 pairs of shoes. The issue was resolved politically, but it did encourage ISC to work out its labor problems.

The capacity of the corporation had grown enormously during the 1940s and was not limited to war production. Consumer demand for shoes increased with the improving economy during the war years, and the production of shoes was limited only by the supply of raw materials. In 1944 government business constituted 36% of ISC’s dollar volume, and 27% of its production. That year ISC manufactured 53.92 million pairs of shoes—surpassing for the first time the production level of 1929. By the end of World War II, International Shoe had approximately 32,000 employees in 67 shoe factories, subsidiary plants, and tanneries located in Missouri, Illinois, Kentucky, New Hampshire, Arkansas, West Virginia, North Carolina, and Pennsylvania. Plant capacity was well over 200,000 pairs of shoes daily. By 1950 ISC had added an additional 3,000 employees and increased capacity to 70 million pairs annually. Its tanneries could process 3.5 million hides annually, and, in addition, the company manufactured rubber heels, cements, containers, and 10 million yards of textiles for shoe linings.

The death of Frank C. Rand in 1949 marked a significant turning point for ISC. His presence had been felt for 31 years as president. It was primarily at his direction that ISC grew through vertical integration, expansion, and the acquisition of other shoe-manufacturing firms. Two of his sons would assume the presidency of the firm, Edgar E. Rand in 1950 and Henry H. Rand in 1955. Although the Rands would continue to have a significant role in the firm, non-family management would determine the future of ISC, and growth would take on different characteristics. The acquisitions in 1952 of the Florsheim Shoe Company, a manufacturer of better-quality men’s shoes founded in 1892, and in 1954 of Savage Shoes, Ltd., the largest shoe manufacturer in Canada, were the last sizable acquisitions of shoe manufacturers until the mid-1980s. In 1958, however, ISC acquired its first offshore manufacturer, the Caribe Shoe Corporation of Puerto Rico. The firm was small, with a daily capacity of 3,500 pairs of juvenile shoes, but it foretold of the future. Six months later ISC closed permanently a plant in Chester, Illinois, that had been operating since 1916 and manufacturing approximately 5,000 pairs of juvenile shoes daily.

Additions for the rest of the decade were in shoe retailing operations, and in 1959 ISC formed a new division, International Retail Sales. As a result of this expansion, by 1960 ISC had controlling interest in approximately 800 retail outlets, as compared to 275 in 1955. This was a response to the implications of low-priced imports. ISC moved quickly to ensure the continued profitability of the firm by expanding its retail operations and by diversifying into other product areas. The drive to diversify was guided by Maurice R. Chambers, who had joined ISC in 1949 as a divisional sales manager and who was elected president of the firm in 1962. He was the first person to reach this position who was neither with the original Roberts, Johnson & Rand Shoe Company nor a member of the Rand family. Under his direction, ISC moved aggressively to expand operations outside the continental United States and to acquire companies in areas other than shoe manufacturing or retailing. Chambers’s strategy was to seek out well-managed and profitable companies with strong brand identification and, once acquired, to leave the management team intact. Between 1964 and 1978 ISC acquired 21 separate companies, and with the exception of Central Hardware in 1966, all were apparel manufacturers or retailers. The acquired companies were given operating freedom, and some of these units went on to acquire additional firms in related areas of business, adding to the overall growth of ISC. The company was markedly successful in acquiring thriving firms with good product lines, and became a role model for other firms seeking to ensure profitability through acquisitions. In 1966 in keeping with its broader base as a diversified apparel maker, footwear manufacturer, retailer and department store operator, the International Shoe Company adopted the corporate name INTERCO.

During the 1960s there were significant changes in INTERCO’s core business. Within a year of Chambers taking office, the company permanently closed six manufacturing facilities—more closings were to come—and set up a special division to import a full line of footwear from Italy. The plant closings reduced overall production capacity approximately 12% and were part of a major effort to streamline and upgrade facilities to meet the surge of import competition. This strategy, coupled with diversification, kept INTERCO profitable despite the fact that by the mid-1970s imports had taken more than 44% of the domestic shoe market. By the early 1970s INTERCO’s apparel and general-merchandise subsidiaries were generating approximately 56% of sales and 47% of profit. By 1974 INTERCO had become a billion dollar corporation with ten consecutive years of record sales and earnings.

The expansion and diversification of the late 1960s and the 1970s had created a firm with three major operating divisions. The apparel manufacturing group consisted of 11 apparel companies, with 62 manufacturing plants and 13 distribution centers. The general retail merchandising group operated 856—owned or leased—retail locations in 29 states. The footwear manufacturing and retailing group operated 874 shoe stores and leased shoe departments in 43 states and in Mexico, Canada, and Australia; and it managed 24 factories and 10 distribution centers. A major addition to the footwear group was made with the acquisition in 1986 of Converse, a Massachusetts-based manufacturer of athletic footwear founded in 1908.

A new direction was begun in 1979 when INTERCO agreed to the acquisition of Ethan Allen Inc. for cash and stock totaling $130 million. Ethan Allen, begun in 1932 as a home-furnishings jobber, was a fully integrated manufacturer and retailer of furniture and accessories. With the acquisition in January 1980, Ethan Allen’s 24 factories and more than 300 retail showcase galleries became the core of INTERCO’s fourth operating group in furniture and home furnishings. That same year, in August, INTERCO, agreed to the acquisition of Broyhill Furniture Industries for cash and notes totaling $151.5 million. At the time of the acquisition, Broyhill, located in western North Carolina, was the largest privately owned furniture manufacturer in the world. The acquisition added 20 manufacturing facilities to the furniture and home-furnishings group.

The largest acquisition in furniture and home furnishings came in 1987 when INTERCO gained control of the Lane Company at a cost approaching $500 million. Lane, based in Altavista, Virginia, was founded in 1912 as a maker of cedar chests, and through growth and acquisition expanded into a full-line manufacturer of furniture in the medium-to-upper price ranges. With the addition of Lane’s 16 plants, sales of the furniture and home-furnishings group approached 33% of INTERCO’s total sales.

The primary architect of the merger-and-acquisition drive, Maurice R. Chambers, relinquished day-to-day control of the company in 1976, but continued as a major force as a director and as chairman of the executive committee until his retirement in 1981. His successor as CEO, William L. Edwards Jr., continued Chambers’s policies. In early 1981 and in anticipation of Chambers’s retirement, INTERCO restructured as part of a plan to develop younger managerial talent within the company. John K. Riedy was moved up to the vacant position of vice chairman and was succeeded as president and chief operating officer by Harvey Saligman. Then 42 years old, Saligman had been president of Queen Casuals, an apparel manufacturer founded by his grandfather and acquired by INTERCO in 1976. The move was propitious in that Riedy and Saligman were in place when Edwards died unexpectedly in June 1981. Riedy was elected chairman and CEO, positions he would hold until his retirement in June 1985. His successor in these offices, Saligman, would lead INTERCO into the most tumultuous period of the company’s existence.

The acquisitions of Converse in 1986 and Lane in 1987 were an integral part of the reorganization of INTERCO devised by Harvey Saligman. Of the four operating groups in the company, footwear manufacturing and retailing and furniture and home furnishings were the two most profitable and appeared to offer the most promise for the future. Beginning in 1985, Saligman’s long-term strategy was to emphasize footwear and furniture and to divest the company of less-profitable operations in apparel manufacturing and retailing. INTERCO’s overall performance and stock price in the mid-1980s did not meet expectations and showed no sign of an immediate turnaround. Saligman’s restructuring strategy came at a time when heavily leveraged hostile takeovers of undervalued companies were rampant. INTERCO was a prime candidate. Because the company owned well-known brand names, INTERCO was regarded by takeover specialists as worth more broken up than as a conglomerate.

At the annual meeting in June 1985, while reporting a first quarter net income decline of 42%, INTERCO amended its bylaws to create obstacles in the event of a hostile takeover bid. Additional similar action was taken at a board meeting several months later and again the following spring. At the same time INTERCO was proceeding with the divestment or closing of apparel manufacturing firms, including Saligman’s family firm, Queen Casuals, and unprofitable retail operations. The acquisitions of Converse and Lane were negotiated at this time. It appears that these acquisitions contributed to a liquidity problem and a lowering of the value of the company’s stock, which may have made the company more vulnerable to takeover.

Anticipating a takeover bid, Saligman and INTERCO retained the services of an investment banker, Wasserstein Perella & Company, in July 1988. However, the firm’s advice and handling of a takeover challenge brought INTERCO to the edge of bankruptcy. The bid came later that same month from a group of investors led by Steven M. Rales and his brother Mitchell Rales, of Washington, D.C. The initial bid of $2.26 billion, approximately $64 per share, was followed within days by an increased offer of $2.47 billion, or approximately $70 per share. INTERCO’s stock had increased by $8.375 to $67.75 a share in response to the first bid, and to $72.50 with the second bid.

INTERCO rejected both bids and took defensive measures to retain its independence. The Rales group had acquired 8.7% of INTERCO’s stock before making the bid. It had the resources to pursue the takeover battle, and indicated that its intent was to sell off all INTERCO assets with the exception of the furniture-manufacturing group, which would be retained. Financing and direction of the hostile bid was being provided by Drexel Burnham Lambert. With INTERCO shares trading above the hostile offer, management was encouraged to pursue defensive measures. Wasserstein Perella was authorized to provide confidential financial data to potential friendly merger partners, and Goldman, Sachs & Co. was employed to seek purchasers for the planned divestment of the apparel manufacturing group.

In mid-September the Rales group extended and increased its offer to INTERCO shareholders, but the bid appeared to be in serious trouble. Drexel Burnham Lambert, was charged by the Securities and Exchange Commission (SEC) with insider trading, a charge that eventually would lead to the downfall of that company. Drexel, unable to raise sufficient funds from outside investors, was obliged to provide over $600 million of its own money to support the bid. To counter the Rales bid, INTERCO’s board approved a $2.8 billion restructuring and special dividend plan that was valued at $76 a share in cash and debentures. The plan would be financed by the sale of assets, including the possible sale of Ethan Allen, the core of the furniture group. In October INTERCO declared a dividend of $25 per share, and declared its intent to sell securities in the open market with the proceeds to go to stockholders. In effect, INTERCO was taking on an enormous amount of debt to make the company less attractive to a hostile raider. The Rales group increased its bid to $74 a share and indicated the possibility of an additional increase if it was able to gain access to INTERCO’s confidential financial data. By early November approximately 93% of INTERCO shares had been tendered to the Rales group, but it was prohibited from purchasing the stock because of legal proceedings instituted by INTERCO in the Delaware courts. The Rales group brought matters to head by establishing a firm deadline for negotiations with INTERCO’s board. At the deadline it cancelled the offer to purchase shares. Within weeks Rales sold its stake in the company and took a profit of $60 million on its three million shares.

The withdrawal of the bid did not release INTERCO from its obligation to restructure the firm, and it proceeded with its plans to pay special dividends of cash and securities to shareholders. INTERCO went ahead with the sale of assets, disposing of major units in apparel manufacturing, retailing operations, and Ethan Allen in the furniture group. This was being done in the midst of a declining bond market, which affected the value of the restructured company. The expectation was that the recapitalized firm would give shareholders a total value of $76 a share. By July 1989 the total value was estimated to be $61 and the stock of the restructured firm, which had been expected to trade at approximately $10, was trading for less than $3 per share. The sale of assets never reached the projected level, falling far short of the amount needed to service the company’s obligations. By the early months of 1990, INTERCO stock was trading at less than 50¢ per share, and company bonds were trading in the range of 3% to 25% of face value.

In March 1989 Richard B. Loynd was named president and chief operating officer. Loynd had led a leveraged buy-out of Converse and was chairman of that firm when it was acquired by INTERCO. In August, Harvey Saligman, who had initiated the restructuring of the firm and who uncompromisingly resisted the hostile takeover, stepped down and Loynd became chief executive officer of the firm. Saligman noted that INTERCO was entering a new phase of development and that Loynd’s experience in leading a company in a highly leveraged environment would be beneficial.

The company that Loynd was to lead into the 1990s was far different from the INTERCO of a few years earlier. The company that had grown in relatively small increments over an extended period of time, and had done so with a minimum of debt, began the 1990s with a negative net worth of almost $1 billion. It had narrowed itself down to the two operating groups, footwear manufacturing and retailing and furniture and home furnishings, with some peripheral assets slated for divestment.

This is the profile of the firm Saligman had projected some years earlier but without the debt generated by the takeover battle. The future of INTERCO was thus clouded. By the summer of 1990 INTERCO was unable to meet interest payments due and was obliged to seek a restructuring of its debt. The cooperation of bond holders and banks allowed INTERCO to survive, but the firm would face a major financial crisis in 1994 when interest on its subordinated bonds was to be paid. If the overall economy remains generally healthy, then INTERCO may be able to generate sufficient operating revenues to service its debt.