How Not to Grow
Five years ago, San Francisco's Yuba Consolidated Industries was a sturdy little company which by concentrating on its traditional business—gold mining—managed to turn a tidy $1,700,000 profit on sales of $22 million. By last year Yuba had mushroomed into a glamorously diversified corporation that could point to sales of $98 million drawn from enterprises ranging from missile-base construction to the manufacture of power tools. But, in dramatic contrast to W.R. Grace & Co. (see above), Yuba is a case study in how not to expand a corporation. Last week, having lost $12 million last year despite its skyrocketing sales, Yuba was in bankruptcy court.
In 1957 Yuba's directors were warned that by the late 1960s the company's long-profitable gold fields would peter out. Hoping to diversify the company (then called Yuba Consolidated Gold Fields), the directors brought in as chairman and president a hustling and autocratic executive named John L. McGara. McGara, 51, who had made his name by merging a complex of plate steel and boiler equipment suppliers into Buffalo's Adsco Industries, abolished Yuba's monthly board meeting to give himself freer rein. He ruthlessly dismissed old Yuba hands who questioned his policies. The directors didn't mind, because McGara promised that with his kind of leadership Yuba would do "in two or three years what it took other companies ten or 20 years to do."
Up in the Suite. Seven months after his arrival at Yuba, McGara merged the company with San Francisco's Portuguese-American Tin Co. Then, in return for lavish amounts of Yuba cash or stock, he successively bought a welding company, a steel fabricating mill, a Texas petrochemical firm, an Indiana crane manufacturer, an Ohio power toolmaker, and even his former employer, Adsco Industries. Within three heady years, Yuba boasted 17 operating divisions run from a plush suite of offices in San Francisco's new Crown Zellerbach Building. Carried away by McGara's predictions that Yuba's sales would soon hit $330 million a year, investors ran the company's stock from $3 a share up to $17.50 a share.
In its haste to expand, Yuba bought companies that were struggling under inefficient management—and rarely overhauled them sufficiently to make them effective. The insistence that, above all, Yuba must show continual sales gains drove division managers to enter into many contracts that later turned out to be profitless; one division lost $3,300,000 on two Titan II missile-site construction jobs. No less disastrous was the practice of pushing divisions into businesses that they did not understand. The Nichols-Southern division, which had been clearing as much as $250,000 a year renting equipment to the chemical and petroleum industries, stumbled into a loss of $250,000 when it sought to expand into highway construction.
Down in Court. By March of last year, McGara had run through $22 million in Yuba cash; the company's reserves were nonexistent, and its debts had mounted to a grotesque 83% of its net worth—2½ times what is usually considered sound for a company of its type. In desperation, the directors agreed to pay McGara $30,000 a year for ten years to break his contract, replaced him as president with J. (for John) Philip Murphy, 53, former head of one of the McGara-bought subsidiaries. Hoping to convert Yuba into a more modest but profitable $35 million-a-year operation, Murphy sold off six divisions. But of the eleven remaining divisions, only four were in the black, and at last Murphy decided that bankruptcy was the only way out for Yuba.
Ironically, as Murphy last week awaited a federal court ruling on Yuba's bankruptcy petition, one of his most vocal creditors was ex-President McGara—who was miffed because Yuba was in arrears on his $30,000 annual payment. Complained McGara, who had apparently been rethinking his philosophy of management: "What is happening now is entirely inexcusable. The company should be reduced to a mining operation only. Then creditors could be paid off in two years."