The fight for Tecumseh Products
Published in May, 2009
Ray Herrick-a master toolmaker and close friend of Henry Ford, Harvey Firestone, and Thomas Edison-started Hillsdale Machine & Tool Company in 1930. Four years later, it was on the brink of bankruptcy when the town of Tecumseh, full of people looking for work at the height of the Depression, agreed to give it an abandoned 30,000-square-foot factory. With a boost from investors and a line of credit from a Detroit bank secured by Ford himself, Herrick moved the firm one county east and renamed it Tecumseh Products.
After Ray's son, Kenneth, came back from World War II and took charge, the company flourished making compressors for window air conditioners. By 1960, its plants in Michigan, Ohio, Wisconsin, and Canada were turning out ten million compressors a year, and the company had diversified into a more visible product-small gasoline engines for lawn mowers and garden equipment.
"It was a total company town back then," Tecumseh mayor Harvey Schmidt remembers fondly. "Almost everybody you knew had a dad who worked there. My dad worked there. My friends' dads all worked there. But it was good-great, really." The company gave away turkeys at Thanksgiving and had big picnics in the summer.
Kenneth's son, Todd, joined the family business in 1970, after flying Chinook helicopters in Vietnam. The company continued to expand domestically in the 1970s then internationally in the 1980s with joint ventures in Brazil and France. By the mid-1990s, Tecumseh Products' sales were approaching $2 billion, and the company was earning more than $100 million a year.
It all started to go bad in 2002 when the Brazilian real strengthened against the dollar, cutting the company's revenues from its huge operation there almost in half. The next year, Kenneth retired and Todd became chairman.
The third generation of Herrick leaders took over in the face of a perfect storm: the price of raw materials was skyrocketing, and Chinese companies were taking over the window air conditioning market from the American manufacturers Tecumseh supplied.
The company lost $220 million in 2005 and $80 million in 2006, and rumors of bankruptcy surfaced.
"Things were pretty grim by the end of 2006," says company spokeswoman Teresa Hess. (Both Tecumseh and the Herrick family prefer to wage their battles for public opinion through proxies. Neither the Herricks nor Tecumseh's management agreed to be interviewed for this article.) "Herrick family management, though they had built a very successful company, were without the background and/or expertise to fix things. In the era of globalization, they lacked the skills to handle a global operation and to turn around a global company."
The company's five-member board of directors, then still controlled by the Herricks, went looking for new investors. But few were interested in a company that was hemorrhaging money. Late in 2006 they cut a deal with Tricap Management, a New York investment fund known by some as a "vulture investor"-a firm that buys into debt-strapped companies with an eye towards selling off the assets if the company can't be saved.
"Tricap would loan $100 million," says Hess, "but they told us the company needed to seek professional, non-family management. We agreed. Todd Herrick agreed, though he probably thought he'd get to step down at a time of his choosing. But things had gotten so critical so quickly that the board felt it had to act immediately-and it put Todd Herrick out as CEO in January of '07" by a vote of 3-2.
The Herricks' spokesperson, Jim Cain, sees things differently. "Todd had already agreed to step down before the board approached Tricap," he says. "If you've already agreed to resign, how can you be fired?" Yet Todd Herrick himself, in a legal deposition, described his departure as a "firing." His son, Kent, a company vice-president, departed the same day.
Whatever the circumstances, the Herricks were plainly unhappy. Todd still chaired the company's board, and within weeks he nominated two new members. The Herricks' spokesperson at the time said they did so because "we really felt that the board needed people of more experience in financial matters." Hess suspects a different motive: "Todd nominated two people of his choice because he wanted to regain his management position."
"Todd Herrick has said throughout this entire battle that he doesn't have any design to return to a leadership role in the company," responds Cain. But just in case he did, the company majority on the board moved to expand the board to seven members to try to prevent the Herricks from retaking control. Then they booted Herrick off the board.
But the Herricks, personally and through a family trust and the Herrick Foundation, were still the company's biggest stockholders. Within weeks, the foundation sued Tecumseh Products and the three directors who'd voted to kick out Todd. The company in turn filed suit against Todd and Kent Herrick, Todd's sister and his lawyer, and the Herrick Foundation.
The suits were settled with an agreement that the board would not expand to seven members until a permanent CEO was appointed, that one of the anti-Herrick directors would not stand for re-election, and that Todd Herrick would give his voting seat on the board to his son, Kent. (As chairman emeritus, Todd can attend board meetings but not vote.)
If Todd Herrick represented Tecumseh Products' small-town roots, his successor as CEO is a paragon of industrial globalization. Fifty-five-year-old Ed Buker, hired by the company-controlled board in August 2007, has overseen auto quality for Honda's American operations, BMW's new model development in Germany, and American factories for both companies.
In less than two years, Buker has reinvented the company. He sold off the small-engine division and made plans to use the money from the sale to reinvest in Tecumseh's core business: air conditioning compressors. But the Herricks oppose that plan. They want to pursue a "value strategy"-minimizing investment to maximize return to the company's shareholders, chiefly the Herricks themselves. Last year, they asked the company to liquidate their holdings or Tecumseh Products itself.
The family's formidable stock block has been the center of a tug-of-war ever since. Last year, the board changed the rules for calling a special meeting to require support by 75 percent of the stockholders-prompting a new round of litigation. After months of legal back-and-forth, the Herricks won. Lenawee County circuit court judge Timothy Pickard ordered Tecumseh to hold a special shareholder meeting last November 21 to vote on the family's proposal to remove the remaining two directors on the board who'd voted to oust Todd Herrick. At that meeting, the motion failed. But the two sides have continued to battle over a proposed stock restructuring that would eliminate the family's special class of super-voting shares.
The company says fighting the lawsuits has cost it $5 million. The Herricks say their successors have only themselves to blame. "The company allowed itself to get distracted," says Cain. "Rather than giving what the Herricks had to say a fair hearing, they ended up wasting time and money trying to frustrate the foundation."
It was in the midst of this turmoil that Tecumseh Products moved to Ann Arbor. The company had drawn down its hometown headcount for decades, moving manufacturing first to states where labor is cheaper and then to countries where labor is much cheaper. By last July, all that was left was global management, a small manufacturing component, and a smaller research team.
"There were less than 250 people working in Tecumseh when we closed there," says Hess. "The bulk of the manufacturing work went to Tupelo, Mississippi, and a small amount went to Canada. Global headquarters came to Ann Arbor, and fifty or so engineers are still in Tecumseh.
"The city was incredibly gracious," Hess continues. "Of course, they were disappointed when we announced the move, but they understood." It helped ease the blow when, last September, Governor Jennifer Granholm announced that Ohio-based Consolidated Biscuit would buy part of the Tecumseh Products plant, bringing 500 jobs to the city.
That deal, however, has yet to close-most likely because Consolidated, like Tecumseh Products, is being whipsawed by the economy. Tecumseh has already cut staff at its Ann Arbor headquarters, from 110 people last August to about eighty-five in April.
Tecumseh's gyrating stock price tells a similar tale. In the prosperous late 1990s, it traded at $55 a share. By April 2007, after the Herricks' ouster, it had fallen to just $10. A year ago, it had rebounded to $35 a share, only to slide again-in mid-April, it was trading at $6.70.
Asked what happened, Hess answers with a succinct email: "Complete turnover of top management, substantial inflows of cash from the fall of 2007 through the spring of 2008, Herrick lawsuits, proxy battles, and so on … and then throw in the biggest economic downturn in decades for good measure."
For Buker and the board, though, there is one upside to the depressed stock price: it's so low that the Herrick family is no longer eager to liquidate.
That doesn't mean, though, that they've abandoned their effort to shape the company they created. If anything, the conflict has grown more complex and bitter.
The next round in the ongoing fight will take place at the company's annual meeting this month. Both sides have nominated slates of four directors-so that whoever wins will control the seven-member board.
Whoever wins will then face the challenge of leading Tecumseh Products-not just from Tecumseh to Ann Arbor, but further, into the treacherous, fast-changing global economy.
[Originally published in May, 2009.]
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