401 Theodore Fremd Avenue
"The Environment I see before us should provide ample opportunity for Lynch to Grow. Declining multiples, especially for basic, 'boring' industrial companies (the kind we love), will create an attractive pool of acquisition candidates; declining interest rates and improved liquidity in the banking and high yield markets will eventually create plenty of financing; and, the new accounting rules on goodwill should help make the fruits of one's efforts look even more rewarding."—Mario J. Gabelli, chairman[ol0]
Lynch Corporation is described by its CEO and chairman, well-known money manager Mario Gabelli, as a leveraged buyout (LBO) fund in public form. Since Gabelli gained control of the company in 1985, Lynch has expanded beyond the manufacture of glass-forming machinery and quartz crystals to become a diversified holding company with three main subsidiaries.
Lynch Systems, Inc. continues the company's traditional glass business, designing and producing a broad range of manufacturing equipment used in two primary markets: cathode ray tube (CRT) displays for computer monitors and televisions, and household consumer products such as ovenware, giftware, and tableware. The subsidiary is located in Bainbridge, Georgia, and also has a European presence through Lynch-Amav, a joint venture with a German company that primarily provides engineering services to the glass industry.
Another Lynch subsidiary, Spinnaker Industries, Inc., makes adhesive-backed label stock. With headquarters in Troy, Ohio, Spinnaker Industries itself has three wholly owned subsidiaries: Spinnaker Coating, Inc., Spinnaker Coating-Maine, Inc., and Entoleter, Inc. It is the largest supplier of pressure sensitive postage stamp stock used by the United States Postal Service. The Spinnaker subsidiaries also produce approximately 80 percent of Lynch's total revenues.
The third primary subsidiary, M-tron Industries, Inc., produces crystals that are used primarily in a variety of communications products to control the frequency of signals. Its headquarters is located in Yankton, South Dakota. In recent years, Lynch has also spun off a number of businesses: Lynch Interactive, which acquired the company's telecommunications and broadcast interests along with The Morgan Group, which transports vehicles and mobile homes through a network of independent drivers; Tremont Advisors, providing investment products as well as advisory services; and East/West Communications, holders of five valuable wireless telephone licenses in such areas as Los Angeles and Washington, D.C.
Corporate Ancestry: 1917–70s
The history of the Lynch Corporation can be traced to Anderson, Indiana, and the 1917 foundation of the Lynch Glass Machinery Company, makers of machines to blow glass bottles. Lynch was then incorporated in the state of Indiana in 1928 to acquire Lynch Glass Machinery plus another Anderson business, Dice Machine Company. Lynch then acquired Miller Mold & Manufacturing of Columbus, Ohio, during the 1930s and became involved in producing glass presses. Another major part of today's Lynch Systems also has a long history in the glass industry. Miller Hydro, acquired in 1984, was started in 1914 in Bainbridge, Georgia. Miller Hydro made bottle washers for soft drink and beer producers. That expertise was then transferred to the manufacture of other types of machines, such as case packers, which became the company's main business after the market for bottle washers was eliminated in North America. Over the years, Lynch made a number of other industrial machines, such as butter wrapping machines, ice cream bar machines, and candy bar machines. Even after discontinuing these lines, Lynch was able to make money by providing parts that could be priced at a high margin.
In 1960, Lynch became involved in producing phonographs when it acquired the Symphonic Electronic Corporation. The company added another division when it acquired Cox Instrument Corporation in 1963. Apparently glass and packing machinery was not a good fit with electronics, because in 1964 the company was forced to cede control to Curtiss-Wright Corp., an aviation and electronics company, which bought $5.5 million in 12-year notes, which could be converted into stock, and warrants to purchase additional shares in Lynch. Potentially Curtiss-Wright would be able to gain 51 percent of Lynch's stock, but it already controlled the board. Under terms of the deal, Curtiss-Wright could nominate seven directors to Lynch's 13-member board.
Although in 1971 and 1972 Symphonic Electronic accounted for 65 percent of Lynch's revenues, it was also the reason the company suffered a net loss of more than $5 million. Management decided to discontinue the operation, selling off its inventory, equipment, and other assets. In 1976 Lynch acquired M-tron Industries for approximately $5.3 million. Unfortunately, the primary market of M-tron's quartz crystals, the CB radio market, suffered an almost immediate setback. The Federal Communications Commission decided to permit CB radios to increase from 23 channels to 40, effecting a change in technology that would reduce the number of needed quartz crystals. Instead of 14, each CB would now only need two or three crystals, resulting in a major reduction in orders for M-Tron. Although Lynch would still report a net profit of $1.4 million on sales of $18.6 million in 1976, the permanent loss of business at M-tron forced the company to take a $2 million write-off in 1977.
Gabelli to the Rescue: 1985
In the early 1980s Lynch sold off its Cox Instrument interests to Ametek, Inc., for approximately $1.65 million, then acquired Miller Hydro for $1.257 million. It was also during this period that Mario Gabelli began to buy the company's stock, which was trading between $6-$10 on the American Stock Exchange. Lynch had originally been listed in 1946 on the New York Curb Exchange, forerunner of the American Stock Exchange (AMEX). Gabelli recognized that Lynch carried potential with little risk and soon bought more than 20 percent of the company for the portfolios he managed. In the meantime, the head of Curtiss-Wright, T. Roland Berner, had taken a major loss buying Western Union stock. When Gabelli learned that Berner intended to sell his 22 percent stake in Lynch, he decided to buy it, rather than face the uncertainty of new ownership. In 1985 the money manager now found himself at the head of a company that, if broken down and liquidated, would realize little more than the $7 million Gabelli had invested in it. It made more sense to try to grow the business and use the corporation as another investment tool. Unlike Warren Buffett, another money manager who found himself as the chief executive of an operating company (textile manufacturer Berkshire Hathaway), which he essentially used as an investment fund, Gabelli opted to buy companies or interests in companies through Lynch.
Gabelli, the son of first generation Italian-American parents, was the quintessential self-made man. Born and raised in the Bronx, where he spoke Italian before learning English, he received a scholarship to Fordham University in New York City. "As a good Italian boy," he said in a Money profile, "you were supposed to be a doctor, a lawyer or an accountant, and accounting seemed practical." Aside from being practical, he was also driven to succeed. While maintaining high grades, which would lead to Gabelli graduating summa cum laude in 1965, he also held several school offices and dabbled in business to earn spending money. In addition to caddying he organized student trips to Bermuda and the Caribbean. During a New York blackout, Gabelli sold flashlights out of the trunk of his car.
By the time Gabelli attended the Columbia Graduate School of Business he was already investing in the stock market. It was at Columbia that he would become a firm believer in the theory of value investing, which held that stocks should be valued by what a prospective buyer would be willing to pay for the company. Essentially that meant all of a company's component parts needed to be priced. Gabelli also learned to look for a catalyst, such as the possibility of a takeover, that could then unlock the company's hidden value and result in windfall profits for shareholders. After receiving his M.B.A. at Columbia in 1967, he learned research skills at the Wall Street firm of Loeb Rhoades & Co., where as an analyst he initially covered the auto parts industry and, later, media and broadcasting and conglomerates. When he went to work for William D. Witter Inc. in 1975, Gabelli already enjoyed a reputation as a hard worker and a developing mystique for picking undervalued stocks. It was becoming apparent that he would not be content to remain an analyst much longer. In 1976 Witter was acquired by Drexel Burnham Lambert, and a year later Gabelli decided to strike out on his own, setting up an institutional research boutique operation funded by $100,000 of his own money and a similar amount from outside investors. Contacts he had made at more than 100 institutions allowed Gabelli to survive on research business until his money management company, Gamco, was able to take off. By 1981 he was managing $31 million for 81 accounts. A year later he reached a new level when his pension business signed Honeywell as a client, which opened the door to other major corporations. By the end of the 1980s Gabelli would run a brokerage, as well as three mutual funds. His pension business would manage $2.5 billion for 700 clients. Gabelli was essentially a one-man band, known to work 17-hour days, and still willing to do the nuts and bolts researching. He spent considerable time on the road making some 50 personal visits to companies each year. He was also becoming something of a celebrity, a regular contributor to Barron's Roundtable, and an occasional guest on TV business shows. As his funds racked up impressive results, he became known as "Super Mario," an image that helped to bring in even more business.
Despite being stretched thin by his many commitments, Gabelli became the chairman and chief executive officer of Lynch in 1986, although he tried to delegate most of the day-to-day responsibilities. As a first step in diversifying Lynch's operations, Gabelli raised $23 million for Lynch through convertible bonds. In 1986 he then established Lynch Capital Corporation, a securities brokerage, followed by Lynch Asset Management Company, to which he added the acquisition of Tremont Partners, a Connecticut-based investment management consulting firm. Tremont would then launch a number of investment funds and acquire other money management firms. Gabelli also purchased a 20 percent stake in a Rock Island, Illinois, television station and formed Lynch Entertainment. Furthermore in 1987, he bolstered Lynch's manufacturing segment by acquiring an 83 percent interest in Safety Railway Service corporation, makers of milling machines, heating equipment, and air pollution control equipment. Perhaps of equal attraction was the $3.8 million in cash and marketable securities the company held. Lynch would expand into the service sector in 1988 by acquiring Morgan Drive Away, a transporter of mobile homes and recreational vehicles that would form the basis for The Morgan Group.
In 1989 Gabelli and Lynch moved into the telecommunications sector, establishing Lynch Telephone and buying Western New Mexico Telephone Company. In the next few years, the subsidiary would add other systems, including Inter-Community Telephone, Cuba City Telephone Exchange Company, Belmont Telephone Company, Bretton Woods Telephone Company, and J.B.N. Telephone Company. In 1996 Lynch purchased some 1,400 lines from U.S. West. A year later it acquired Upper Peninsula Telephone Company and spun off East/West Communications. In 1999 Lynch also acquired Iowa's Central Scott Telephone Company.
The Morgan Group added to its Morgan Drive Away business by acquiring the assets of Transamerican Carriers in 1993, followed by Low Transportation, Inc. In 1995 Morgan acquired the assets of Transfer Drivers, Inc., which relocated rental vehicles for customers that included Ryder Systems, Budget Rentals, and Penske Truck Leasing. It also delivered new equipment for customers such as Utilmaster, Grumman Olson, and Bluebird Bus. By 1995 Morgan companies had created a network of 1,800 independent owner-operators with 1,000 part-time drive-away employees. It had 108 offices in 36 states. Furthermore, Morgan Finance provided insurance and financial services to the owner-operators.
Spinnaker Industries arose out of a 1994 reorganization of Safety Railway Service Corporation after Spinnaker Ohio was purchased, which became the Spinnaker Coating subsidiary. Spinnaker Industries was then augmented with purchases that included Brown-Bridge Industries and Alco Standard Corporation. The Spinnaker Coating—Maine subsidiary was created when Brown-Bridge was combined with the acquisition of S.D. Warren Company and its pressure sensitive label stock business. Entoleter, the third Spinnaker Industries subsidiary, had been part of the Spinnaker Ohio acquisition. In 1999 Lynch would opt to focus its attention on the adhesive-backed paper industry, and sold off the industrial tape operations of Spinnaker Industries.
Challenges During the 1990s
In 1990 Gabelli's reputation began to lose some of its luster. His funds posted unprecedented declines and his method of value investing was being called into question, as was his tendency to act as a one-man firm. His connection with Lynch also led to questions about a conflict of interest and subsequent trouble with the Securities and Exchange Commission. Although the SEC did not charge Gabelli or his funds with insider trading, it questioned a 1992 situation in which Lynch securities were traded shortly before financial results were released and Lynch's stock jumped 28 percent in five days. Eventually Gabelli would agree to pay a $100,000 fine to settle the matter, an amount which he characterized as "Draconian." Essentially Gabelli was found to be lax in having appropriate policies in place to guard against insider trading. Gabelli also agreed to allow an independent consultant to review his companies' policies, and announced that his funds would no longer invest in Lynch.
Gabelli's celebrity, which had launched him into the top ranks of money managers, now became something of a burden. Instead of attention and adoration he was receiving scrutiny and criticism. A 1997 Wall Street Journal article noted that Gabelli's self-promotion no longer brought in the same number of clients, his funds were no longer producing stellar results, and his method of value investing had simply gone out of style. His energy that had once been portrayed as a strength was now eclipsed by the suggestion that he was not able to build bench strength in his organization. Office intrigue was also aired in public, as infighting was blamed for stalled growth. In particular, Gabelli was accused of locking one of his fund managers out of her office and then withholding pay.
In 1998 Gabelli moved his operations to Rye, New York. Lynch underwent a number of changes that resulted in a reshuffling of businesses, as well as a couple of years of poor earnings. In 1999 Lynch Interactive was spun off, taking with it Lynch's cable television and broadcast television interests, telecommunications operations, as well as The Morgan Group. The company also began the process to spin off Entoleter, which manufactured industrial process equipment and no longer fit in with Spinnaker's emphasis on the adhesive-backed paper label stock business. Troubles with Spinnaker prevented the spinoff from occurring during 2000 and resulted in a restructuring of the business and a cost reduction program. An effort to sell part of M-tron through an initial public offering also failed to materialize.
Lynch showed steady growth in the late 1990s, with its stock showing appreciable gains. The company, which generated revenues of $167 million in 1996, grew sales to more than $219 million in 2000, but the company posted just $85,000 in operating profits in 1999 and a loss of $5 million in 2000. Gabelli appeared to be trying to make Lynch into a traditional public company with a more narrow focus of activity, rather than having it serve as an adjunct to his investment funds, but as long as he was the chairman of the board it would be his name and celebrity that would remain the center of attention.
Principal Subsidiaries:Lynch Systems, Inc.; M-tron Industries, Inc.; Spinnaker Industries, Inc.
Principal Competitors:Avery Dennison Corporation; Bemis Company, Inc.; CTS Corporation; Minnesota Mining & Manufacturing Company; Saronix; Vectron International.