Walbro Corporation

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Walbro Corporation

6242 Garfield Street
Cass City, Michigan 48726-1397
U.S.A.
(517) 872-2131
Fax: (517) 872-2301

Public Company
Incorporated: 1950
Employees: 2,300
Sales: $325.20 million
Stock Exchanges: NASDAQ
SICs: 3592 Carburetors, Pistons, Rings & Valves; 3714 Motor Vehicle Parts & Accessories

Walbro Corporation, a manufacturer and designer of fuel systems for automotive and outdoor power equipment, is headquartered in Cass City, Michigan, with subsidiaries throughout the world. Initially a small engine carburetor manufacturer, Walbro now has a separate subsidiary which focuses on small engine fuel systems—Walbro Engine Management—and another subsidiary for automotive systems—Walbro Automotive. Walbro Engine Management is a world leader in small engine carburetors, especially diaphragm carburetors. Walbro Automotive is a leader in fuel efficient technology with an international profile and huge growth potential. Automotive products account for more than 60 percent of Walbro Corp.’s overall sales.

Walbro was founded by Walter E. Walpole in 1950 in Fenton, Michigan. Walpole left college in his freshman year and entered the business world as a messenger at a Chicago bank. He eventually worked his way up to become secretary treasurer of the carburetor division of the Borg-Warner Corp. Walpole’s real goal, however, was to have his own company, and he created Walbro to fulfill this dream. Walpole hoped that his company would become the major supplier of carburetors for small power tools, lawnmowers, and outboard motors.

Walpole was betting that the postwar economic boom would mean more homes and leisure time, which would translate into a high demand for products requiring small engines. If these products were to become indispensable to the American way of life, Walbro would have a growing market for its specifically designed carburetors. Walpole was willing to cash out his pension and mortgage his own home, putting his family of five children in financial jeopardy, to finance his dream. The dream seemed a long way off during the early years of the company, when Walpole experienced frustration and mounting debts during the three years it took to make his first sale.

The first significant event that helped to reverse Walbro’s poor fortunes came in 1954, when Walbro moved from Fenton to Cass City, Michigan. Cass City and Walpole had something to offer each other. The city needed new industry and Walbro needed space at a reasonable rate. The Cass City Industrial Development Corporation offered Walpole a 6,000-square-foot building and five acres of land for nominal rent. Not everyone in Cass City thought that Walbro represented a sensible gamble for the town. Walpole had to convince the city that his company could provide them with a future, even though Cass City’s main banker assured them that Walpole and his company were all but bankrupt. Despite the gloomy appraisal of the local bank and the fact that the company was indeed in poor financial shape, Walpole managed to find local investors to the tune of $25,000. A $1,000 investment made in the company in 1954 was estimated to have a value of $150,000 by the late 1980s. Since many of the initial investors were still shareholders 30 years later, it would appear that some Cass City merchants hit the jackpot when they invited Walbro to move to their town.

In 1957 Walbro began designing fuel systems for automobiles. Eventually the automotive industry was to become a major growth area for Walbro, but small engines for power tools, lawnmowers, and outboard motors continued to be the most significant sector throughout the 1960s and 1970s. Most of Walbro’s automotive products were designed as aftermarket products. It would be over 20 years before the company made significant inroads to the original products market in the automotive sector.

In 1972 Walbro became a public company. Walbro sold stock in order to raise money to finance joint ventures and expand outside of the U.S., as well as to develop new products especially for the automotive sector. Walbro developed a fuel injection system in the 1980s for what became the company’s first major foray into the automotive original equipment market.

Walbro’s sales in 1972 were approximately $10 million, with modest growth expected. After twenty years of building the company into one of the leading fuel system manufacturers for small engines, Walpole was taking his biggest gamble since mortgaging his home back in the early 1950s. He placed his bets on two things: that demand would grow for more ecologically sound emissions; and that Japan would emerge as the automotive giant of the next few decades. Walpole’s gamble paid off in both respects. The company’s Asian connections have expanded to include joint ventures in Korea, Singapore, and China. Research and development investments made during the 1970s also paid off as Walbro was poised to fill orders for fuel supply systems that would meet higher emissions standards. Nevertheless, Walpole’s decision to finance these developments by taking the company public proved to have complications after his death.

Walpole, the company’s founder and first president, had seen Walbro through the lean years into a period of global expansion and successful joint ventures during the 1970s. Walpole died in 1987, but his family continued to influence Walbro. Walpole’s son-in-law Bert Althaver became president and CEO, while his sons Robert and Forrest became vice-presidents. In addition to the continuity of the family connection, Walbro continued to enjoy a close relationship with its home base of Cass City, Michigan. Perhaps because the company came so close to failing before Cass City made its offer, Walbro continued to think in terms of the good of the community, or its “stakeholders” rather than simply its shareholders. Forrest Walpole expressed his father’s feelings about the company in an interview for Inc. in 1989: “We give people jobs that create some meaning in life, and we think serving the wider community is what business is all about.” This relationship was tested in the early 1990s, when the company faced a hostile takeover attempt soon after the death of Walter Walpole.

Eight months after the founder’s death, Althaver received a copy of a 13D schedule filed with the Securities and Exchange Commission which notified him that New York-based UIS had acquired over 6.8 percent of Walbro common stock. Accompanying the schedule 13D was a letter from UIS president Andrew Pietrini suggesting that he and Althaver meet to discuss mutual areas of interest. Althaver interpreted this letter as an attempt to buy the company out from under him.

Rather than taking time to consider the possible advantages of a buyout, Althaver phoned Pietrini the next day to tell him that Walbro was not interested. One week later, after persistent attempts by Pietrini to convince Althaver to cooperate, UIS made a formal tender offer to buy the company. By this time UIS owned 288,000 shares, or 8.6 percent, of Walbro stock. UIS advertized in the Wall Street Journal offering shareholders $27.25 each for their outstanding shares. UIS’s strategy was to purchase 61 percent of the shares in order to control Walbro; however, Walbro management viewed this limited share purchase as a tactical error on the part of UIS. Had UIS offered all shareholders a chance to cash out, the offer may have met with more success. Instead, the UIS offer seemed to insure that one-third of existing shareholders would be left out of the deal, so it garnered little sympathy from shareholders. Walbro management took advantage of the situation to gain additional leverage with major shareholders, undermining UIS’s claim that its offer was in the best interest of both companies.

Althaver knew that it was not going to be easy to fight off the UIS siege. He hired investment banking firm Goldman and Sachs and a New York law firm to help organize a strategic defense against the takeover. In the end, however, Althaver credited the local and family continuity for saving the company. Management and the board of directors owned 17 percent of the stock at the time of the takeover bid, so they had more breathing room than other boards who were faced with similar situations. In addition, another 10 to 15 percent of the shares were held by other members of the Cass City community, thanks to Walter Walpole’s early agreement to sell a stake in Walbro to Cass City residents. In order to ward off UIS, Walbro drew up shareholder agreements which insured that approximately 30 percent of the shares would not be sold before the end of the year. John Haire, owner of the Cass City Chronicle, stated that there was “a unanimity of support” for Walbro, and the town’s stockholders signed pledges not to sell.

Confident that there was a healthy base of stockholders who would not sell out, the board created more shares and looked for a large capital base that could keep these new shares in friendly hands. Goldman and Sachs helped to map out this most costly phase of the strategy. As Althaver told the story to Ward’s Auto World: “We ended up with General Electric Credit Corp. We put together a deal in one week where they bought $35 million in preferred stock, convertible into what amounted to a million shares of common.... There was no agreement they had to vote in any given way. [But] that meant the company had shares in friendly hands that was very close to 50 percent. The importance of the GE [loans] was of course the million shares and the million votes it represented.”

Although Walbro was able to ward off the hostile takeover from UIS, the cost was enormous. The fees to Goldman and Sachs alone were about $1 million. According to Goldman and Sachs, only five percent of companies survived takeover bids in anything like their pre-takeover shape. If General Electric Credit Corp. represented a white knight for Walbro, it was a white knight with a price tag. General Electric Credit Corp.’s role in the affair was very profitable both in terms of the dividends it received—essentially interest on what was in fact a loan—and in fees for structuring the deal, which totalled approximately $1.5 million. Although UIS was unsuccessful in its takeover bid, the enterprise was also profitable for them. With various lawsuits pending and threatened, the two companies came to an agreement that enabled Walbro to buy back the UIS shares at a considerable profit to UIS. UIS agreed to sell its 8.6 percent of Walbro stock, most of which it had purchased at around $22.15 per share, back to Walbro for $25.50.

When Althaver finally met the man who had cost him so much money there was little open hostility between the two parties. Pietrini for his part was unapologetic, contending that UIS’s bid would have been advantageous to Walbro. As Pietrini described the takeover bid in Forbes: “They represented a fit for us....[Walbro] management would have continued, and they would have had liquidity as well.” However, Walbro’s escape from UIS was greeted with glee by the Cass City faithful and by corporate watchers everywhere who held a soft spot for the perceived underdog.

Althaver himself was less gleeful than most after having saved the company. Before the fight with UIS Walbro had a long-term debt-to-equity ratio of two percent, but this ratio ballooned to 71 percent as a result of paying out $5 million in expenses and borrowing much more than that to buy back stock. Then Walbro laid off 75 workers in 1989, undermining the euphoria in the community. The debt load and the layoffs at Walbro, when contrasted with the profits gained by almost all other players in the takeover drama, made it difficult for Althaver to view the defeat of the UIS bid as a victory for Walbro.

Althaver feared that the huge debt would affect Walbro’s research and development expenditures, which he considered the linchpin of the company’s success and growth potential. He also was wary of the possibility of facing another hostile takeover in the future, asserting that no public company was safe as long as the board owned less than 51 percent of the shares. Putting all of these fears behind them, the board went ahead and sold yet more stock in the early 1990s to finance continued research and global expansion.

Walbro bounced back from the anxiety-filled years following the 1987 takeover bid with record sales and profits in the 1990s. The company was able to capitalize on tougher fuel emission standards by developing highly efficient fuel systems that decreased waste and small engine systems that used alternative fuels such as methanol. An electronics division was added to Walbro in 1993 and expanded in 1994, committing the company to electronic fuel injection technology.

The high-water mark for Walbro’s success in the automotive sector was its fuel modules for the Chrysler Cirrus, Motor Trend’s “car of the year” for 1994. Success with Walbro systems on the Cirrus led Chrysler to make Walbro the supplier of fuel modules for its immensely popular minivan series—another coup for Walbro. The company developed other new products for the automotive sector in the 1990s as well, including plastic fuel tanks, which were lighter and produced lower hydrocarbon emissions than traditional models. Walbro built an entire plant for construction of plastic fuel tanks without any customers to by the new product. The new tanks were used by Ford in its 1994 minivans, thereby vindicating Walbro’s faith in its new product by assuring several hundred thousand units of sales for at least three years.

While the automotive sector heated up domestically, Walbro also concentrated on the international prospects for its small engine products. For example, it entered into a joint venture in the 1970s with a Japanese carburetor manufacturer. The new company later became a wholly owned subsidiary with facilities in Singapore, Europe, and Mexico. Walbro was particularly aggressive in China, where production of two-wheeled vehicles escalated dramatically during the 1990s to surpass Japan as the world leader in 1993.

Walbro purchased 60 percent of Fujian Hualong Carburetor in China in 1994. Later Walbro purchased 40 percent of Korea Automotive Fuel Systems Ltd. No matter where the Asian market expanded, Walbro had a legitimate stake and could reasonably expect to reap the rewards of diligently forged international ties. Walbro did not neglect the European market, either. In 1995 Walbro purchased the Fuel Systems Division of Dyno Industrier AS of Oslo, Norway. Earlier Walbro had forged joint ventures with Italian and French firms.

When Walbro faced the hostile takeover threat from UIS in 1987, it was a much smaller company than it would become just eight years later. Althaver’s efforts to keep Walbro independent would seem to have been justified given the exceptional growth and profitability of the company. Company founder Walter Walpole’s foresight in developing the automotive sector, investing heavily in research and development, and forging international connections assured Walbro a lucrative future.