6 – Private Investment Program – 1962 to 1984
6 – Private Investment Program – 1962 to 1984
Investments Originating Between 1962 and 1967
Mohawk Data Sciences Corporation (“MDS”)
In mid-1964, Dave Datttelbaum, a senior officer in the New York office, received a phone call from an old friend, Max Phillipson, a broker and OTC stock dealer (especially local area bank stocks) located in Utica, NY. A few weeks earlier, a small group of employees terminated their employment at the local Univac factory and came to Max -- via a local attorney, Bob Groben -- seeking advice in obtaining a little over $1 million to fund the early development of their newly formed corporation -- Mohawk Data Sciences Corporation (“MDS”).
Dave promptly reported the Philipson phone call to the author who in 1962 had been transferred to the New York office where he was to organize a corporate finance services and staff capability for the Eastern region. After hearing Dave out, the author reminded Dave that the firm's policy about private investments (“we will not make them”), and the corporate finance policy about raising venture capital funds (“we won’t take on these assignments”).
It was left that Dave should go back to Max Philipson and regretfully report that we were not in a position to be of assistance. A day or so later, Steve Weiss, one of the firm's top brokers in the New York office, brought to the author’s attention the newspaper announcement of Univac group’s departure and intentions. The author briefed Steve on Max Philipson’s call to Dave Dattelbaum, and the position that we had taken on the matter.
About a week later, Dave came into the author’s office and reported that Max Philipson was in fact in the lobby of our office building with the MDS Chairman and Controller, and wished to come upstairs for a visit. Apparently Dave hadn’t exactly “signed off” with Max Philipson, and the author once again reminded Dave of our policies. Even so, Dave felt the need to meet with Max and his companions and urged the author to come in, be pleasant, and turn them down politely after hearing them out. The author reluctantly agreed.
The meeting took place at about 11:15 am. Over the next 20-30 minutes, Ed Johnson, the leader of the MDS group, laid out, in quite succinct form, the group’s main business plan, and the credentials of the group to carry it out. There was a certain authenticity to this presentation that struck the author as never before. The author excused himself, canceled an existing lunch arrangement, and invited the MDS group to lunch to discuss their backgrounds and planning in more depth. At the end of the lunch, and a detailed interrogation of their thinking and experience, the author expressed the opinion that the group would likely obtain the funding it sought, and that Becker’s policies were adverse to taking on the assignment. However, exceptions could be made, and if MDS would give the author a week to intensively study and evaluate the project, he would let them know whether Becker would or would not take on the project, including possibly making an investment. If we came back with “yes, we will take on the project,” we would outline the basis on which we would do so. The MDS group agreed to this plan.
The MDS proposal contemplated developing three ideas for computer system accessory equipment totaling a need for a little over $1 million. One of these ideas, requiring an estimated $300,000, involved the development and prototype manufacture of a device (later called a “Data Recorder) which, through a standard keyboard, data could be entered directly to a reel of magnetic tape mounted on the device. The tape could then be mounted directly on a main frame computer and the data read into its storage. The data recorder process would replace the cumbersome, time-consuming, expensive, and noisy process of entering data into a punch card though a keyboard on an IBM key punch machine. The punched cards would then be stacked on a card reader, the data (holes) read into the the reel of tape. The tape would then be mounted on the main frame computer. The Data Recorder would eliminate the use of the Key Punch machine, key punch cards, card reader, and all the cumbersome and noisy human activity connected with these steps.
After this lunch meeting, the author and Colman completed a phone discussion and decided that, notwithstanding our corporate finance policy, the project should be investigated. To that end, during the next week, John Griner traveled to Herkimer, N. Y., to review the business plans of MDS in some detail, to meet with all the then employees, and especially George Cogar, the inventive genius behind the Data Recorder design. In the meantime, the author vetted management and particularly George Cogar -- about whom Seymour Cray (then with Control Data and later the founder of Cray Resources) said “If George Cogar says something can be done, then it can be done.”
In studying MDS’s proposals, and relating the proposed development complexities, time and investment, potential revenues and profits, and the competitive environment, it was John Griner’s and the author’s judgment that MDS should concentrate solely on developing and marketing thee Data Recorder.
Within the one week time period, Griner and the author proposed to John Colman and the Becker Executive Committee that we should defintely consider an exception to our various policies, and assist MDS in its financing on the basis that (1) MDS would concentrate solely on the development of the key-to-tape device requiring $300,000; (2) we would invest $100,000 and purchase common stock warrants for $30,000; and (3) we would raise $200,000 from investors. This proposal was accepted by Colman and the Executive Committee, and shortly afterwards by MDS. While waiting for our response, MDS management had come fundamentally to the same conclusion as Becker about concentrating on the key-to-tape development.
The MDS group by this stage consisted of eight persons who had contributed $5,000 each to start up the corporation. Each investor, if he or she held the shares for four years, from the start-up in August, 1964 to August, 1968, would have had shares worth $2.7 million, or a gain of over 500 times cost.
After developing a private placement brochure, Becker submitted the MDS business plan and financing proposal to three institutional or family office investors with whom the firm had some relationship, one of whom had been a founding investor in a major computer manufacturer. The financing proposal was promptly turned down by each institution on the basis that, given the wide public knowledge that some one-third of IBM’s profits were attributable to the rents they received on their keypunch machines, there was no possibility that IBM would tolerate a startup penetrating (actually replacing) these machines. MDS’s argument was that the savings involved in renting and using the Data Recorder were very large, measured in many dimensions, and the machine would gain rapid acceptance and use, and IBM rentals would be canceled widely and quickly.
Given the rapid turn downs from the three selected investors which were approached, we altered our approach to obtaining financing for MDS. John Colman and Mac Skall identified two wealthy families with whom they had long personal relationships and with whose businesses Becker had successful client relationships. The author contacted them and explained the MDS business plans and potential. Each requested the brochure we had prepared for institutional investors and politely the author suggested that the venture did not lend itself to traditional analysis, that the technology which was involved was beyond the understanding of a layman, that we were assured by an expert that it would work. We also said that we felt confident the machine could be built and would perform as expected, that the market for it was huge, and that MDS knew how to organize to reach that market. We said that under the then tax law at the time for personal investors an investment of $100,000, if completely lost, could be deducted against regular income, and the maximum loss potential for theses investors would thus be $50,000, against an upside potential of, say, $1 million, if the business was successful. We said the deal was a 20:1 long shot. Furthermore, Becker was investing $100,000 side-by-side with them, and for our services, we were purchasing warrants for $30,000. Each potential family investor said they would consider the investment and call us back. Each called back later in the same day and said “we’re in.”
The business was quickly successful. Additional funds were needed; John Griner arranged a private placement with Midland Capital, a subsidiary of the Marine Midland Bank. Joint with N. M Rothschild & Sons, Becker managed a $15 million Convertible Bond financing in Europe in April, 1969, to fund the development of MDS’s European marketing organization. Later, in December, 1969, Becker managed a $30 million Convertible Bond offering in the U.S. market, and later handled other issues for MDS.
In 1967-70, the firm initially sold (or used to repurchase preferred and/or common shares of the firm) over half our stock position, and then later sold the balance of our common shares and warrant position for a cumulative after tax gain of over $10 million. Each of our side-by-side investors for their $100,000 investment realized a profit of some $4 million. As noted earlier, an investment by an original founding employee shareholder would have resulted in over a 500:1 gain.
As a postscript, MDS went on to somewhat greater heights after we realized gains on our investment, but then fell into a set of traditional problems for many ventures. George Cogar left to form his own business. Ed Johnson retired, and later came back, but too late. Management steadily changed. The company over expanded, seeking to achieve through acquisitions a broad product line of computer system accessory equipment. The acquisitions were poor businesses with no unique -- in some cases old technology -- resulting in substantial dilution in share ownership, coupled with the use of time and large write offs. Competition appeared and was intense. Devices with even better technology were engineered, manufactured, and marketed. The MDS share price fell substantially The company ultimately was merged into another company of about the same size, with headquarters in New Jersey, and the name and soul of MDS faded into history.
Molex Incorporated (“Molex”)
In the late 1930s, Edwin Krehbiel and his father, August Frederick Krehbiel, developed a durable, moldable thermoplastic material which they called “Molex.” They formed a business named “The Molex Products Company” which was located in Chicago. Later, A.K.’s other son, John, joined the business. During World War II and into the 1950s and 1960s the Krehbiel's began to use Molex and related materials in the manufacture of all types of electrical and electronic components. With A.K.’s death, the brothers and a long time key employee, Marie Manatte, inherited the business, each brother owning 40% and Marie owning 20% of the outstanding shares. Over time, Edwin’s interest was reduced to about 16%, and he and his brother had become estranged. In the mid-1960s, Edwin decided that he wanted to sell his interest and had in mind a price upwards of $1 million.
In 1968, Dan Good was in contact with a friend, John Colmar Jr., who referred Dan to his father, John Colmar senior, an attorney who represented Edwin Krehbiel. Neither John Krehbiel nor the company had the resources or desire to purchase Ed Krehbiel's interest. The company at the time was too small for an initial public offering, although rapidly growing with excellent margins. A private sale was the only alternative. David Heller was assigned to work with Dan Good in evaluating the company and the Ed Krehbiel minority interest using available comparables. Molex’s earnings per share at the time were in the $2.50-3.00 area. A price of $18 per share was agreed on, valuing Ed’s shares at a little over $671,000. Becker purchased about 37% of these shares for $250,000 and placed the balance with clients, the transaction taking place in 1968.
As part of the purchase, it was agreed that the shares merited a Board position and Dan Good was elected. Dan remembers that Board meetings were tense and hardly any financial information was provided. In due course, with the urging of Marie Manatte, Chairman John Krehbiel realized that Becker was not an adverse party and could be helpful; relationships became more cordial. Ed Krehbiel's shares now owned by Becker and clients did not have a right of registration. However, in 1972, the company agreed to register all the Becker-and-client shares for a public offering. The sale took place at the end of October, 1972, following an effective 16:1 share split, resulting in Becker owning 250,000 shares at an adjusted cost per share of $1.
Becker brought in William Blair & Co. to manage the syndicated public offering of the shares and, through that work, Molex became a valuable client of Blair. 624,400 shares owned by Becker and its clients were registered for sale. 47,568 shares owned by various clients were retained and not put into the offering. The offering price was $26.75 per share for total proceeds of $16.7 million, which after underwriters discount of $1.48 per share, resulted in net proceeds of $25.27 per share, or $15.8 million.
Becker sold all its 250,000 shares in the offering receiving proceeds of a little over $6.3 million, and realizing a capital gain before taxes of some $6.1 million, or $24.27 per share vs. a cost per share of $1. Becker clients sold most of their shares realizing proceeds of some $9.1 million, and a gain before taxes of some $8.6 million, also on the basis of a 24.27 to 1 gain. As noted. some clients retained some or all their shares worth somewhat over $1 million at the time. It is interesting to note that had those shares been retained until the 2013 acquisition of Molex by Koch Industries, the shares would have reached a value of some $150 million. On the same basis, Becker’s shares would have become worth about $1 billion.
The Comress Group (“CG”)
Comress, Inc. was a privately owned company founded in 1962 in Washington D.C. The company primarily developed proprietary software used in data processing. The primary product was “SCERT” a program used on a computer to evaluate the performance of other computers.
Comcet, Inc., owned 50% by Comress, Inc., was founded in 1968 and based in St. Paul, MN. Comcet developed and manufactured a family of communication computers to transmit input and output information to and from data processing computers especially those working on on-line and time-sharing applications.
Computer Network Corporation, owned 37% by Comress, Inc., was located in Washington, D.C.. CNC provided computer time-sharing services in the Washington, D.C. metro area.
Comress and its affiliated companies was founded and managed by Don Herman, a friend of William Morrison, an attorney with Gardner Carton, then general counsel for Becker, and a son-in-law of James Becker. Sometime in the mid-1960s, Bill Morrison introduced Herman to Becker and the firm became an investor in the Herman enterprises.
In or before 1967, Becker purchased 33,750 shares of Comress for $90,000. In 1968, Becker added 1,500 shares of Comress $6,000, and purchased 60,000 shares of Comcet for $200,000. In early 1968, the firm purchased 25,000 shares of CNC at cost of $175,000, or $7 per share, and later in the year sold 15,400 shares at its cost basis, reducing its position to 9,600 shares at the fiscal year end, October 31, 1968. As of that date, thus, the firm owned 9,600 shares of CNC shares, 35,250 shares of Comress, and 60,000 shares of Comcet.
In 1968, Becker managed a $5 million IPO for Comcet.
On October 31, 1968, the CNC shares were valued at $536,000, the Comress shares at $397,000, and the Comcet shares at $825,000. In aggregate, these positions had a cost basis of $363,000 and a fair market valuation of $1,758,000, with an unrealized gain just short of $1.4 million, before taxes.
In 1969, the firm sold its position in CNC for $295,000, for a gain of $228,000 before taxes. The firm maintained its positions in Comress and Comcet and as of October 31, 1969, the two positions were valued at $2,469,000 vs. a valuation one year earlier of $1,222,000.
The archives are missing an Annual Report to Shareholders for FYE October 31, 1970 but as best can be determined by the report of the following year, the Comress and Comcet positions were sold in 1970 at a handsome gain.
Efforts to determine what happened to Don Herman have been to no avail.
Investments Originating Between 1968-1973
Becker Technological Associates (“BTA”)
By early 1968, it was apparent that the five direct investments of the firm originating in the 1962-1967 period, above reviewed, were going to be quite profitable, and the firm’s capital would be substantially increased. Share transition from older to younger employees was well along. In each of these investments, there certainly was an element of luck in being exposed to the investment opportunity and some very good fortune in timing At the same time, the Executive Committee concluded that the firm now had sufficient capital, wide ranging contacts, and client-investor interest, to consider an “organized” program of private investing, particularly in the wide-ranging fields of technology.
We also had an employee -- Phil Greer -- with good marketing, evaluative, and managerial potentials, who we believed could develop and build such a program. Phil had come to us as part of the firm’s absorption of S.R.Arias & Co. Phil was working in the Corporate Finance area and was intrigued and motivated to take on the development of BTA. Soon after BTA was formed, Tancred (“Tank”) Schiavoni and then Wells Hardestry joined Phil in the BTA operation.
We created a brochure laying out our plan to have BTA invest in technologically-oriented businesses in the developmental stage of growth (as opposed to start-ups). We set the initial capital at $10 million of which we would provide $1 million. BTA would be a general partnership the general partner of which would be BeckTech, a corporation owned entirely by Becker. Phil assisted by contacts of various associates raised the capital through initial cash payments and the balance on dated calls from individual and institutional clients. In the balance of 1968, BTA made five excellent investments and then carried on into future years.
In early 1978, a final annual Report to Partners was published to the BTA partners, and summarized the investment program of BTA over its nine years of existence. As noted in the Report, the investment period 1969-1977 was poor with a variety of negative events affecting investment gains. However, on an index of 100 at the start of BTA, the partnership registered a result of 183, whereas on a comparable basis, the S&P realized 138, and the Lipper High Growth Mutual Fund result was less than 100. Relatively, thus, BTA did okay for its partners.
As to BTA investment management leadership over the nine year period, Phil Greer left Becker and BTA in 1971 to join with Steve Weiss and an associate to form Weiss, Peck, and Greer, Inc. With his affiliation, Phil continued to be involved in venture investing. Tank Schiavoni took Phil’s place as the head of BTA. Given the 1978 outlook for start-up or early growth investing in the tech area, a decision was made not to form a new BTA fund.
Becker Entre-Capital Associates (“BEC”)
Following on the heels of a successful launch of BTA, and the gains being realized in the earlier direct investment program, BEC was created in 1969 to match and bring together experienced and successful manager-entrepreneurs with businesses (including corporate divisions) searching for new leadership and quite often in need of a change of ownership and a capital infusion. BEC was an early form of the modern day Private Equity partnerships where new management and a leveraged purchase are quite often key ingredients. It was anticipated that in many cases the prospective manager-entrepreneur would have identified and evaluated the business he wished to acquire and lead.
There was no fund established to support the BEC program it being the intention to finance each acquisition separately as the situation arose.
A manager for the BEC program was hired: Michael O’Reilly, a fellow student of the author at the Harvard Business School. He was joined by Mo Cunniffe and later Piers Curry. The team developed marketing brochures to inform businesses interested in BEC’s services and approach, and to attract entrepreneurial managers interested in taking over as CEO and building a company. The team also developed and extensive list of possible manager-entrepreneurs. The BEC program was partially successful in that two investments were made and later sold at a profit. However, for various reasons, the program was discontinued in late 1972 or early 1973.
Private Investment Services Group (“PISG”)
As noted in the main history, in 1971, given the the firm’s capital was now sufficient and owned by younger employees, some private investing could be prudently pursued. Two investment programs as above described were already underway, and the firm had created an individual, family, and institutional clientele interested in private investing through and with the firm. In light of these factors, management decided to group these activities under the oversight of Bill Cockrum, located in Los Angeles,and make this activity a regular part of the firm’s operation. The first new investment program to come under Bill’s oversight and guidance was Becker Communications Associates.
Becker Communications Associates (“BCA”)
The planning for BCA started in 1972 and funding and initial operations were implemented in early 1973. Jim Ackerman was head of lending at Economy Finance of Indianapolis, a Becker client, which company owned a small portfolio of loans to CATV operators. Jim believed the cable television and related industries had great growth potential which ideas he shared with Bill Cockrum. Together, they mapped out a lending/investment program to be conducted within Becker under Jim’s management which program, backed by a partnership fund, would provide specialized financing and management services to CATV and related communications businesses. An LLC with equity capital of $11.5 million was formed with a number of institutional investors of which capital Becker provided $1 million through an intermediate partnership. The fund obtained a $20 million revolving credit from a group of banks.
Harold Ewen, Ed Canty, and David Wicks joined Ackerman in staffing the program, as a component of PISG, under the leadership and counsel of Bill Cockrum. Wicks serviced the corporate financing needs of BCA clients, and of other communications companies which began to recognize the specialized financial and operational knowledge within the Becker/BCA staff.
In 1980, a few years before its scheduled termination, BCA was fully committed, and BCA II was formed with $10 million in equity from institutional investors with Becker contributing $1 million. Together, the two BCA funds made some 55 loans/investments over their lives, with no losses. Given this record, along with a good net interest margin within BCA and the values realized for warrants (or underlying stock) which were received by BCA as additional compensation for its loans, the BCA operation was quite profitable to its investors, even after a management fee and gains participation taken by Becker as the organizer and manager. The BCA investment program had an excellent IRR for all concerned.
The BCA funds were liquidated in 1983 in connection with the sale and dissolution of Becker.
Becker Venture Associates (“BVA”)
BVA was formed in 1982 under the management of Stuart Johnston, a Becker employee in the San Francisco office. The operation was under the oversight of Bill Cockrum and within PISG. The purpose of BVA was to invest in high technology oriented businesses in industries that included service companies, computer and computer peripheral firms, and industrial and medical instrumentation manufacturers. A fund was raised from investors in Washington state and San Francisco in an amount not listed in the archives. Only a few investments were made before Becker’s termination and with insufficient time before any gains or losses could be determined.
The fund’s assets were purchased at book value by Johnston and a group of investors, and the fund was liquidated. The operations was carried forwarded as a non-Becker entity under Johnson’s management.
Private Investment Activities 1977-1984
The firm carried on private investment activities during this period but the public reports are not clear as to the nature or final result.
In the operating statements for the three year period F1977 through F1979, a total gain from investment securities of almost $11 million was recorded for this three year period. It is possible that these gains were being realized within BCA with respect to Becker's participation, although the gains looks relatively large if that were the sole reason. It is possible that some of the gains were from direct investing. During this period, the statements of financial condition for the firm show a position in investment securities which reflected a steady cost level over the three year period of $4-5 million, but a market value rising from $5.3 million to $10.9 million. Clearly whatever private investment activity was taking place during this F1977-9 period was profitable.
Starting in F1980 and running through F1984, with the sale and liquidation of the firm, there are no operating statements by which to determine annual gain or loss on investment securities. However, the cost basis of the investment account, being maintained as in the recent three years in the $4.3-$4.6 million range, jumped substantially to the $21.7-$21.9 million range at the end of F1981 and F1982, the latest financial statements in the Archives. This increase of some $17 million (or the total of some $22 million) may have been due to the investment in BVA, as earlier mentioned, or the making of some substantial direct investment(s). In late 1981, Becker was purported to be making an investment in Pargesa; this may have been the reason for the large increase in the investment securities account. Whatever the reason, it is not known whether these investments were profitable, as of the termination of the firm in September, 1984.