Stayin' alive

A PROPOS OF YOUR COVER STORY ON dying industries ("The Turning Point," April), when was the last time you saw someone smoking a pipe? It was probably 1964. "My Three Sons" was a big TV hit, and Fred MacMurray smoked a pipe on the show. The U.S. Surgeon General appeared on TV, smoking a pipe, to announce that cigarette smoking was dangerous to your health.

At the time, there was a pipe manufacturer in the New York area. The company could not keep up with demand. It built automated manufacturing facilities and financed its growth through bank loans from a major financial institution. Sales topped $4,0 million, a considerable sum in 1964.

Turn the clock ahead to 1979. As a senior accountant at a Big Four accounting firm, I was sent off to a remote, rural location to audit a long-standing client of the firm. It was the pipe maker, which had by then shrunk from a $40 million manufacturer to a $1 million importer.

Nice people, still hanging in and still owing the bank millions from the go-go days. Why did they hang in, and why do others in dying industries hang in? The answer is simple.

Founders and executives may make a fortune when things are great. If they carefully watch the trends, they can modify company operations as business conditions change. While they may not continue to make the kind of fortune they did when things were great, they may still make a decent living. Hanging in could make them the only or the dominant player in a much smaller industry. Imagine how well the very few buggy-whip manufacturers must be doing now.

As people get older, they can't always switch gears. Unfortunately, this strategy may not enhance shareholder value much, but top executives may keep their jobs, especially if they have substantial control over voting stock. However, it is more often than not the responsible move to keep the company alive in its legacy industry, rather than let it wash away in a sea of change.

Stewart W. Robinson

Partner, Director of Securities Practice

KBL LLP

Via E-mail

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