Irwin Jacobs Gets Back in the Boat
He’s back. After putting Genmar Holdings, his flagship boat company into bankruptcy last summer, Irwin Jacobs is once again in the boat business.
“The thing that dragged me back into this thing is that I started in Little Falls, Minnesota, 35 years ago,” Jacobs says, referring to the home of one of his key manufacturing plants. A “guilt phase” made it hard to focus on the future, he says, but concern over what the bankruptcy had done to employees in Little Falls and in Wisconsin is a major reason he wants to revive the business.
Having picked up some of Genmar’s assets in a court-supervised auction of its 13 operating companies, Jacobs hopes to steer his new boat business, J&D Holdings, LLC, to revenues of $300 million to $400 million in a few years.
Jacobs, a fixture on the Twin Cities investment scene for nigh on four decades, is probably best known locally for his opportunistic purchase of the Grain Belt brewery in northeast Minneapolis in 1975. Though he never brewed any beer, he made a small fortune on the company.
Jacobs borrowed about $4.5 million from Carl Pohlad to finance the Grain Belt acquisition, then sold off the assets in three steps. First, deciding that a small, local brewer could not compete cost-wise with industry giants, he sold the Grain Belt brand to G. Heileman Brewing (based in LaCrosse, Wisconsin, at the time) and recovered most of his initial investment. Next to go was the brewery equipment, sold over a two- to three-year period. Finally, the real estate assets were sold to the City of Minneapolis in the early 1980s for $5 million.
Nationally, Jacobs was known as one of a stable of so-called corporate raiders in the 1980s, both famous and infamous for buying out underperforming companies with so-so management teams. The appellation “Irv the Liquidator” was one of many things then written about him.
Genmar had roots reaching back to the late 1970s, when Jacobs picked up the Larson and Lund boat lines. It was a $1 billion company in 2007. But swamped by the recession and a corporate structure that was “too fat,” according to Jacobs, Genmar filed for bankruptcy protection in June 2009. With the benefit of hindsight he says, “Genmar had too much overhead, too much corporate bureaucracy,” a mistake he vows not to repeat.
Jacobs meant for Genmar to emerge from bankruptcy using the traditionally management-friendly route of a Chapter 11 reorganization. But there was a last-minute flare-up with the unsecured creditors’ committee and its accounting and legal advisors about the propriety of some historical intercompany transactions among Jacobs’ businesses, and it torpedoed the Chapter 11 deal.
Instead, Jacobs and his 50/50 partner, John Paul DeJoria of John Paul Mitchell haircare-products fame, struck a deal with Platinum Equity, a Los Angeles–based private-equity firm. In February 2010, Platinum bought most of Genmar for about $70 million in a court-supervised sale, and then turned around and sold Jacobs and DeJoria the assets that were not central to its strategy. Jacobs declines to say how much he and Mitchell paid Platinum, whose boat company they anticipate competing with in the future.
Platinum has said in a February press release that it will put its collection of boat brands “on a path toward long-term growth and profitability.” If it follows the usual model of private equity firms, Platinum presumably will seek an exit in three to five years, either through a sale or an IPO. The firm plans a new corporate identity for the former Genmar assets, but hasn’t revealed it yet as of early June.
J&D Holdings, meanwhile, moves ahead with the six boat brands (Carver, FinCraft, Larson, Marquis, Seaswirl, and Triumph) and three factories that it purchased from Platinum. The company also bought one other asset: a boat-building technology called VEC that Jacobs sees as his key competitive advantage in an industry that is now a fraction of the size it was a couple of years ago. (See sidebars on this page and page 60.)
VEC stands for “virtually engineered composites.” Originally owned by a Pennsylvania company, Genmar acquired the technology and its owner back in 2000. The VEC process replaces labor-intensive open-faced fiberglass molding with a closed-molding system. Genmar said VEC would reduce manufacturing time per boat from eight or 12 hours to one hour, and in addition would reduce hazardous styrene emissions by 90 percent.
VEC was never fully deployed by Genmar because of the capital that would have been required to overhaul all of its manufacturing sites. But Jacobs now expects that VEC will allow his company to dramatically reduce the cost of manufacturing and overcome the marine industry’s most prevalent quality and warranty issues: defects of inaccuracy and lack of durability.
In addition to leading his new boating business, Jacobs controls three other operating entities. J. R. Watkins, a Winona-based retailer of natural products including seasoning and personal- and home-care products, is led by his son and Watkins CEO Mark. His daughter, Trisha Blake, runs FLW Outdoors, a fishing tournament business whose primary purpose is to promote boating. (FLW was not part of Genmar.) The third family business is Jacobs Trading, a dealer in distressed merchandise of all types and descriptions, run by son-in-law Howard Grodnick.
Now operating out of a Jacobs Trading office in Hopkins instead of his previous offices in the IDS Center, Jacobs says his “whole drive in business is to clean up the mess that was created this last year.” In late March, he sat down with Twin Cities Business to discuss the storms he’s passed through, and the waters he hopes to navigate in the next couple of years.
SW: Elsewhere you were quoted saying that as little as two weeks before Genmar filed for bankruptcy, you couldn’t imagine that that would be the end game for the company. What happened in those two weeks to tip the company over?
IJ: Yes, two weeks before we went, if you had asked me if bankruptcy was possible, I would have said it wasn’t. What really did it was our bank. They pushed our back right through the wall.
SW: Did you put money into the company in the months before the bankruptcy?
IJ: We [Jacobs and DeJoria] put in $45 million in the equivalent of equity [unsecured debt] within 120 days of the bankruptcy. One of the things that people would give me a little credit for is that I am not a neophyte in the world of business. And if I had known that the company wasn’t going to make it 120 days, I sure wouldn’t have put $45 million in it.
SW: What about a separate financing to take out the bank?
IJ: I went to an investment banker, Jefferies in New York, to raise $150 million. I had concluded that I needed to get rid of [our bank] as quickly as possible. Jefferies gave me a letter of intent, but said it would take six weeks to raise the money.
I gave this letter to the bank, and their response was they ‘really weren’t interested in waiting.’ I said, ‘Do you want to put this company into bankruptcy?’ The individual to whom I was speaking responded that ‘you’ll never put this company in bankruptcy. You just put $45 million into it.’ I hung up the phone and concluded that I would get a bankruptcy lawyer, that there was no way we were going to be able to make this work.
I was convinced I could raise the money. As it turned out, they never gave me the time to do it.
SW: Looking back at Genmar and the events that led to bankruptcy, any regrets?
IJ: Lots of things, but let me say that the world changed in record time. We were not the only victims of the times. But would I have run the business the same way? No, I would not. I feel after the fact that we were too fat. But if anyone is to blame for the decisions, it’s me. I put my money where my mouth is. I was the biggest loser.
SW: When Genmar filed, you owned about 40 percent of the stock. Who were the other shareholders?
IJ: There were many other shareholders. The next biggest was the Pohlad family with 15 to 17 percent.
SW: In February this year, the Star Tribune ran a story on the front page of the Sunday business section questioning the propriety of some of the intercompany transactions among the various Jacobs companies, including Genmar and Jacobs Trading. Your reaction?
IJ: We put money in from every one of our businesses. What that was about was a very small minority shareholder in Jacobs Trading. This person was unhappy that Jacobs Trading lost money in the transaction. This was nothing more than a vindictive thing. The facts are the facts. I stand tall to it.
SW: Why get back into the boat business at all?
IJ: One, I started in Little Falls 35 years ago. The people up there were innocent of this problem. I saw where they would be the victims. I felt that I least owed them the opportunity to try and make this [relaunch of the business] happen.
I did the same thing with the plant in Pulaski, Wisconsin. The assets that were not being bought [by Platinum], I said, ‘Let me try and figure out to do something.’
I have great optimism about VEC. VEC was a no-brainer if I could get it at a price I wanted to buy it for. When you put these three pieces together, they made all the sense in the world to me, but not because I want to be a giant in the boat business.
SW: You’ve got to believe you’re going to make money.
IJ: I’m not Don Quixote or Robin Hood. I’m not a 501(c)3 [nonprofit]. I plan to make money in the boat business, no question. In fact, in April, the Larson factory will be profitable. It will take longer for the Carver and Marquis brands. It’s like a steel mill. You’ve got to get it up and running.
SW: The VEC technology has been variously described as being used to make boats, blades for wind energy, and containers for the military. Where is the sweet spot?
IJ: The VEC technology can be used for all types of things. But nothing is yet commercially there other than boats.
SW: So, do you plan to be in the wind business?
IJ: VEC is in the wind business, but we haven’t built the first blade. We’re in the process of designating where we are going to build and who will be our first customer. In the next 90 days, it will be very clear where we are going and what we are doing in the wind business.
SW: In 2008, you announced a wind joint-venture with Boone Pickens, the well-known Texas oil and wind businessman. What happened to that initiative?
IJ: It was not a joint venture. Boone was talking about coming onto our board. People had construed that [it was about wind] because Boone was heavy into that industry. He was simply a friend of mine and wanted to support and help me.
SW: You’re a big fan of VEC technology.
IJ: VEC is clearly, without any doubt whatsoever, the number-one answer for building the finest, most environmentally clean, most precise manufacturing of boats in the world. Using VEC, we have built 85,000 boats.
When we brought VEC into the building of boats, we did it with just Glastron and the smaller Larson boats. We couldn’t go out and market this technology as the only type of boat you should buy, because my other boat companies were much larger at that time. I couldn’t beat up on those brands for the benefit of VEC. Today, I have no [internal] competitors in the lines I have. So, for the first time, I will be able to exploit VEC as the ultimate process for building boats.
SW: But wouldn’t you have been better off to cannibalize your own business?
IJ: It was a matter of timing. It was our hope that VEC would be so successful that we would be able to get it to the other companies. But I had just spent $20 million on building the factory in Little Falls just for VEC. It was a case of capital availability. I had 13 operations going. I couldn’t do this everywhere. Now, the gloves are off.
SW: What are the price points of your boats?
IJ: With the entry-level of fishing boats, the FinCraft brand, $14,000 to $24,000. These are retail prices, competing against aluminum and fiberglass. Larson, from $14,000 on up to $300,000 for cruisers. For the Seaswirl brand, the saltwater side of the business, from $20,000 to $170,000. For the yachts business, Carver and Marquis, from $400,000 to $3 million.
SW: What is the state of the boat business overall?
IJ: The industry last year was off almost 80 percent.
SW: What level does it need to get back to for you to have a successful business?
IJ: At this point, we’re not planning for the industry to come back. Not because we don’t hope or want it to. But we can’t plan our business based on maybes. We will be more efficient, we have a technology in VEC that no one else has. We will exploit VEC and competitively price such that no one else will be able to compete with us. Even with the market off 60, 70 percent, we can make money.
SW: In the boat business, like other recreational products, the health of the dealer network is key. Where does yours stand?
IJ: I can’t get into much detail right now, but we will be very helpful to our dealers in giving them opportunities to have less risk and more profit. We will have three or four company-owned yacht centers with all of our products. Dealers won’t have to stock our products; they’ll be able to take customers to the centers. Before, we had $150 million of inventory in the field. Today, that won’t be the case. Dealers won’t have to go out and mortgage their houses to buy our boats for their boatyards.
SW: What about financing for customers at the dealer level?
IJ: We already have it. GE [General Electric] is back in the business of financing our dealers.
SW: Let’s leave the boat business behind for a second. A snapshot of Jacobs Trading?
IJ: It has 11 distribution facilities today. They range from handicapped centers to prisons to warehouse operations where we process returned goods.
SW: What is the business model of Jacobs Trading? In a previous interview, you said that Jacobs Trading ‘makes goods disappear’—to foreign countries, to fourth-level retail stores, or flea markets.
IJ: We buy merchandise, everything from customer returns to excess goods to bankruptcies to water- or fire-damaged goods. Anything imaginable that is problem merchandise. We started this business many, many years ago and are the largest or pretty close to the largest in this niche.
SW: What is the best deal you ever did?
IJ: I’ve never sat down and said, ‘What is the single best thing I’ve done in business?’ A lot of it would have to do with how I got started, because that’s what gave me the opportunity to do the things I’ve done. And that goes back to Grain Belt.
But the deal that changed my life the most was when I bought the W. T. Grant receivables in 1976 for $40-some million. [W. T. Grant was a bankrupt variety-store chain.] Carl Pohlad was a partner of mine in that transaction. We paid it off [the purchase price] in 75 days and collected money for 10 years. It gave me the capital to go out there and do things. That’s when I started building Jacobs Industries.
SW: Worst deal?
IJ: The deal that has affected me the most in a negative way is the bankruptcy of Genmar. Never in my life did I dream or think of something like this.
SW: Why did it affect you so?
IJ: I was not prepared for this emotionally. I’ve had more sleepless nights between the beginning of last year and until the recent days of resolving this thing than I’ve had in all the rest of my life put together. I’m able to take stress. And I’m able to deal with adversity. But I’ve never had anything affect so many people’s lives as this did. Until I finally got past that guilt stage, that sense of what I had done, I found it very diffi-cult to try and focus. Yet I had to every day.
SW: Returning to Carl Pohlad, your thoughts on him?
IJ: I worried about it for a long time because I saw Carl go downhill. But I never thought I would be as affected as I was by his death. It was difficult not only because he was my mentor in life, but truly a person who cared a lot about me. And I cared a lot about him. You can’t tell someone what that means unless you have had that personal experience.
SW: You’re 68 [by July, 69]. What are your passions outside of business?
IJ: I think of business as not necessarily just making or losing money. What you’re doing in business is either enhancing people’s lives or destroying people’s lives. What’s most important to me is to deliver something to my children, because most of them are in my businesses. Am I able to bring added value to their lives and the people they will touch?
We never know if we’ll make it to tomorrow. As I look at things, I’m in a hurry because I don’t know what the timeline is. My whole drive in business is to clean up the mess that was created this last year. There’s a lot of work to do yet. But I’m having fun again. It was not fun last year.
SW: How would you like the first three lines of your obituary to read?
IJ: What’s important is how you feel about what you’re doing. That’s the impression left on society.
I can’t live worrying about what other people think of me, although we all want to think that others believe we’re doing some good. I’ve learned in life that there are two words that are very confusing: ‘envy’ and ‘jealousy.’ People confuse those two words. Envy is, ‘I’m happy for you, but I wish it were me, too.’ Jealousy is, ‘It should be me, not you.’