Chapter 51

Hans was at the airport with the limo to pick us all up. I was a little surprised and disappointed when Joyce didn't pop out of the limo too. Hans must have noticed my disappointment.

"They're all over at the company. Your father is in the middle of negotiating a new purchase. A big one. They've been talking togrther for months. Now, suddenly, they're in a big rush to get the sale completed."

"Who is it? One of the bakeries out on the West coast?"

"No. A company called Alliance Vending Corporation. They are located mostly in the Southeast. I think they're based in South Carolina, but I'm not sure. I know its the subsidiary of some conglomerate in New York. Your Mama told Gerta that it was going to cost three hundred forty millions to buy them out. She's worried about being able to come up with so much money. Your father is trying to raise the money with his banking contacts in New York."

I asked Hans to swing by the plant to see if my Dad and Joyce were still there. It was only ten minutes out of our way. On the way there, I explained to Cindy, Eddie and Dale about the possible new acquisition. I had never heard of this vending company, but I already knew that vending was the area where we were growing the fastest. It made sense for us to buy more locations if the numbers were decent. I knew my father wasn't going to overpay for anything he bought. It had to be a great deal if he was putting everything else aside to pursue it like this.

We got to the plant and saw my Dad's car, Joyce's. Brenda's car and Shirley's were there too. Seeing this, I asked Hans if he needed to get back home right away for anything.

"No. I can go over to the deli and pick up some things for Gerta. I was going to go in the morning, but this will save me a trip. You want me to pick up some sandwiches and drinks for you?"

After Hans dropped us off, we went upstairs to Joyce's office. All the other girls were there, and the children, but Joyce was over at my Dad's office. I quickly made my way over there, not stopping to spend any time with the other wives and my children. I expected to be gone for fifteen minutes or less, just wanting to stick my head in to say hello to Joyce, and to my father. It didn't turn out like that.

"Kenny. Come in, come in here. You're just the person I needed to speak to. Things are really moving quickly right now. Joyce and I have been putting out feelers to a company called Trans Apollo Holding Corporation, trying to find out if they have any interest in selling off one of their holdings, Alliance Vending. It was Joyce's idea, because Alliance is already a strong presence down South, where we're going to be expanding. Buying a company like that would bring us some instant credibility in that part of the country."

"Hans mentioned some of this, but he made it sound like you're in final negotiations, not just feeling them out."

My Dad got an annoyed look on his face. I knew it was because Hans seemed to know more than my father thought he should. It was Dad's fault that he did though. He talked to Mama, Mama spoke with Gerta, and Gerta told Hans. Dad was a lot better in the way he now treated Hans and Gerta, but he hadn't quite gotten to the point where he thought of them both as family. All the rest of us had long since gotten to that point.

"Trans Apollo started it by calling us this morning. They suddenly sound anxious to unload some assets in order to buy a company they think is a much better fit for them. They've offered us Alliance for three hundred and forty million dollars. Joyce and I both believe it is a bargain at that price. Unfortunately, they need an instant answer from us, and I can't commit to the purchase without first lining up the financing for it."

"How closely have you investigated this Alliance? Are you sure it doesn't have big problems we don't know about?" When I asked that, Joyce spoke up. She hadn't said anything to me other than a big smile when I first stuck my head into Dad's office.

"They're a well run company, Kenny. Too conservative though, only growing at three or four percent a year. This is primarily because their sales team is too small to be able to give them full market coverage. Their main emphasis is on taking care of their existing accounts. New accounts are usually gotten through referral. They haven't been going out and making any real effort to expand any of their markets. This is part of what makes them such a good bargain for us. Sales is our core strength in vending. Some of their line of products will complement our current lines too. My opinion is that they are a near perfect fit for us. The only problem is finding a way to come up with the money to buy them."

"Why can't we use the money from Mama and me? This is expansion too. Buy the company, then Dad can head off to New York and renegotiate our credit facility with the bankers. I'm assuming this Alliance will throw off earnings like we get from the Lucas Company, right? Same profit margins and all?"

"I've thought of doing just that, Kenny, but this means delaying our Southern expansion plans, and we've already begun with redoing some of the plants and ordering in new equipment. We've already committed more than a hundred million of the money from you and Bertie. I can't really justify putting our current plans on hold in order to make this purchase now. In the long run though, to answer your other question, Alliance should turn out to hold the same margins as the Lucas Company. That is mostly owing to the different nature of our two core businesses, and the lessened competition we now face with our vending operations."

"It seems to me your choice is very clear and simple to make. Do you want to pass up an investment in a business that returns fifteen percent margins in order to expand in an industry that returns only two or two and a half percent margins? It doesn't make sense to not purchase this Alliance company if the price is right. Once we own it Dad, you can approach our bankers and get them to raise our credit facility enough to support our original expansion goals. If you can't, we'll find another way to raise the money. If anything, this is going to make our company even more attractive to bankers. They look at margins, you've told me this a hundred times. Look at how much easier it was to get a generous credit line after we started including the Lucas Company earnings in our P&L's to the banks."

"That was as much a factor of the growth rate of our sales and earnings as it was the margins we were holding." Dad seemed to be arguing only to draw me out further with new arguments in favor of doing what I had recommended.

"Joyce just said this Alliance's only weakness was an inadequate sales and marketing team. Once we turn Rob Lucas and Shirley's dad loose on them, this weakness will turn into a strength. When it does, the growth rate will be there."

"I envy the optimism of youth, Kenny. To you, nothing seems impossible. That is how companies get into trouble though. We're back to the philosophical differences between us. I prefer having all of the possibilities covered before I commit to an action. You prefer to commit and then overcome any unforeseen consequences as they arise. I'm uncomfortable with this shoot from the hip mentality of yours."

"I think Kenny's right this time, Tom. You do too, or you wouldn't counter with this philosophical differences argument. Kenny's talking about huge returns on profit margins, and makes a strong case for choosing the investment with the highest profit potential. He's paid you a compliment when he claims he has absolute faith in your ability to arrange the financing we'll need later for the bakery expansion effort. We need to put our expansion dollars to work where they'll have the best opportunity to grow the fastest. Acquiring Alliance just popped up for us suddenly. We've been pursuing them quietly for months though. We need to take advantage of the opportunity when it comes to us like it has."

Dad looked at both of us. He picked up his phone and looked around for a phone number before he started dialing out.

"Franklin, this is Tom Parsons. I'm sitting in my office with most of my board of directors. We've been discussing your proposal." My Dad stopped talking for a minute and listened to what was being said to him. "I appreciate that, Franklin, and that's why I convened this board meeting so hurriedly. We've discussed it at great length, and it comes down to there being a conflict between our existing expansion plans, which we've already begun, and using these same funds to go ahead and consummate this purchase from you. We can't possibly do both at this present time. I've already committed over a hundred million dollars to the expansion we were planning on doing until you called me with your offer." Again, there was a pause while my father listened to what the other person was saying. This time, the speaker on the other end spoke for some three or four minutes without pausing. "That is a generous concession. We do have that amount of cash on hand, but it would exhaust our expansion capital. Three hundred and twenty million is very attractive. I'm glad you didn't offer it to me for three hundred million even, because, if you had done, I'd have said yes right away. As it is, I'll need to run this past the board." There was another, much shorter pause. "Very well, we have a deal. I hope you'll be as happy with whatever asset you intend to purchase for yourselves."

After Dad hung up the phone he was beaming from ear to ear.

"Did he go to three hundred million?" Joyce blurted her question out before I could ask him the same thing.

"Yes, we're closing in New York next Tuesday. Three hundred million was too good to pass up. Three twenty was as well, but when he offered it to me for that I had a strong feeling that he might go even lower. Kenny, I hope you remember that it was you who urged me to take this action. I'm fearful that you'll find it frustrating when the money isn't instantly available for you to implement your own expansion efforts."

"I don't think so, Dad. Really, I'm expecting you to come up with the money for it anyway. I didn't have any set timetable in mind for putting the integrated plan in place. There aren't five people who even know what we're planning for Macklinson's, not the full extent of it. The only one I've told very much to is Kyle, and he's going to be pretty busy getting his own end of it set up down in Birmingham. The rest of them are too used to not having the money to expand their business. I feel bad for some of the plant workers who lost their jobs at the Consolidated plants. Maybe we should bring some of them back in and put them to work on the old equipment, until we get the money to retrofit those plants. Even if it was only break even for us, it would save the labor force in the area. The biggest problem will be for us to remember to not hire more people than we'll be able to retain after we set up the newer, more automated, baking plants."

"You could do something like that if you want to. It shouldn't be too expensive to get the ovens back up and operating again. It wouldn't make sense to invest too much though. I'm afraid you'd have to handle the administration out of the Birmingham office though, payroll and everything else. It might put a strain on your people."

"I hired a really well trained accountant down there. Cindy's aunt. She is very good with computers, and she knows how to handle complex projects. I'll turn her loose on setting things up for that. I've even got some people in mind for going back to interview personnel for the reopening of some plants."

"Now we have to go talk to your mother and explain how we squandered most of the money she lent me for our Southern expansion on something we just purchased on a whim."

"I'll bet you anything that Mama will love it. Tell her we bought something that will make us more money than all the other bakeries we own put together." Joyce spoke up again after I got through saying that.

"Tell her this company is a lot bigger than the Lucas Company. Tell her we'll be selling them all their new vending equipment by purchasing it from that company she owns with David and Craig. That will make her happy. We had gotten to the point where we couldn't keep up with their production output. With Alliance added into the mix, this shouldn't be a problem to us for at least four or five more years."

"Are you happy with this purchase, Joyce?" I knew she was, but I wasn't sure why she was so excited by it.

"Happy doesn't begin to describe it, Kenny. I've been so worried that we were going to be unable to feed the growth from putting the vending products in retail stores. Having more production wasn't the only problem. There was an issue with the shipping costs because you can't package vending product like our bakery goods. It costs more to ship vending boxes, unless you put them in as space fillers with the other shipments. With everything coming out of Omaha, our shipping costs were hurting us. With this purchase, we can hub out of Columbia, and now we can open the Texas plant we got from Consolidated, and turn it into a vending product bakery. All we'll need is another plant out in the Northwest, and my shipping problems will be solved."

"You never mentioned any shipping problems Joyce." My Dad sounded concerned. He didn't like being kept in the dark about any company problems.

"It wasn't a problem, Tom, more like the high price of doing business with Kenny's expansion into convenience markets. It was a logistical situation that had me baffled. It costs more than twice as much to ship vending product by itself as it does when we use it as filler for other shipments. With all the hubs we now have, we were able to limit the extra cost in shipping from Omaha to the first destination hub. After it arrives at a hub, we throw the vending product on bakery shipping orders, as space filler. This saves us a lot."

"How much is a lot?"

"Millions, really. We bill out all the mixed product shipping to the bakeries, not to the Lucas Company." Joyce seemed pleased with her explanation. My father didn't look happy, and neither was I. No wonder the Lucas Company profit margins were so high. They were free loading a good part of their shipping off on the bakery shipment costs.

"How is that a fair representation of the actual shipping costs?" My Dad asked the question. Joyce stopped smiling when he did.

"It costs the same to ship the bakery goods either way. All we do is fill up the empty spaces with vending product going the same way. It is an added bonus for us that we have a way to take advantage of what would otherwise be wasted space. It doesn't harm the bakeries. They'd pay the same amount, regardless."

Joyce was right. Still, her method of accounting didn't take into consideration the actual division of the costs for moving freight. My father suggested she charge the Lucas company half as much as it would normally cost to ship the same quantity of vending product by itself. Joyce said she could do that, but she didn't see why she needed to. It was all company money anyway.

"Joyce, it is in our interest to have the traditional bakeries be as profitable as possible. Anything that can be done to increase their profitability helps us. If apportioning freight costs this way ends up with an extra million in profitability to the bakeries, that amount makes a bigger difference, percentage wise, than it would coming from the Lucas Company."

"This is more like five million than one million, Tom. And, it's going to be growing by a lot soon. If we do it the way you suggest, the profit numbers for Lucas Company are going to skew down quite a lot."

"Perhaps, but it will reflect the reality of our actual costs more closely. We are already taking fullest advantage of our rail shipping. I can't believe our shipping costs will be so onerous as to put us out of having a profitable situation with the vending operations. If your estimate of five million proves correct, that will be a real shot in the arm to our core bakery profits. In many ways this is good news to me, even though losing that amount of profit from our vending operation will be an unfortunate offset."

"Do you need me to go back and make adjustments for past shipments too?"

"No, just with everything going out from now on. What I want you to concentrate on is finding some way to lower the shipping costs from Omaha to our hubs."

"I know one way to do that already, but I'm hesitant about suggesting it to you. It won't sound like it makes any sense at first, but I've played with the numbers, so I know it would work."

"Don't tease us, Joyce. Tell us what your idea is." I was smiling. I loved it when Joyce thought of something that seemed counter intuitive. I had no doubts that whatever she proposed would work. It always seemed to. I'd grown used to her finding solutions where others only saw problems.

"Ship all the bakery product through Omaha now, and through Columbia and Texas when we start shipping out of those plants too. We'll ship the vending in the open spaces instead of loading and shipping straight to the hubs. The money we save on shipping this way will be a lot more than the added cost of shipping up to Omaha from here or the other plants close by. It will also qualify us for a deeper volume discount when the product flows through Omaha. Our Omaha rates are what we use to negotiate with all our other hubs. They match whatever rate Omaha gives us."

"You're certain this would result in a net savings to us?" My Dad sounded skeptical.

"Not a huge net savings, but if we applied everything so it benefited the regular bakeries, it would be a huge difference to their bottom lines. That's what you said you wanted to encourage. The Lucas Company would remain the same, as far as the freight costs they pay now, but this would mean quite a bit of savings for the other bakeries. If we tweak everything as much as we can, and apply the added shipping discount to only the regular bakeries, it might be as much as fifteen million dollars in savings. We'll have about five million in additional freight costs from bringing the bread and rolls up to Omaha, and there will be another half day delay in bringing the product to the hubs. It will look like the bakeries are earning an extra ten million dollars a year."

"This will mean we should put our hubs as close to the vending product bakeries as we can, and if we open new bakeries, we should consider this when fixing on a location?"

"The hubs, yes, but new bakeries only matter if we're talking about Omaha. Our nationwide freight rates are predicated on our Omaha rates. After this last rate discount, we'll already be at maximum rate drop. This is their lowest volume rate they can offer us. New bakeries should be located close to a vending product bakery, because each of them will be near one of our hubs."

"How certain are you of these figures, Joyce? Ten million extra doesn't just fall from the sky like that."

"I've been working on this ever since I sent that first batch of vending product to Kenny in Birmingham. I knew it was going to change things around if we had a big sudden increase in the demand for our vending products. Freight costs have always been a big consideration. Rob and Virginia never had to worry about freighting their product anywhere. It was all done with their own trucks, and all locally. It was only after we started shipping all over the country that the freight costs became a big factor to us. The railroad deal made it a lot better for us, but it was still always a big cost component for us."

"Does your estimate of ten million include the extra five million after we begin apportioning freight costs fairly to the Lucas Company shipments?" I knew Joyce. She still wasn't convinced she should charge the Lucas Company for using something our other bakeries weren't able to use themselves. I didn't want her trying to keep things the way she had done them before. She was liable to try that, because that was how she did things, her way.

"I didn't think you'd still want to do that after we started paying all the old freight costs directly to the other bakeries. Shouldn't the Lucas Company save something from this too?"

"Come on, Joyce. You said it yourself, we already own all these companies. Dad should get to post profit wherever he needs it. He's the one that has to go out and convince the bankers to lend us the money so we can continue to grow. It will make it easier if we can point to a more balanced earnings platform. To do that, we need to spice up the earnings of the bread bakeries, if we can."

"That means another five million then, but it also means five million in extra expense for the Lucas Company. That's going to tarnish their rate of earnings."