British Engineer Pulls Off Buyout of Racal Instruments
By ANDREW SIMONS
The deal of Gordon Taylor’s career came down to a napkin,a Ritz-Carlton Laguna Niguel bar napkin to be precise.
The chief executive of Irvine-based Racal Instruments Inc., a maker of electronics testing gear, was trying to free his company from parent Racal Electronics PLC. The British defense company itself had just been acquired by French aerospace conglomerate Thales.
Sitting at the Ritz-Carlton bar, Taylor, a genteel British engineer turned businessman, asked the bartender for a pen. He took a napkin from a stack on the table. On it he jotted down the parameters of a leveraged buyout of Racal, a deal he had spent the past seven months of his life negotiating.
When he was done, Taylor handed the napkin across the table to Keith Oster of San Francisco-based Thomas Weisel Partners LLC and Stephen Brooks of New York-based J.F. Lehman & Co.
The two investment bankers ran down the elements of Taylor’s proposal, writing “yes” on some areas and “no” on others.
Then they handed it back to Taylor, who took another pass at the proposal. He knew it was right. The three signed the napkin. The deal was done.
“It was the end,” Taylor said, “of months of hell.”
It was 36 months, to be precise. The deal closed in August, making Racal an independent company with 400 employees in Irvine and 800 overall, spread across the U.S. and Europe. It plans to keep the Racal Instruments name.
Taylor had been trying to secure backing for a Racal buyout for years.
A decade ago, a San Diego-based supplier introduced him to John Lehman, the founding partner at J.F. Lehman and the former Navy secretary under President Reagan. Lehman met with Taylor several times and decided he would give Taylor the clout he needed.
“I always had a hankering to make us more independent,” Taylor said.
But Taylor’s first buyout attempt would fail, setting him up for a fight to control his company. He had reason to,his career at Racal Instruments was long, and perhaps no one knew the company better than him.
Taylor started out in Britain designing electronic triggers for atomic bombs when he wrote to Racal, one of the country’s largest defense contractors, to tell them how they could improve some of their technology.
“That’s how I ended up joining them,” he said.
Taylor said he found a natural home at Racal Instruments, Racal Electronics’ tiny test and measurements division. Much of Taylor’s work designing triggers fit well into the test and measurement technology of Racal Instruments.
Along with two other friends, Taylor gradually built up Racal Instruments within the larger company, making it a cash cow that helped fund many of Racal Electronics’ larger projects.
But something bugged Taylor.
“We were never part of their main strategy because the main purpose of defense is to sell to governments,” Taylor said. “As an instrument company, we were not instrumental inside the big giant.”
In 1977, Racal Electronics acquired a small Dana Point-based company called Dana Labs. It was a strategically important acquisition, but it became immediately apparent to Racal’s upper brass that Dana Labs was a poorly run outfit that needed hands-on work.
“My boss came into my office and said, ‘Get your ass over to the USA before it gets into any more trouble,'” Taylor said.
Six months after Taylor’s arrival, Dana Labs turned a profit.
Taylor stayed in Orange County, where he quietly built up Racal Instruments as a test and measurements company, competing head-to-head with industry heavyweights Hewlett-Packard Co. and Tektronix Inc.
In 1987, his company was a founding member of an influential industry group that set an important standard for test systems to come. His work with the consortium helped establish Racal as one of the key test and measurements companies and fueled Taylor’s desire to break free of the larger Racal.
The company suffered inside Racal, according to one observer.
“As a small business unit within the much larger Racal group, Racal Instruments was a victim to lack of management focus and resources,” wrote Shekar Gopalan, an analyst with San Antonio-based Frost & Sullivan Inc.
Taylor got his chance. In 1999, right when Hewlett-Packard was spinning off its test and measurements division,what’s now Agilent Technologies Inc.,Lehman loaned Taylor the money buy Racal Instruments. With cash in hand, Taylor went to Racal Chairman Ernest Harrison and proposed the buyout.
The meeting was rough. Unbeknownst to Taylor, Racal Electronics was in talks with Thales to sell the entire company.
“So they rejected our bid,” Taylor said. “It could have unsettled the whole sale of Racal to Thales. Here comes this guy who wants to take this company that’s very profitable. I was disturbing something. I had no idea what was going on. And I went away with my tail between my legs.”
But Taylor would get a second chance. Following the Racal acquisition, word floated up to Denis Ranque, Thales’ chairman and chief executive, that Taylor had been seeking to buy Racal Instruments.
Ranque brought Taylor into his office to hear him out.
“We weren’t strategic to their business,” Taylor said. “And they concluded sometime last November that we weren’t. They put us on the block.”
That is when what Taylor calls “hell” began. Ranque knew that Racal Instruments,with 2000 sales of $99 million and a 26% annual growth rate,could fetch a pretty penny. Shares of HP spinoff Agilent tripled in value only a month after its public debut.
Thales floated word that Racal Instruments would be for sale. Five bidders,three companies and some European investors,came forward with serious offers. Taylor risked losing his company.
“They wanted to get top value,” he said.
Taylor was in a bind. He knew he had to put together enough capital to attract Thales while retaining enough cash to grow the company after it split off. He sent out for reinforcements.
By this time, a Lehman partner jumped ship to join Thomas Weisel, which had established itself as the vanguard West Coast investment bank and a Silicon Valley insider. The partner brought Weisel in on the deal. With Lehman and Weisel batting for Taylor, the three set up a buying company, RIG Holdings Inc.
It was late November 2000 and Taylor was the first to present to Thales. He showed Thales’ management the company’s fundamentals and his expected budget for the coming years. The figures showed Racal Instruments hitting around $125 million in sales for 2001
Ranque wasn’t pleased.
“He thought we should have been more aggressive,” Taylor said.
But Taylor knew a meltdown was coming. He had been golfing several times with friends who had advised him they were getting “cagey” about their shipments.
“That was the early warning sign,” Taylor said. “And low and behold, by spring the market was beginning to crash.”
Following Taylor’s presentation, Thales had him fly around the U.S. and Europe for another four months of making presentations to the other bidders. Taylor and his executive staff made at least a dozen trips to Britain, he said.
“We put on a huge road show,” Taylor said. “We had presentations for each of the bidders. Then there were follow-up presentations, and more follow-up presentations. There were no days off, no Saturdays or Sundays.”
Taylor’s team had an in: it would be hard to turn down the managers who had led the company for so long.
“We had the inside track as it were,” Taylor said.
Taylor still had to get favorable terms from Weisel and Lehman. After the buyout, Taylor knew he needed to have enough cash to grow and enough equity to offer stock options to employees.
The talks were made tougher by technology stock crash earlier this year. But Taylor said he got a good deal: 30% in debt with the rest in shares of the new company. A majority of the shares went to Weisel and Lehman, a third went to Racal.
The deal closed on Taylor’s 60th birthday.
“The acquisition of (Racal) by U.S.-based capital partners is likely to provide a big boost for its image and presence in the United States,” Frost & Sullivan’s Gopalan wrote. “The company now has a focused management that has a priority of building Racal Instruments as a strong competitor in existing and new markets.”
Taylor said he hopes to grow the company through acquisitions with an eye toward an eventual public offering. Weisel and Lehman are doing research for him on potential acquisitions, Taylor said.
Meanwhile, Racal is eyeing test gear to be used in the development of a third-generation wireless network, known as 3G.
“I don’t want to sit on a yacht or anything. I just like what I do,” Taylor said.. “And this deal enables me to keep doing it.”
