Harvard Business School
BW/IP International, Inc.
In the second week of June, 1988, executives at BW/IP International, Inc. were assembling materials for a presentation they would make to their bankers on June 15. They recently had agreed to acquire United Centrifugal Pumps (UCP) for $18.5 million. UCP's product line complemented BW/IP's extremely well and the managers of BW/IP's pump division were eager to combine the two. Nevertheless, BW/IP's bank lenders were expected to be somewhat less sanguine. Only a year ago, in May 1987, they had lent $131 million to finance a $235 million leveraged buyout (LBO) of the company. BW/IP had performed according to expectations since then, but it still carried total debt of $204 million, of which more than $100 million was owed to banks. Although U C P was small, and would require additional borrowing by BW/IP of only $13 million, it had been losing money recently. Perhaps more important, BW/IP's management team was still fully occupied by an ambitious business and financial plan. UCP would be one more thing to worry about. Though BW/IP's managers felt confident assuming this additional responsibility, they had yet to persuade their senior lenders to approve it.
Borg-Warner Industrial Products, Inc. Until May of 1987, BW/IP International had been Borg-Warner Industrial Products, Inc., a wholly-owned subsidiary of Borg-Warner Corporation, a large, diversified company headquartered in Chicago. Industrial Products had been the smallest of Borg-Warner's major business groups, which also included Automotive, Air Conditioning, Chemicals and Plastics, Financial Services, Protective Services, and Chilton Corporation (credit reporting). Industrial Products manufactured advanced-technology fluid transfer and control equipment, and was 1
Andrew D. Regan, Charles M. Williams Fellow, and Professor Timothy A. Luehrman prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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1. Borg-Warner had acquired Chilton Corporation in 1986. In the same year it spun off Air Conditioning to shareholders and announced that both Industrial Products and Financial Services would be sold in a broad restructuring.
BW/IP International, Inc.
organized into three divisions: the Byron Jackson Pump Division, the Mechanical Seal Division, and the Fluid Controls Division. In 1986, this group recorded an operating profit of $32.7 million on revenues of $244.8 million (excluding intercompany sales). The Byron Jackson Pump Division produced centrifugal pumps and provided aftermarket parts and services, primarily for customers in the petroleum and power industries. Byron Jackson specialized in designing, manufacturing, and servicing pumps that could safely handle dangerous fluids and operate reliably at very high temperatures and pressures. For example, Byron Jackson was the second-leading supplier of pumps to nuclear power generators in the United States and, because of its technical expertise and large installed base, had a 40% share of the aftermarket for servicing nuclear pumps. It had a 30% share of the aftermarket for the power generating industry generally. Roughly 60% of Byron Jackson's 1986 sales of $159.9 million came from aftermarket parts and services, compared to 40% from sales of original equipment, i.e., new pumps and related systems. Operating income in 1986 was $11.3 million. Byron Jackson engineered and manufactured most of its...
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