Veritas: Small, but with big ideas Young financiers want to return profits to BethShip yard

Have partners, will invest

"We're inclined to go after things that other people won't touch"

Investing

September 14, 1997|By Sean Somerville | Sean Somerville,SUN STAFF

If Veritas Capital Inc. completes its deal for Bethlehem Steel Corp.'s Sparrows Point shipyard, the yard's fate will rest with a pair of Wall Street financiers trying to pull big profits from orphaned businesses.

The BethShip Inc. yard, which faces closing if it isn't sold, would be the sixth acquisition for Veritas. The 5-year-old merchant banking fund plans to complete the $15 million purchase this month.

Unlike Bethlehem Steel Corp., a huge public company, New York-based Veritas is small. With about six people in its Madison Avenue office, Veritas is so small that co-founder Thomas J. Campbell answers his own phone. And unlike Bethlehem, Veritas is privately held and therefore discloses little financial information.

Veritas says it aims to buy divisions discarded by big companies that are trying to boost profits. The target is struggling but "fundamentally sound franchises" that can be turned around with management changes and start-up capital.

"We're inclined to go after things that other people won't touch," said Robert B. McKeon, 43, who started the fund with Campbell, 38. "We think it's a challenge."

Veritas, which aims to give investors a 25 percent annual return, has bought five companies for $102 million.

Investing about $11 million on behalf of the two partners and 10 retired executives of top companies, Veritas received $260 million in financing from a variety of sources to buy, operate and expand the businesses.

So far, the sale of two companies and increased value of the other three have given Veritas investors a return of $65.1 million, including at least $12 million in cash. That's a 491 percent return -- if Veritas' estimate of its equity interest is correct.

Veritas releases few details about its individual companies. The fund says it sold Hitco Technologies, a California aerospace manufacturer, at a huge profit to a German company. Another Veritas company, Bar Technologies, a former division of Bethlehem, has had steep losses over the last couple of years. But Veritas said Bar Technologies is in the midst of a turnaround.

More jobs, lower pay

It's difficult to gauge the effect of Veritas' transactions on employees. For employees at Bar Technologies, formerly a shut-down division owned by Bethlehem, Veritas' purchase meant the return of hundreds of jobs, but at much lower pay.

"It was like night and day," said Joe Anderson, president of Local 2632 of the United Steelworkers of America in Johnstown, Pa. "The Bethlehem contract had been in place 50 years. We didn't start with the Bethlehem contract. This was negotiations from scratch."

McKeon said Veritas does not meet the stereotypical image of buyout financiers. He said it doesn't buy companies, slash hundreds of jobs and then quickly sell. "Employment has grown or stayed the same because of the things we do," he said. "We're usually picking up businesses off the ground and dusting them off."

He said Veritas' general approach is to buy and hold companies. "It's so hard to get good investments that it's silly to buy a company, create value, sell and then pay taxes on the gain," McKeon said. Martin Sikora, editor of Mergers & Acquisitions magazine, said Veritas is not alone in its search for manufacturing businesses that have been left for dead. "There's been a lot of interest in the smokestack areas," he said. "Banks are flush and looking for good deals. And some of these old-line smokestack businesses seem to be in good shape."

Campbell and McKeon, who grew up a few miles apart in the suburbs north of New York City, first did deals together at Wasserstein Perella & Co. The firm was founded by two of Wall Street's most prominent financiers in the merger-crazed 1980s. Among the partners' deals was Maybelline Inc., which Wasserstein Perella bought in 1990 and sold last year, turning a $600 million profit, McKeon said.

Veritas -- Latin for truth

Still in their 30s but veterans of the go-go '80s, McKeon and Campbell started Veritas -- Latin for truth -- in 1992.

Calls to several associates of McKeon and Campbell -- including investors, parters and executives of Veritas companies -- were not returned. The two partners have worked closely with New York-based Blackstone Group, which has the nation's second largest corporate buyout fund at $3.7 billion. "That tells me they're serious," Sikora said.

To raise money for its new fund, Veritas recruited retired CEOs of Fortune 100 companies as investors. That touch gave Veritas capital, instant credibility and what its founders call a sounding board for investment strategies.

In addition to Hitco, Veritas has sold Composite Energy Management Systems of Grand Rapids, Mich. The fund would not disclose details of those deals.

The Veritas deal that most resembles the BethShip deal is the 1994 purchase of Bar Technologies -- formerly Bethlehem's rod and wire facilities in Johnstown, Pa., and Lackawanna, N.Y., which was shut down in 1992.

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