Power struggle at Tecumseh Products follows years of financial losses

The name of the southeast Michigan company once was widespread on U.S. lawn equipment.

king / blade

The name of the southeast Michigan company once was widespread on U.S. lawn equipment.

TECUMSEH, Mich. - For Todd Herrick, heir to one of the Toledo region's greatest industrial empires of the 20th century, it was an uncharacteristic appeal.

"Give me a chance to adjust to today's challenges and I promise you won't be disappointed," he assured shareholders of Tecumseh Products Co. last spring at their annual meeting.

Ten months later, the 64-year-old chairman and chief executive officer of the firm was removed from both posts. He is now locked in a legal fight to regain influence over the company managed by his family for nearly three-quarters of a century.

His ouster by the board of directors last month followed years of setbacks for the Fortune 1,000 firm whose high points include production in 1947 of a compressor for the first window-air conditioner made for household use.

The name of the southeast Michigan company once was widespread on U.S. lawn equipment.

The Michigan firm's longtime logo, featuring a legendary 19th-century native American leader for whom the company and its hometown are named, was once a common sight on the engines of gasoline-powered lawn mowers nationwide.

Mr. Herrick has blamed the company's problems, including financing issues that some feared could push it into bankruptcy, on globalization and competition from cheap foreign imports.

His ouster, he contends in a lawsuit filed March 7 in Lenawee County Circuit Court, is part of a power grab by the vice chairman of a powerful suburban Detroit consulting firm that has been paid $30 million over the past two years to help turn Tecumseh around .

That man is Albert Koch, of AlixPartners LLP, who serves as Tecumseh's lead director. He and other Tecumseh board members, including two veterans who joined the board long before the consultant arrived, have a much different explanation for the firm's problems: They blame Mr. Herrick.

"The record will show that Tecumseh's financial position - largely as a result of Todd Herrick's poor leadership - has greatly deteriorated," lawyers for the board wrote last week in an initial response to the lawsuit.

"While in his position as CEO and chairman Todd Herrick oversaw and was responsible for numerous failed business transactions that resulted in millions of dollars of losses to the company," the response said.

Mr. Herrick, whose family controls 43 percent of voting stock through a charitable foundation and family trusts, is seeking to reassert control over the board of directors. He nominated himself and two others for seats on the five-member board in an election to be held at the annual shareholders meeting April 25.

His lawsuit revolves around countermeasures taken by the board to thwart the action, which was almost guaranteed success given that the Herricks control 2.2 million voting shares.

But if company board members get their way, the family won't get a chance to vote those shares. Late last week, the board filed suit in U.S. District Court in Detroit contending that the Herricks gave up voting rights by failing to fully disclose their intentions in federal securities filings and other actions.

Todd Herrick, who succeeded his father as CEO in 1986, declined an interview request. But in a written statement, he said, "My actions have always been guided by serving in the best interest of the company."

Board members, through a spokesman, declined to elaborate on court filings.

Tecumseh employs 19,000 people, 70 percent of whom are in foreign countries. It produces compressors for air conditioners and refrigeration equipment; engines for lawn mowers and snow-blowers; and small motors for furnaces and other uses.

The firm's problems are worrisome for residents of Tecumseh, a onetime Quaker settlement and stop on the Underground Railroad 40 miles northwest of Toledo.

The 300 people employed at headquarters offices and a warehouse are just a fraction of the workforce the firm maintained in the community before a shift to overseas manufacturing.

"Whatever happens is going to be pretty significant to us," said Kevin Welch, manager of the 7,400-resident city.

"We're watching with a careful eye. Having a Fortune 1,000 company located in this community is huge. We're going to do whatever we can to make sure they're part of this community."

Loyalty to the Herrick family runs deep in Tecumseh.

The family's name is on buildings including a hospital and a school.

The Detroit-based Herrick Foundation, with $180 million in assets - 17 percent in Tecumseh Products stock - doles out about $9 million a year. Much of it goes to Detroit, including a $2 million grant in 2006 for a neurological research center at Henry Ford Health Center.

But the city of Tecumseh also benefits. Last year, the foundation bought a fire truck for the community and gave money to Lenawee Christian School to establish a scholarship fund.

Northwest Ohio institutions including the Toledo Zoo, Public Broadcasting Foundation, and St. John's Jesuit High School have been recipients of the foundation's largesse in recent years. Over the past half-century, the organization has given $300 million to charities.

"My father worked there for 40 years," said Jack Baker, a Tecumseh business owner and city council member. "I know what that company did for us when I was a child growing up in Tecumseh. We would not be the community we are without the Herricks."

To many people in the Lenawee County town, the company is known simply as "The Products."

Some older residents still refer to founder Ray Herrick, who died in 1973, as "Dad Herrick."

A machine-tool-maker by trade, he and his son, Kenneth, turned the firm into a major force after moving to Tecumseh from nearby Hillsdale in 1934.

When Fortune magazine launched its famous list of the 500 U.S. companies with the highest revenues in July, 1955, Tecumseh Products ranked 248 with $125 million in sales. (With $1.8 billion in 2005 sales, it ranked No. 851 on the most recent Fortune list.)

In an accompanying article headlined "Little, Big-Rich Tecumseh," Fortune described founder Ray Herrick as a fiery leader and manufacturing marvel.

Todd Herrick is Ray's grandson.

He is a pilot who is licensed to fly commercial planes and helicopters, according to Federal Aviation Administration records. His backers say he recognized in the 1980s that manufacturing would become increasingly global and began to position the company to take advantage of the trend.

Still, he was an unorthodox CEO.

In an era when corporate leaders typically participate in conference calls with Wall Street analysts to discuss quarterly financial results, he left the task to the firm's finance chief.

He rarely granted media interviews. In 1995, the firm's then-advertising director said of the news media: "We hate them."

Approached by a Blade reporter after last year's shareholder meeting, Mr. Herrick initially ignored a question about the firm and launched an angry criticism of the newspaper's coverage of the company.

Responding to board criticism of his leadership in a written statement last week, he suggested current directors should accept responsibility because they have dominated the company for the past year.

His backers say that consultant AlixPartners has done a less than stellar job of fixing the firm's small-engine and power train products unit, which was its primary assignment.

The unit's sales slipped by 31 percent in the third quarter to $85 million, and it lost $3.7 million.

But the loss was $1.5 million less than the loss at the same time the year before, wrote Michael Schneider, a financial analyst with Robert W. Baird & Co. Inc. He predicted in a research note distributed Dec. 26 that Tecumseh's cost-cutting moves will begin to pay off in coming months.

Mr. Schneider raised to neutral his rating on Tecumseh shares, which are trading at about $16 on the Nasdaq exchange.

The firm hasn't yet reported results for the fourth quarter of 2006. The results typically would have been released in February.

Defending the consulting company, a Tecumseh Products spokesman said that AlixPartners is a highly regarded consultant used by some of the nation's top corporations. Clients include Toledo's Dana Corp.

Even before the lawsuits, there were signs of trouble on the board. Three directors quit last year, with one giving a single day's notice. They could not be reached for comment.

According to an account in a court filing, Mr. Herrick's break with other directors resulted from the board's decision to promote James Bonsall, the AlixPartners consultant who had been overseeing the engine and power train group.

Mr. Herrick agreed last year to step down as CEO when a replacement was picked.

No candidate was found by January, and directors decided that immediate action was needed to "remedy deteriorating operational and financial conditions throughout Tecumseh," board lawyers said in court documents.

Directors interviewed two candidates, including an unnamed individual recommended by Mr. Herrick, for the newly created post of chief operating officer.

When other board members settled on Mr. Bonsall, "Mr. Herrick made clear that he was unwilling to work cooperatively" with the new operations chief, court documents state.

On Jan. 19, the board fired Mr. Herrick but agreed that he could remain as chairman. Directors also dismissed Mr. Herrick's son, Kent, who was an executive vice president of the company.

Mr. Herrick responded last month by nominating himself, Steven J. Lebowski, and Raymond W. Gunn to seats on the board.

Mr. Lebowski is a lawyer and accountant in Milford, Mich. Mr. Gunn is a managing partner with venture capital fund Wingspan Capital Partners Inc. in Wilmington, Del.

With evidence that he was about to launch a battle for control, other board members reacted by stripping Mr. Herrick of the board chairmanship on Feb. 28.

To fill the post, they picked David M. Risley, a board member since 2003 who retired last year as finance chief of La-Z-Boy Inc., Monroe.

They also voted to expand the board to seven members. Because the move came after the deadline for shareholders like Mr. Herrick and the Herrick Foundation to submit additional nominations, it effectively prevented him from regaining control of the board.

In court papers last week, directors said that with the company's precarious financial position, which had been brought on by Mr. Herrick's demonstrated lack of stewardship, the director defendants justifiably concluded that effectively ceding control of the board to Mr. Herrick would "breach their duties to all of Tecumseh's stakeholders."

Mr. Herrick's suit seeks to either overturn the action or allow him to nominate a fourth candidate to the board.

The proposed new nominee was later identified as his son Kent. With four of seven votes, Mr. Herrick would control the board.

"This lawsuit is about a shareholder's right to nominate and elect directors free from interference," Todd Herrick said in a written statement.

The federal suit filed last week by the board raised questions about the existence of voting and non-voting shares, an arrangement initially set up to help the Herricks maintain control.

The Class B voting shares represent just 28 percent of total common stock but have 100 percent of voting power, the suit stated.

Mr. Herrick is being represented by Detroit attorney Todd Mendel. Directors and the company have hired the Detroit firm Miller, Canfield Paddock & Stone PLC.

Mr. Herrick's complaint is being heard in county Circuit Court in Adrian by Judge Timothy Pickard.

Mr. Herrick has given no indication that he will seek to return as CEO.

He agreed to step down last year as part of a $100 million financing deal.

The financing arrangement was among demands of Tricap Partners Inc., a New York investment fund that specializes in troubled companies with recovery potential.

Tricap officials also called for the establishment of a three-person advisory committee to help the board screen candidates for Mr. Herrick's post and other key management jobs.

Additionally, it required the company to submit a weekly report on cash flow.

Tecumseh lost $81 million in 2005. The firm lost $17 million through Sept. 30, down from $172 million at the same time in 2005.

Sales rose slightly during the period to $1.33 billion from $1.32 billion the prior year.

Wall Street analysts believe the firm ended the year on a loss and expect additional losses this year.

Profits peaked in 1999 at $133 million and have declined every year since except for one.

Despite the problems, a bankruptcy filing is unlikely, according to current company officials.

"We believe the company's financial challenges can be successfully addressed by continuing to implement our turnaround strategy," spokesman Roy Winnick said.

Contact Gary Pakulski at: gpakulski@theblade.com or 419-724-6082.