Case Study

I. Brief Summary

The Rust Belt is back. So say bullish observers as U.S. exports surge, long-moribund industries glow with newfound profits, and unemployment dips to lows not seen in a decade.

The focus of the story is Burgmaster Corp., a Los Angeles–area machine-tool maker founded in 1944 by Czechoslovakian immigrant Fred Burg. Holland's father worked there for 29 years, and the author interviewed 22 former employees. His shop-floor view of this small company is a refreshing change from academic treatises on why America can't compete.

  Producing innovative turret drills used in a wide variety of metal working tasks, Burgmaster was a thriving enterprise by 1965, when annual sales amounted to about $8 million. The company needed backing to expand, however, so it sold out to Buffalo-based conglomerate Houdaille Industries Inc. Houdaille was in turn purchased in a 1979 leveraged buyout (LBO) led by Kohlberg Kravis Roberts & Co. By 1982, when debt, competition, and a sickly machine-tool market had battered Burgmaster badly, Houdaille went to Washington with a petition to withhold the investment tax credit for certain Japanese-made machine tools.

  For those who see LBOs as a symptom of what ails the U.S. economy, Holland offers plenty of ammunition. He argues persuasively that the LBO crippled Burgmaster by creating enormous pressure to generate cash. As Burgmaster pushed its products out as fast as possible, he writes, it routinely shipped defective machines. It promised customers features that engineers hadn't yet designed. And although KKR disputes the claim, Holland concludes that the LBO choked off Burgmaster's investment funds just when foreign competition made them most necessary. As for Houdaille, it was recapitalized and sold to Britain's Tube Investments Group.

But Burgmaster's problems had started even before the LBO. Holland's history of the company under Houdaille is a veritable catalog of modern management techniques that flopped. One of the...