Strategy 1 — Focus on People and Technology

In proposing early acquisitions in Mendocino County, Harry Merlo indicated that he went after people and technology, not timber. He wanted the best technology for making lumber. All technology, whether it is a spaceship or a saw, exists first in the human mind. It comes from human creativity, often prompted by need or aspiration, and generally accompanied by persistence. “I haven’t failed.” Thomas Edison, one of history’s most inventive individuals, remarked. “I’ve just found 10,000 ways that won’t work.”
Living out the start of a rags-to-riches story, Merlo believed in the 1950s that a little guy, lean and scrappy, could be competitive against a flabby giant. In nine years he had moved up the corporate ladder of Rounds and Kilpatrick Lumber Company—from sales clerk, to vice president of sales, and finally vice president and general manager, heading up both the sales office in San Francisco and the remanufacturing plant in Cloverdale, CA. In the process, he learned not only about the redwood market and its U.S. customers, but about the small mill owners in Mendocino County and the workers that shored them up. “These were people that didn’t come from the big companies,” Merlo said. “Big companies operated on the assumption that they didn’t need to be efficient to survive in the market—in other words, they didn’t have to worry about overrun.” For those not familiar with timber industry terms, the definition of overrun comes down to this: did you get the amount of rectangular boards that you originally estimated would come from the round log—or even more?

During the interview, Merlo reached 2 or 3 times for pencil and paper to sketch an imaginary board and illustrate how he collaborated with sawmill workers in Cloverdale to boost production—always searching for the saw cut that would give him even more. Reminded that computers today automatically determine the log cut, the former lightweight boxer jabbed back, “Those calculations came from the heads of lumbermen.”

Strategy 2 — Use Stock to Buy Assets

When Merlo became, in 1968, a V.P. in one of the largest timber companies in the United States—Georgia-Pacific Corporation (GP)—his strategy for acquisition would take shape. In this, Robert Pamplin, GP Chairman, was clearly his mentor.
Founded in Augusta, GA in 1927, GP moved its headquarters to Portland, OR in 1954. By 1970, GP owned 3.5 million acres in the U.S. alone. The company had grown so big that the Federal Trade Commission (FTC) regarded it as a monopoly. In 1972, the FTC ordered GP to divest some of its acquisitions. GP was to transfer 20% of its assets to a new corporation. The FTC slapped other restrictions on GP as well, e.g. the timber giant could not make any timber-industry acquisitions in the South, its original home turf, for a period of 5 years.

The spin-off company from GP was Louisiana-Pacific (LP). Initially the spin-off was uncertain. “The FTC had said that LP did not have enough ownership of timber,” Merlo explained. In 1973 GP acquired 225,000 acres near Fort Bragg, which once had been Union Lumber Company lands, for, according to Merlo, $111 million. “LP took 50,000 of the acres,” Merlo said, “and GP took the rest, which satisfied the FTC and won their approval for the spin-off.” Merlo became CEO of LP at its launching and remained at its helm until 1995, at which time he was directing an organization of 13,000 employees with close to $3 billion in sales.

In what proved to be a key decision, the FTC allowed LP stock to be distributed to GP stockholders. In effect, there were two companies with the same shareholders. “It was a big advantage that LP and GP both had premier stock in the new company,” Merlo said. “I was able to use stock to buy assets.” Merlo illustrated how this strategy worked in many of his acquisitions:

I would offer, for example, $10 million of GP stock and guarantee that it would go up to $15 million in 3-5 years. This would be tax-free stock earnings. Meanwhile, I put $5 million of stock in reserve. In no case, did I ever have to use the reserve stock. It was an attractive deal for the seller because he got the stock at book value, which meant he did not have to pay income taxes—plus he would get $5 million appreciation on the stock. You could only do this if you had good stock, which we did. The time frame for the terms varied. Three to five years was an average. In the case of Crawford Lumber Company, the terms were 11 months. Of course, in later years, the laws surrounding such deals changed.
Merlo’s aggressive buying spree in northern California reportedly prompted one GP official to quip, “Harry is buying so many mills down there that I hope he’s not buying the same one twice!”

One early example of this stock-for-assets approach within Mendocino County was the L.P. purchase of Hollow Tree Lumber Company in 1973. The company was founded in 1946 by Bill Moores. Its first sawmill was near Hollow Tree Creek at present day Hales Grove, northeast of Rockport on Hwy 1. LP acquired Hollow Tree Lumber Company for $2 million in cash plus LP stock valued at $900,000 but guaranteed to appreciate to $1.8 million within 3 years (UDJ 14 May 1973).

Note:  The name Hollow Tree Creek, by the way, appears on the 1891 Government Land Office (GLO) plat map for lands surveyed between 1875 and 1888—so the name preceded the lumber company by 60 or more years. The MRC Ukiah Forestry Office is currently in the old HQ of the Hollow Tree Lumber Company.

Merlo considered F.M. Crawford Lumber Company his best acquisition in Mendocino County. He suggested the acquisition around 1968 when he was still a new V.P. with Georgia-Pacific(G-P) in Samoa, CA. This proposal illustrated Merlo’s early strategy to focus on people rather than timber. “Frank Crawford’s people,” Merlo said, “were the best to be found.” One reason for this assessment, according to Merlo, was that Crawford used the Al Thrasher edger to produce lumber with minimum waste. “If you have the best mill,” Merlo said, “the trees will come to YOU!”

Note: Al Thrasher was born in 1920 in Chelan, Washington and started working at age 10 in the sawmill industry to help his family. Later he became a sawmill owner in Oregon. In the late 1960s, he revolutionized timber saw blades. His technology drastically reduced the thickness of the saw blade and, therefore, increased the amount of lumber recovered from a log. He also designed a “floating” saw that, unlike the earlier fixed collared saws, could easily glide for adjustments.

Although not a technical wiz himself, Frank Crawford hired individuals like Herb Ryan who would pore for hours over log data and propose sawing patterns that would optimize the amount of lumber recovered from a log. Merlo wanted people in the mold of Herb Ryan, who were oriented toward maximum efficiency and could get the most “product” out of a log. In fact, Herb Ryan became a consultant to L-P.

In part, it was a family tragedy that precipitated Merlo’s acquisition of Crawford Lumber Company. Frank (55) and Vivian (53) Crawford, along with two companions, were killed when their Cessna 320, piloted by Vivian, crashed in Canada on September 7, 1966. The group had left Ukiah on September 2 for a fishing trip; they were returning when their plane went down in a remote area, thick with timber. Exactly two years passed before hunters accidentally spotted the wreckage. Struggling in those intervening years to carry on the inivestigation of the missing plane and to keep the business going, the Crawford family finally decided to sell F.M. Crawford Lumber Company to G-P in 1968. Merlo had negotiated the deal with George Schmidbauer, who was married to Peggy Crawford, the daughter of Frank and Vivian. Schmidbauer became G-P’s general manager of Crawford operations.

Shortly before the negotiations, the three family-owned Crawford corporations—Covelo Lumber Company, Dinsmore Lumber Company, and Apache Lumber Company—were merged under the name F.M. Crawford Lumber Company (UDJ 10 April 1968). The eventual sale to G-P included about 62,000 acres, as well as sawmills in Ukiah, Willits, Alderpoint, Potter Valley, Covelo, and Dinsmore, and a re-manufacturing plant in Ukiah (PD 1 September 1968). At the time, there were 550 employees in the Crawford company.

Note: In the mid-1980s, L-P proposed to spend about $2.5 million to rebuild the old Crawford mill and install computer equipment (PD 12 Sept 1983). Around 1993 the mill was shut down; its crew went to the Willits sawmill until LP built the new computerized mill between 1995 and 1996. This mill is still operational and is now the Ukiah sawmill of Mendocino Forest Products (MFP), one of the sibling companies of MRC. MFP has upgraded three of the major components of the sawmill equipment since 1998.

Merlo did not specify any obstacles or deals that escaped him as far as the redwood region in Mendocino County. However, Merlo did say that when he got ready to buy Masonite Corporation’s Western Woodlands Division, he offered $100 million. That was only about 30% of Masonite’s asking price of $340 million. At first, there was no deal; Masonite held out. “Masonite finally took the offer 1½ years later,” Merlo said. “I had made a fair offer.” The Masonite lands were actually sold on November 6, 1986 through Timber Realization Company (TRC), an outfit put together in 1982 for the sole purpose of selling the Masonite property and protecting its investors. Merlo’s deal brought LP 88,000 acres in Mendocino County, west of Ukiah and south of Highway 20, and 8000 acres in Sonoma County—a total of 96,000 acres. At the time, local newspapers reported that, with this sale, LP holdings in Mendocino County rose to 275,000 acres.

Merlo indicated that Rounds was a “very humble man.” When Rounds needed to come from Rockport to Cloverdale, he would hitch a ride on a lumber truck and always stop at Boonville on the way to pick up some apples for himself from the local orchards—and three or four for Merlo as well. However, Rounds, in Merlo’s estimation, did not know the redwood market; he was a retail lumberman from Kansas. Working at Rounds and Kilpatrick, Merlo came to know the redwood market very well.

In 1949, Merlo took his B.S. in Business Administration from U.C. Berkeley and transitioned to “the real world” of corporate America. He quickly soaked up every aspect of the business at Rounds and Kilpatrick, becoming familiar, he recalled, with every sales order, every shop machine, every mill-hand, and every stack of lumber. Instinctively, Merlo believed you could not manage or lead from behind a desk. “You have to be in the plant, not behind a desk,” he advised. “My nose and ears could tell me when a plant was not running right.” As one might expect from a business major, Merlo invariably looked at the timber industry from the product side, emphasizing that “you had to be smart about processing and SELLING.”

Merlo started out as the hotshot salesman for Ralph Rounds and remained, even as a CEO of LP, the quintessential salesman. David Ogilvy, who, for good or ill, is sometimes called the father of modern advertizing, probably described the corporate role of sales as well as anybody. “In the modern world of business, it is useless to be a creative original thinker unless you can also sell what you create,” Oglivy insisted. “Management cannot be expected to recognize a good idea unless it is presented to them by a good salesman.” In a consumer society where everything has a sticker price, the salesman is king.

According to Merlo, Bill and Dwight Rounds were “playboys” or just “fun-loving,” depending on your perspective. Merlo clarified this observation by saying that Bill and Dwight “had a limited attention span for business.” When Bill co-founded, in 1961, the Breckenridge Ski Area (86 miles west of Denver, Colorado), he kicked things off , Merlo said,“by skiing naked down the slope.” Clearly, this showed off his uninhibited sense of fun—and, of course, his other assets.

When Ralph Rounds died on July 23, 1960, the Rockport mill had already been closed for about 3 years. That same year, 1960, the Rockport timberlands were certified as the Ralph Rounds Tree Farm. Bill Rounds held onto the family property for 8 years after his father’s death. He ended up selling Rockport because, according to Merlo, “he didn’t want to fuss with it”. Almost as an afterthought, Merlo added, “Besides, I made him a good offer.”

Merlo actually brokered the Rockport deal on behalf of Robert Pamplin, CEO of Georgia-Pacific Corporation (GP). About 18 months earlier, Pamplin had purchased Rounds and Kilpatrick for $4.75 million. As the story goes, Pamplin wanted Merlo even more than he wanted Rounds and Kilpatrick. To paraphrase Victor Kiam’s old slogan in the TV ads for Remington shavers, Pamplin “liked Merlo so much that he bought the company.” As part of the Rounds Kilpatrick sale, Merlo went to work on May 1, 1967 as a V.P. in charge of GP’s timber, plywood, and lumber operations in Samoa, CA. The sale of Rockport Redwood Company was just the first of many that Merlo would arrange in Mendocino County, a playing field that he knew very well. In Pamplin he clearly had a mentor for his own ambitions. In 20 years as president and later chairman of GP (1957-1976), Pamplin directed a period of aggressive growth, taking GP from annual sales of about $100+ million to $3 billion.

The Mendocino Beacon reported that the agreement to sell Rockport Redwood Company came on July 23, 1968:

Note: Ralph Rounds reportedly will received $10 million in GP stock for the 33,059 acres at Rockport, north of Fort Bragg, plus acreage of Rockport owned lands near Philo. The Philo acreage is listed as 3, 422 acres, the coast tract. (MB 2 Aug 1968, p. 1)

Merlo did offer a good insight on how Bill Rounds ended up with Rockport upon his father’s death. Dwight loved the West Coast and Bill loved the Midwest. Carl Nelsen, who was the Rockport Redwood Company bookkeeper at the time, added up Ralph Rounds’ assets. Because he knew that Dwight wanted to live on the West Coast, he distributed the assets nearly equally but tilted the value slightly to the Midwest distribution. Dwight had first choice to pick either the West Coast assets or the Midwest assets. Since he could see that the scales were tipping a little more in the Midwest direction, he chose it. Bill Rounds told Merlo, “Well, you and I are going to be partners.”

Note: The business association between Bill Rounds and Harry Merlo persisted beyond the sale of Rockport Redwood Company. When Merlo became the CEO of Louisiana-Pacific in 1973, Bill Rounds served on LP’s first board of directors and continued in that capacity until his retirement in 1987.

“Dwight Rounds was always in limbo,” Merlo said, “he could not focus on one thing very long.” Merlo recalled Dwight telling him that in Wichita he would go out from the lumber yard “to the graveyard to shoot crows.” Neither Dwight nor Bill was a familiar sight at the Rockport office. “Dwight and Bill might show up twice a year at Rockport,” recalled Merlo. Dwight lacked the capacity to take interest or satisfaction from day to day operations of the business. He often seemed at loose ends. “Dwight was never happy even when things were going well,” Merlo pointed out, “and he didn’t want to pay attention to business.” In contrast to Merlo himself, “Dwight didn’t get any fun out of business.” Merlo, on the other hand, felt that to be successful in the timber business or, perhaps, in any business, you had to “love sales, learn sales, and know sales.”
When 46-year-old Dwight committed suicide in 1972, his wife Betty took over Rounds and Porter Lumber Company in Wichita, KS. Without any aptitude for business, she ran the company that Dwight’s grandfather had founded into bankruptcy. This was especially tragic for Merlo because it had been “a company that had made a profit for 80 years.” Out of respect for Ralph Rounds, who had died in 1960, Merlo paid $6 million to bankruptcy court and bought Rounds and Porter. This is the only purchase that Merlo said he made for sentimental reasons. Years later Rounds and Porter was sold.

Merlo’s response to the question “do you think you got it right the first time” was an emphatic, “Damn right!” That unguarded expletive is tame, of course, by today’s standards—one can hear worse on the school playground. Still it clearly shows that Merlo remains confirmed in the conviction that his understanding of the timber industry and of redwood growth and resiliency is correct. “Timber is just like a garden, just like a vineyard,” Merlo insists. “It’s an agricultural product.”

Merlo’s advice was succinct and, as one might expect, still fiercely competitive: “Be the most efficient operator and you can shut anybody down; the trees will come to YOU.”

“It’s just a game—it’s fun!” This is how Merlo described his working years in the timber industry. From his childhood, Merlo recalled, as he often did in the interview, advice that his mother had given him. “Mama would tell me,” Merlo said, “‘We can’t play so we have to make fun out of work.’” That idea of making fun out of work stuck with him. In this, Ralph Rounds was like-minded. “Ralph Rounds would always ask me,” Merlo said, “‘Harry, are you having any fun?’” Merlo would assure him that he was—the most fun ever.

“You got to know the market,” Merlo said. In her own way, Merlo’s mother was someone who subscribed to this same mantra—even though, for her, “the market” was the customers at her boarding house and restaurant in Stirling CA or her dealings with local peddlers. “Mama had native intelligence that taught her to survive,” Merlo went on. “She became a capitalist because it was forced on her.” It was because of his mother’s instincts and incredibly hard work, that Merlo concluded, “Relatively speaking, that’s why she would have made a good CEO of LP.”

Brandy, the apricot poodle that had been lounging on the office couch, started to walk around the edges of the office, staring out the window behind his master, and then circling the desk to lay his head on my knee. “Oh, now you’re my friend,” I said as I petted his soft puddle coif. Brandy was hinting, Merlo told me, that it was time for his morning walk around the block “to lift his leg.” Seeing that no one was taking his hint, Brandy returned to the comfort of the couch. Given Merlo’s obvious affection for the omnipresent Brandy, it’s no surprise that one of his favorite books is John Steinbeck’s Travels with Charle, about a road trip that Steinbeck took around the U.S. in 1960 with his French standard poodle.

Merlo, who earlier had maintained that he had been “burned” by interviews in the past, seemed more relaxed as the conversation turned to questions about his mother. He relayed, affectionately, the story of one of his first personal land deals and perhaps his mother’s first real glimpse of his business prowess. He put $4,000 down on a piece of land that cost $40,000. The land was in Chula Vista Estates. It had been sub-divided many years before into 170 lots. The remainder of the money for the purchase ($36,000), he borrowed from a widow in Marin, CA. When he told his mother, “Mama went to Mass everyday to pray because her son had borrowed money from a widow.” In Mama’s mind, this was putting the widow at risk. Later Merlo sold the property for $170,000 at a profit of $130,000. When Merlo showed his mother the profit he made on the land deal, “Mama went to Mass everyday to pray because she thought her son was a crook.” Mama had a pay-as-you-go policy. She told her son, “if you borrow from the bank, you’re working for the bank”!

“Mama had a great sense of humor,” Merlo said. He fondly recalled the story about his mother, who became a proud and patriotic American citizen, returning to Italy and saying, with both dismay and sarcasm, that “you needed a match to find the tiny Italian light bulbs”. Laughing as well, he also recounted how his mother took great delight in the story about the penny-wise immigrant who had a quarter slip out of his pocket and “down the hole” in the outhouse and then, mumbling, tossed down a $10 bill—to make it worth his while to retrieve the quarter.

“History is important in the sense that you have to know your industry,” Merlo said. On second thought, he added that “history is tomorrow—you’re making history.” In a practical sense, Merlo saw that history could keep you from making mistakes that others before you had made. “You have to know where you’ve been,” Merlo continued, “so you don’t make the same mistakes twice.” Laughing, I shared with Merlo one definition of insanity—doing the same thing over and over again and expecting different results. While Merlo said he had not heard this quip before, he did, as a businessman, agree with it.