Case study: What happens when a city's 'big employer' gets bought?

In southwest Michigan, Upjohn faded, but Kalamazoo survives

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United Technologies Corp. announced plans in September to acquire Cedar Rapids-based Rockwell Collins for $23 billion. Including Rockwell’s debt, the deal is valued at $30 billion.

If completed, the deal would see Rockwell Collins join UTC’s aerospace business to form a new division, Collins Aerospace Systems. Headquarters for that division has not been determined.

The acquisition could close between July and September 2018.

By Tom Chmielewski

KALAMAZOO, Mich. — It was only natural for Kalamazoo residents to believe the Upjohn Co. always would be there for the community. For the people who live here, it always has been.

Dr. William E. Upjohn founded the company in 1886, and it grew to become the southwest Michigan county’s largest employer. For not-for-profits, charitable fund drives began with a call to Upjohn.

The company remained a tightly held corporation. Only family members or Upjohn employees could serve on the board of directors until 1968.

By 1993, Upjohn had an estimated 7,900 employees in Kalamazoo County. But merger fever spread through many boardrooms during those years, and in 1995 Upjohn caught it. Upjohn and the Swedish company Pharmacia agreed to join in what company executives called a “merger of equals.”

“I remember the panic we all felt,” said Judy Jolliffe, at the time director of the Arts Council of Greater Kalamazoo. “For the first few years when it merged with Pharmacia, we still had (corporate) people in town, we still had some high-level executives in town that were involved. They were still giving money, but not to the extent that we had been receiving. It was very slimmed down.”

“There was a gradual drain of top talent in the area,” noted Randall Eberts, president of the W.E. Upjohn Institute for Employment Research, an independent not-for-profit started by Dr. Upjohn as a trust in 1932. “Because of the merger of equals with Pharmacia, they decided they had to have their headquarters somewhere in between. So they moved their headquarters to London” — where neither company had operations.

“You really start to look around and ask, ‘Where’s everybody going?’ Where did the people go who were the (board) chairs and on committees for the arts, for the symphony?” Eberts said.

Most production employees and scientists remained for a time. Economic developers, however, no longer were taking that for granted. Southwest Michigan First, a regional economic development group formed in 1999, assessed Kalamazoo’s vulnerable economy, recognizing that 25 percent of the tax based was located in just one major corporation, Pharmacia & Upjohn.

Sandra Cochrane was manager of the technology initiative at Southwest Michigan First in 2000 when the group began planning an Innovation Center as a wet lab and incubator space.

“Pharmacia & Upjohn was not a dominant player in the pharmaceutical industry,” Cochrane said. “There were really only two things that could happen. Either Pharmacia and Upjohn were going to acquire someone else and become a larger player in the industry ... or somebody else would beat them to the punch.”

In 2002, New York-based Pfizer announced its buyout of Pharmacia. After the acquisition, Pfizer “eliminated all the research and development work in Kalamazoo. We kind of expected to be some type of downsizing, but that was basically 2,000 jobs,” Cochrane recalled. “We opened our doors in late 2003. We filled up immediately.”

“That was just a real blow,” Eberts said. “As the story has it, we were putting in about a billion-plus dollars per year in research, just in the downtown labs.”

Cochrane faced a daunting task of taking top-level research scientists and teaching them basic business skills. Most of the center’s initial entrepreneurs “didn’t understand how to run a business. ... None of them understood how to raise capital.

“None of them understood how to write a business plan.”

Of 15 solid business ideas pitched in the Center’s opening months, a dozen companies went on to become start-ups.

“Ten of them are still in business,” she added.

Cochrane estimated those start-ups created 150 jobs, but added, “that’s just direct at the Innovation Center ... . It’s the indirect that’s more important. For every company that’s started here, they’re utilizing the support system of the community. ... They’re using a lot of those scientific resources in the area. The more companies that start here and grow, the more those ancillary firms could grow.”

Cochrane emphasized that when a large corporation faces a merger or sale, community economic developers need to engage with that corporation’s management before any of them leave town.

“Really try to get up as high as possible,” she said. “Try to remind them that the community is relying on them. Try to keep those relationships strong, but at the same time, telling them you need their help in this transition. It’s not just the company that’s transitioning, it’s their entire community that’s transitioning.”

Perhaps the most innovative economic development initiative created at the time is the Kalamazoo Promise, which offers 100 percent tuition to students who enroll in Kalamazoo Public Schools from K-12. Founded by anonymous donors, it began in late 2005.

Michelle Miller-Adams, a visiting scholar at the Upjohn Institute since 2006, said the initiative was “part of the response to that restructuring of the economy” Kalamazoo faced. The Promise is a long-term effort to stabilize and increase the Kalamazoo population and educate a potential workforce to help make the community attractive to residents and business.

“One of the most dramatic things that happened in Kalamazoo Public Schools, enrollment has gone up 24 percent since the Promise was announced. That growth has come not so much from people moving here, but from not leaving,” Miller-Adams said. “High school graduation rates have been slow to move ... (but) we saw a big jump in the number of students going to college.”

Miller-Adams finds a distinct philanthropic culture in Kalamazoo. In Grand Rapids, about 50 miles north, the perception is donors offer large sums of money for a project as long as their name are attached to it, she said.

“Kalamazoo is very different. Donors are more anonymous. They don’t want as much public recognition, so there tends to be less coordination, and less ‘here’s the money and what you’re to do with it,’” she said.

She describes the Kalamazoo approach as “more democratic” for not-for-profit boards, which improves a community buy-in for any initiatives. But that approach can increase duplication of efforts and decrease efficient use of donations. Finding the balance is challenging.

The loss of Upjohn as a primary source of philanthropy required all the not-for-profits to adjust to a new paradigm.

“It has made everybody look at different sources for funding,” said Jolliffe. who sits on several arts boards. “It’s a lot more difficult, and it’s difficult finding board members. With so many independent workers, they don’t want to take the time. You just don’t have as much middle management” to attend not-for-profit board meetings.

But the arts still thrive in Kalamazoo, the production plant employs about 2,000, and the downtown labs are now filled by a Pfizer spinoff, Zoetis, a producer of medicine for animals.

The end of Upjohn as an independent entity was a shock. But it was not a disaster.

• Tom Chmielewski is a freelancer writer in Kalamazoo, Mich.

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