A clear and consistent vision

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When a company announces an acquisition, it typically does so with great fanfare. Top executives visit or phone key customers to share the good news, the parent corporation writes letters of introduction to new customers of the merged company, then sends news releases to the local press and national trade publications.

A few months later, when the initial euphoria subsides, outsiders seldom hear about what happened following the acquisition. Before long, whisper campaigns started by competitors accelerate into rip-roaring rumor mills and the truth begins to leak out. A year or two after an acquisition, the merged companies are still operating on separate computer systems. Back-office functions havent been consolidated. Infighting erupts between branches and divisions. Turf wars develop.

If it is a public company, the stock price takes a dive. Private companies may be spared that public humiliation, but they cant avoid pointed questions and increased pressure from investors.

The company finally issues a press release announcing the hiring of a new management team elected to turn around the fledgling company.

What went wrong? How can other companies avoid a similar ignominious fate?

Often, the source of such problems can be traced to the companys acquisition strategy (or lack thereof).

Rudolf Huyzer, chairman and chief executive officer of Integra Integrated Procurement Solutions Inc., believes his company has a sound business strategy that will enable it to avoid the problems that have befallen other consolidators of distribution companies. The Northbrook, Ill., firm was founded in July 1998. Its goal is to build a $1 billion national distribution company through internal growth and nationwide hub-and-spoke acquisitions of general mill supply and specialty distributors with a focus on integrated supply solutions.

In spring 1999, it acquired two prominent general-line industrial distributors, the Ross-Willoughby Company of Columbus, Ohio, and J. Fegely Inc. of Pottstown, Pa. It subsequently bought KSC Supplying Industry of Fargo, N.D., and two specialty distributors, Rubber World Connection of Landisville, Pa., and Scheibert Safety Supply of Indianapolis.

Integras annual revenue run rate is about $175 million to date. Three acquisitions expected to close in the second quarter of 2000 should boost that to $265 million. In addition, the company has signed letters of interest with eight to 10 acquisition targets and has expressed interest in talking with a host of other potential candidates.

Although acquisitions make for interesting reading and office gossip, it is only part of Integras overall business plan.

We are not in the business of buying companies, Huyzer says. We are in the business of building a quality company over time.

You must have a plan
Integras strategy is based on much more than simply buying distributors of industrial products.

This is a service business. Its not a distribution business anymore, Huyzer says. We are not shifting product from one corner of a warehouse to another corner. We are in a value-added business. If you dont have that, you dont have much of a sustainable position.

When Huyzer speaks about what it takes to build a nationwide distribution business, he speaks from experience. The former president and CEO of BT Office Products International, a full-service international distributor of office products, Huyzer led that company to sales of more than $1.6 billion and 70 international acquisitions.

Huyzer believes a key success factor for any consolidator is making quality acquisitions of companies with strong management teams who want to stay involved in managing the merged company.

This whole game plan is not about collecting or building volume, its about building quality, he says. We spend a lot of time before we make up our mind about being interested in an acquisition candidate.

Do the two companies share the same vision? Do they have the same mission? Do they have a similar operating strategy? Can they work together?

Ive said it many times. Once the excitement of the deal is over, its back to business. So I ask myself, Can I work with that guy over there? And hes asking the same thing about me, he says.

Ross-Willoughby and J. Fegely share Huyzers vision of how a distribution business should run. Huyzer considers the two companies to be platform acquisitions, regional hub companies around which Integra can build. To qualify as an Integra hub, distributors must have annual sales of at least $40 million. In addition, acquisition candidates must meet about a dozen other criteria (see sidebar at right).

Tuck-in acquisitions, such as R.W. Connection and Scheibert Safety, typically generate between $10 million and $25 million and specialize in a product category that generally falls into integrated supply contracts, such as safety supplies, hose and rubber products, fasteners, power transmission and bearings.

We will try to cover all of the logical specialty niches, Huyzer says. But we have to be realistic as well. We may not be able to cover all of the elements ourselves. So were not opposed to building alliances. But in our view, an alliance is a second-best position because you will never be able to control your allys service levels.

J. Fegely division president Joe Homa says the reason Integra wants to bring specialty distributors into the fold is to enable the company to offer one-stop shopping for integrated supply customers.

If youre going to be a true integrated supplier, you dont want your capability in any area to be a sacrifice for the customer. You want to be just as good of a specialty distributor as any of the competition, he says.

Integrating specialty distributors admittedly is more difficult than merging only general mill supply distributors, a strategy being followed by other distribution consolidators. Specialty suppliers are sometimes involved in manufacturing or assembling products or face technical issues that general mill distributors dont have to deal with.

Integrating companies like yourself is difficult enough, Homa says. When you start to get into specialty commodities, theyre different businesses. So I can see why its not as common an approach. But ultimately, its what the customer is asking for.

Converting to a single system
The fact that few other organizations, except for consortia and alliances, have aggressively tried to put general-line and specialty distributors together creates a tremendous opportunity for the company that can execute such a strategy. But blending a specialist with a general mill supply house doesnt generate more value if the companies dont integrate systems and if there is no effective cross-sell program in place.

Most consolidators struggle with integration, says Homa. Theyre more concerned about harnessing size. Its the integration that generates the value-added to the company.

Integras management team is well-versed in consolidation issues. In addition to Huyzers experience at BT Office Products, Ross-Willoughby and Fegely acquired and integrated more than a
dozen companies since the early 1980s.

In every situation, we integrated those companies into our computer system as quickly as possible, says Ross-Willoughby division president Ron Cory. Integrating systems and sharing services and overhead is an essential element that can help us drive operating and transaction costs down.

Integra wastes little time integrating acquired companies. It selected Eclipse as its operating platform in August and began converting branches to the new system three months later. KSC branches switched systems over one weekend in early December. J. Fegely made the conversion in early April.

To help prepare for the switch to a new operating system, branches sent employees to Columbus for a train the trainer program, where they learned the nuances of the Eclipse system, reviewed conversion checklists and practiced what if scenarios in advance of the planned conversion.

No matter how much time you spend planning a conversion, the process is still intense, says Rich Miles, director of information technology.

Make no mistake about it, this is a heart transplant, he says. Youre taking the heart out of a company and replacing it with a brand new one. Its traumatic.

Converting a hub location might take four to five months, including training people in the conversion process, transferring data between systems, manually matching product numbers to eliminate duplication, making sure that the new system can accommodate special reports required by large customers and so on.

Converting people off their old numbering systems for customers or vendors to the new number scheme is a time-consuming, laborious task, Miles says.

For a hub conversion, Integra sends experienced Eclipse trainers to each branch to oversee the process and answer questions. Before going live on the new system, operators spend a weekend re-keying open sales orders and purchase orders.

Why not simply download all of the files instead of re-keying them?

What weve found is those two very arduous days of re-keying also serve as a great training vehicle, Miles says. When those people come in on Monday, theyll be tired for sure, but at least theyll have handled just about every kind of order imaginable.

A major concern during a changeover, of course, is not to cause grief to customers.

I can safely say we migrated our entire account base without any major disruptions, says KSC president Lon Arnhold. That was a bigger accomplishment in my mind than just moving the operating system over.

A shared vision
Theres more to integrating companies, however, than simply putting them on a combined computer platform. The company launched its first combined catalog last November, established inter-company sourcing, negotiated corporate contracts with suppliers and service providers, developed a national account strategy, and consolidated administrative and accounting functions into three shared service centers in Columbus.

Huyzer points to those accomplishments as examples of Integras aggressive approach to building a quality distribution company focused on sustainable growth and business acumen. The next order of business is to continue to expand its geographic reach in areas where customers already have facilities.

No one in our business is nationwide yet, says Huyzer. But our customers want us to move in that direction. We are under major pressure from our customers either to make acquisitions in other parts of the country, or to consider a green field approach.

Customers are also demanding that suppliers investigate how e-commerce might help them lower procurement costs. Will the emergence of online B2B methods change Integras strategy?

Carolina division president Bud Pritchard says the companys e-commerce strategy is a good example of its practical approach to doing business.

One thing I like about working with Integra is that the group does a good job of trying not to leap into the latest fad, he says. We sit back and analyze the situation, then make a decision that best fits the business plan that we have put together.

Huyzer reasons that when customers are focused on integrated supply, e-commerce will have less of an impact. Because those customers have already benefited from suppliers taking over their storeroom management and holding consigned inventory for them, they will be less inclined to order via the Internet, except for spot buys.

Where we see the upside potential is that it will make order processing more cost-effective, he says. We can lower our costs by using e-commerce capabilities.

Integra will take pains not to jump onto the e-commerce bandwagon without serious analysis of how that would impact its overall business strategy.

We are not going to enter into a me-too approach with the catalog houses, says Huyzer. They have a different agenda. Theyre catalog houses. We focus more on tailor-made solutions and integrated supply. It is not just about e-commerce capabilities, because integrated supply is so much more than order processing.

There is considerable uncertainty in the industry about how e-commerce will change the traditional distribution business model. As Integra continues its march toward building a national distribution powerhouse, one thing is certain: It will continue to take a methodical approach and strive never to stray from the companys operating strategy.

Says Arnhold: We have a clear and consistent vision.

This article originally appeared in the May/June 2000 issue of Progressive Distributor. Copyright 2000.

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