The Race to Consolidate

As acquisitions proliferate in the distributor side of the industry, four companies emerge as front-runners.

November 1998
BY SUSAN KEEN FLYNN

The number of companies in the document management industry is shrinking. For several years, major industry players and independent manufacturers have participated in mergers and acquisitions. But in the past year, a handful of key distributorships have grabbed the baton and joined the race to consolidate. Four companies are setting the pace: Dominion Holdings Inc., Global DocuGraphix Inc., Precept Business Services Inc. and SFI. During this year alone, these firms completed acquisitions valued at nearly $195 million.

"We're in what I call the early stages of consolidation," says Jim Anderson, president of Corporate Development Associates, Hilton Head, S.C., a mergers and acquisitions consulting firm that specializes in the graphic arts industry. "There are a few players out there in the distributor market, but I expect there will be more." For now, the four companies mentioned appear to be the first to the starting block. And they each possess a different race mentality. "The strategies of these four companies are vastly different," says Anderson. Some act as holding companies letting distributorships operate independently, while others purchase firms and fold them into existing operations. A few of the companies are searching for distributorships in certain geographic regions, while at least one also eyes companies with expertise in specific product and service niches. "It remains to be seen what is the most viable way to go," says Anderson.

This article profiles the four front-runners in distributor consolidation. It includes a list of each company's recent acquisitions, as well as information about their acquisition strategies and future plans. Company executives also speculate on the state of the document management industry as a whole. Most agree that while their firms entered the consolidation race, not everyone needs to follow the same track. "There is heightened consolidation activity, but it's not as though every distributor has to do something. It's not time for distributors to panic," agrees Anderson. "Many don't have to participate. They can still make a nice living. But for the right person at the right time, [consolidation] could be very good."

So far, it certainly has been very good for the four companies featured in this article. However, success in the long run depends on many factors—stamina, profitability, foresight and more. It remains to be seen who will cross the finish line as a winner.

Top Executive: David Neely is the chairman and CEO of Precept. He has been CEO since founding the firm 10 years ago. During 1988-94, he also served as executive vice president and chief administrative officer of Affiliated Computer Services, a firm that provides electronic funds transfer processing and information technology services. From 1978 to 1988, he was a member of the executive management team of MTECH, a data processing company that has since merged with EDS. While with MTECH, Neely participated in a turnaround effort at one of the company's divisions, Imagetek, a large forms distributorship. This turnaround launched his career in the document management industry.

Corporate Structure: Precept Business Services, a holding company that went public in March, is traded on the NASDAQ exchange under the symbol PBSIA. It has two divisions: Precept Business Products and Precept Transportation Services. The business products division includes distributor operations. Any distributorships acquired by Precept Business Services become part of this division. Precept Transportation Services includes Wingtip Couriers, a wholly-owned subsidiary that delivers products for the business products division in the Dallas area, and U.S. Transportation Services, a delivery company.

Precept has a 7-member board of directors, including Neely and two other Precept employees, an investment banker, an entrepreneur, a CEO of a publicly traded company and a professional investor. The board, which meets quarterly, serves as a steering committee for the company. "It's an active board that is committed to the growth and welfare of the company," says Neely. Day-to-day decisions about operations, however, are made by Precept's management team.

Recent Acquisitions: Precept's most recent acquisitions include Southern Systems Business Forms & Supplies Inc., a distributorship in Florence, S.C., acquired in late August, and Creative Printing Solutions, a distributorship in Bangor, Maine, purchased in early September. In addition, Precept acquired Garden State Limousine in October as part of its transportation business. During 1998, Precept also has acquired the following distributorships: MBF Corp., Monroe, La.; InfoGraphix Inc., Boston; GraphicSource, Houston; and Fineline Business Forms, Salt Lake City.

Acquisition Strategy: In the past six years, Precept has acquired 35 companies. "Precept has always been an aggressive company in the marketplace," says Neely, who sees his firm as a forerunner in the consolidation trend. "We didn't look at it as consolidation, but there were markets we wanted to be in a few years ago, so we sought companies to acquire."

Rather than target companies with expertise in specific product or service niches, Precept has focused on acquiring distributorships in diverse geographic regions. "We identified certain markets that we want to be in," says Neely. "All but one are now filled. The Northwest is our next strategic move." With 60 offices across the U.S., Precept has a presence in the Northeast, Southeast, Midwest, Southwest and West.

Neely says his firm doesn't pursue only large distributorships, although several of its recent acquisitions include companies with multiple locations and high revenues. For instance, MBF Corp. is a $18.5 million firm with operations in 32 locations, and Creative Printing Solutions is a $16 million company with five offices in two states. "If I lay two [acquisition] opportunities side by side in an area and all things are equal, I'd choose the larger company," says Neely. "It's like getting a business card order. It takes just as much time to write up as a custom continuous forms order. You might as well take the order with greater potential for profits."

But Precept doesn't dismiss smaller firms. "There are some very fine small companies we'd like to do business with," says Neely. Geography takes precedence over size, he adds. For instance, Neely says a small company in New York, where Precept already has a presence, is not as desirable as one in Seattle, where the firm is trying to gain access. When Precept acquired Fineline Business Forms, a small family-owned company with annual sales of approximately $1 million, the distributorship penetrated the Utah market.

"Size is important for the speed of our growth," says Neely. "But the quality of the acquisition and how the company melds into our management is very important, too." For now, the companies that Precept buys will maintain their names, says Neely, "unless there is a market need to change them."

In addition, terms of the deals drafted so far require company owners to retain a management role. Neely says Precept doesn't want to change too much within an acquired firm. "Our philosophy is 'If it ain't broke, don't fix it,'" he says. "These guys are entrepreneurs who built great companies. Why go in and interject a Dallas mentality in Monroe (La.) or Boston?" Firms acquired by Precept maintain their sales operations and management teams, but Neely says his company "absorbs some synergies." Accounting functions, for example, are centralized in Precept's Dallas office.

Even with 35 acquisitions under its belt, Precept doesn't follow a strict formula. "Every transaction is different because the needs of the companies are different," says Neely. All deals involve stock transfers, and most are usually a mix of stock, cash and notes.

Adopting an aggressive acquisition strategy has helped grow Precept Business Services to a $168 million firm, but not without some pains. "The biggest challenge we run up against is how quickly the owner [of an acquired company] can adapt to a corporate structure versus an entrepreneurial structure," says Neely. Precept has corporate policies dictating ground rules for everything from accounting practices to employee benefits. "It takes time to adjust to these rules," says Neely.

In addition, day-to-day logistical headaches arise. For instance, Precept mails paychecks to employees at all its acquired companies for payment on the 15th and 30th of every month. When the first checks were mailed from Dallas to InfoGraphix's employees in Boston, the post office delivered them later than the pay date. "There are going to be bumps like this," says Neely.

Future Outlook: Precept plans to serve large clients nationwide. "We have the ability to attract and support large customers," he says. "We have the infrastructure across the U.S. to support big customers." With 60 offices, Precept can go head-to-head with major competitors for large accounts, says Neely.

To win the battle for marketshare, Precept will continue its vigorous acquisition strategy. Neely says the firm plans to add another $125 million in acquisition revenue during the next year. He predicts that the overall trend toward consolidation in the document management industry will continue, and he hopes his firm will lead this crusade. He envisions an industry in 2003 with fewer than 25 independent distributorships with sales between $10 million and $50 million and only one with sales topping $500 million—Precept.

Top Executive: Tom D'Agostino Jr. was appointed president of SFI earlier this year. He has held several management positions with the distributorship, including vice president of sales from 1997 to 1998 and vice president of distribution and warehousing from 1990 to 1991. D'Agostino also has worked for Hano Document Printers Inc., a manufacturing affiliate of SFI, in various capacities during the mid-1990s, including national customer service manager, general manager and vice president of sales and marketing. He was president of Hano from 1995 to 1997.

Corporate Structure: SFI has 30 sales offices and nine distribution centers. The company's vice president of sales, vice president of operations and marketing department are based in New York. D'Agostino also works out of the New York office. The CFO, chief information officer and vice president of customer service and vendor relations are based in Norfolk.

In 1997, SFI was bought by U.S. Office Products Company, an office supply company based in Washington, and became part of its Print Management Division. In June, USOP spun off that division, which became Workflow Management Inc. (The publicly held company is traded on the NASDAQ exchange under the symbol WORK.) Workflow Management focuses on three main areas—distribution, print manufacturing and envelope printing. SFI is one of three platform companies of Workflow Management and serves as its distribution arm. Workflow Management's other product lines are represented by United Envelope, which includes several envelope manufacturing firms in the Northeast, and Data Business Forms, a Canadian-based company which includes the print manufacturers Hano Document Printers and Multiple*Pakfold.

Recent Acquisitions: While it was part of the Print Management Division of U.S. Office Products Company, SFI acquired FMI Graphics Inc., a distributorship in Maryland Heights, Mo. Since going public in June, Workflow Management has signed three letters of intent on behalf of SFI that were expected to close in October. These deals are with a promotional products company in the Northeast, a West Coast distributorship and a company in Puerto Rico.

Acquisition Strategy: Before USOP purchased SFI, the distributorship already was actively pursuing acquisitions. It acquired 18 companies prior to 1997. Now that SFI is part of Workflow Management, its strategy to grow the firm is two-fold: facilitate internal growth through its GetSmart( electronic account management system and acquire distributorships that will boost its bottom line.

SFI is looking for distributorships with strong sales that are "geographically attractive," says D'Agostino. It has operations east of the Mississippi River and on the West coast "but the middle of the country is kind of light for us," he says. SFI would like to acquire firms in this region, but D'Agostino says his firm is still interested in acquisitions in areas where it already operates. He says if SFI buys a company in the East or West, it would fold that company into an existing location.

According to the company's Web site, SFI seeks "stand-alone acquisitions" with distributorships at least five years old and with revenues of more than $4 million. The site also says the company will "fill out markets currently covered by an SFI sales office" by acquiring and consolidating smaller distributors into SFI offices. These distributors must be at least five years old with sales of more than $1 million.

When companies are bought by SFI, they do not retain their names. The distributorships become sales offices of SFI. Various scenarios play out with management. Some owners manage the sales office, some simply work in sales and others retire. Still, SFI looks for strong ownership. "We're trying to assemble an all-star team—the best of the best," says D'Agostino. "A lot of these companies have been built on the strength of their owners."

Ideally, SFI retains the sales staff and the owner in a sales role, thereby maintaining existing accounts. "That's what we're buying—the relationships with customers," says D'Agostino. He views his firm as an inverted pyramid with sales reps at the top. "SFI management is the facilitator for the sales offices to grow, whether through a new product line or a vertical market," he says. "It's the salespeople who direct the growth."

To woo owners of potential acquisitions and keep them on board afterward, SFI offers "one of the richest compensation programs in the industry," says D'Agostino. Almost all of SFI's acquisitions are strictly cash deals. Once SFI acquires companies, D'Agostino says it maintains "an entrepreneurial sales approach." The combination of money and sales independence is a strong incentive for owners, he adds. "They have to believe they can make money, have longevity and sell the way they want to."

D'Agostino says technology is often the driving force that causes owners to sell their firms. He says smaller distributors often have a solid customer base, but lack the technology solutions to serve clients. "You must offer print-on-demand solutions, Internet technology and more," says D'Agostino. Companies that merge with SFI get the "flexibility of an independent salesperson with some horsepower on the technology side and a support system behind them," he says. SFI operates a proprietary electronic system, including GetSmart Solutions 6.0 software, to manage customer accounts via mainframes, PCs, EDI and the Internet.

D'Agostino maintains that executing acquisitions presents few obstacles. "If you do due diligence ahead of time and have a philosophical fit, there's not a whole lot of challenges," he says. "We're not a Wall Street company making acquisitions. We're a grass roots distributorship." But he admits that merging companies into SFI's operations isn't simple. One challenge involves "alleviating the company we purchase of the administrative side and the dual overhead," says D'Agostino. Sometimes administrative employees are let go, but D'Agostino says SFI tries to find jobs for all employees. For instance, a person who handled accounting prior to the acquisition may be trained as a customer service rep for SFI.

Another issue involves duplicate accounts. In situations where two sales reps previously competed, the distributorship must determine how to divvy up accounts. For example, a Northeast distributorship that SFI purchased served a hospital account. SFI also sold products to that hospital. When SFI bought the Northeastern company, the sales reps who served the hospital began team selling the account. "The ultimate result was more total business," says D'Agostino.

Future Outlook: With a 70-plus year history and 1997 sales of $127 million, SFI is alluring to prospects, says D'Agostino. "There are so many companies who want to come on board, particularly now that we're public," he says. "We've turned down more than we've signed." But the company remains on the lookout for firms that meet a couple seemingly simple, but sometimes elusive, criteria. "It's important that the companies will make money for us and that their market approach is the same as ours," says D'Agostino.

Speculating on how large he'd like his company to be, D'Agostino jokes, "As big as we can grow it, how about that?" Then he pauses and answers with genuine ambition. D'Agostino wants SFI to be "America's largest distributorship to offer the one-stop shop."

Top Executive: Graham J. McClean is the CEO of Global DocuGraphix. Prior to starting the company, he was the president and COO of the Magazine, Catalog and Retail Groups for Quebecor Printing. McClean worked for Toronto-based Moore Corp. Ltd. for 28 years, serving in several management roles. From 1983 to 1988, he was president of Moore's Canadian operating units. In 1988, he was appointed president of the company's U.S. Business Forms and Systems Division. Leaving Moore in 1992, McClean founded a corporation specializing in document archiving and retrieving. He joined Quebecor in 1994.

Corporate Structure: McClean formed a partnership with Thoma Cressey Equity Partners, a Chicago-based equity investment firm, to create Global DocuGraphix. According to a company statement, Global DocuGraphix intends to "create through acquisition the premier company of forms and business printing independents."

Global DocuGraphix currently has a 3-person management team, including McClean, a chief financial officer and a marketing specialist. McClean says the firm may hire more employees, but will have a lean head office. "We're really operators putting a large company together," he says. "We don't intend to create a bureaucracy."

In addition, Global DocuGraphix has a corporate board of directors, chaired by Carl Thoma, one of the founders of Thoma Cressey. Its members are McClean and Robert Manning Jr., a partner with Thoma Cressey. The firm will expand the board in time. "As we grow and decide to expand the Board, we will add key distributors who come into the group," says McClean. However, it's more likely distributors will sit on the company's operating board. Global DocuGraphix plans to set up an operating board to strategize on directions for the company. McClean says he will sit on this board with principals from key acquired firms and Global DocuGraphix's CFO.

Recent Acquisitions: The firm acquired B-N-B Systems Inc., a distributor of forms and commercial printing headquartered in Little Rock, Ark., in July. It acquired Associated Business Products Inc., a printing, image and electronic management company based in Santa Rosa, Calif., in September.

Acquisition Strategy: Global DocuGraphix's goal is to create a company with national scope offering printed products, electronic products, warehousing, distribution, fufillment, pick and pack services and records management. The firm aims to be a $300 million to $400 million company in three to five years, according to McClean. To do so, Global DocuGraphix will acquire about 20 to 30 companies. It is targeting strong regional distributorships and smaller complementary companies.

Global DocuGraphix plans to acquire about 10 strategic regional companies, which it calls "platform" companies. Segmenting the country into 10 market areas, Global DocuGraphix will own platform companies in the Northeast, the Mid-Atlantic, the Southeast, the Midwest, the Northwest, the Mid-South, the Rocky Mountains, northern California, southern California and Texas. The platform companies, which will retain their names and management teams, will be augmented by smaller companies, which Global DocuGraphix terms "tuck-ins." These tuck-ins will expand the size and scope of the platform company.

For instance, B-N-B Systems is the platform company for the Mid-South. With offices in five states, B-N-B Systems had 1997 sales of approximately $27 million. During the next 18 months, Global DocuGraphix will selectively acquire smaller tuck-in companies and merge their capabilities into B-N-B Systems, doubling the size of the company. According to a company statement, these tuck-ins will have annual revenues ranging from $5 million to $10 million. Global DocuGraphix anticipates its platform companies will expand through internal growth and acquisitions, ultimately creating companies with annual sales between $40 million and $60 million.

Global DocuGraphix has general criteria for companies it plans to acquire. Platform companies will have annual sales of at least $8 million, according to McClean. "Aside from size, a platform company should have a strong management team, a strong regional presence and an infrastructure that can support doubling [in size] in 18 months," he says.

Most tuck-in candidates are smaller firms, says McClean, whose "primary focus has been on selling and who can benefit from the infrastructure made available to them by platforms." Their owners may or may not stay with the company. "If a tuck-in has a highly capable owner who intends to remain in the business, a management role is a possibility," says McClean. "But many owners are interested in sales roles." Others may opt to retire. "Rather than use a cookie cutter approach, we deal with each situation as it presents itself," says McClean.

Once in place, the companies will focus on medium and select large customers. According to McClean, medium-size customers include businesses that generate up to $250,000 in sales, while large customers generate more than $250,000 in sales. Global DocuGraphix expects the companies it acquires to maintain their existing business. "These customers are a perfect fit for us, and it's very important for us to keep them," says McClean.

Global DocuGraphix faces some challenges in its pursuit of platform and tuck-in companies. Three big challenges McClean foresees are acquiring quality companies at acceptable terms, maintaining a high level of interest among owners of acquired firms and fueling an internal growth rate at acquired companies between 8 to 10 percent a year.

Future Outlook: "Our primary outlook in the first year and a half is on growth—acquiring key platform companies in distinct regional marketplaces," says McClean. "Once we've accomplished a major portion of that goal, we'll focus more on the opportunities to leverage our size and scope." These opportunities include improved cash management and benefit programs, manufacturing partnerships, national account coverage and the sharing of knowledge among companies.

Top Executive: Roger Jefferson is the chairman of the board of Dominion Holdings Inc. A 26-year veteran of the document management industry, Jefferson also is president of Dominion Solutions Inc., a distributorship based in Roanoke, and president of DMIA. Jefferson began his career in the industry with Burroughs in 1972. He served as branch manager for the company in Roanoke from 1975-78. In July 1978, Jefferson left Burroughs and started his distributorship, then called Dominion Forms Service Inc.

Corporate Structure: In October 1997, Dominion Solutions partnered with FCP Investors, an investment firm, to form Dominion Holdings Inc., a holding company that actively pursues mergers and acquisitions in the document management industry. According to a statement released at that time, Dominion Holdings will focus on acquiring "key distributors in the industry" with diverse customer bases, high levels of profit and strong growth potential. It will act as an umbrella under which several distributorships will operate.

Dominion Holdings has a board of directors composed of key individuals operating the business, including Jefferson, representatives from FCP and Pat Fitzgerald, president of Available Business Group, a Chicago-based distributorship that is part of Dominion Holdings. The board plans the overall direction for Dominion Holdings. Likewise, most distributorships that are a part of Dominion Holdings have boards that strategize for those individual companies. Jefferson compares this structure to that of many large corporations with a master board of directors and separate boards for each operating unit.

Principals of all the companies bought by the holding company will sit on one of the boards of directors and will remain actively involved in the decision-making process of their businesses. For instance, Rick Madison, former president of Dominion Forms & Computer Supplies Inc., was appointed a member of Dominion Solutions' board when his company merged with Dominion Solutions and became part of Dominion Holdings.

Recent Acquisitions: Available Business Group joined forces with Dominion Holdings in January. Dominion Forms & Computer Supplies, a distributorship with offices in Richmond and Fredericksburg, Va., merged with Dominion Solutions in June and became part of Dominion Holdings.

Acquisition Strategy: Currently, Dominion Holdings is a $60 million company. Aside from recent acquisitions, the firm has letters of intent signed with three companies: a direct mail company in Chicago, a distributorship in New Jersey and a distributorship in New York that serves clients in three states. Its goal is to become a $200 million to $300 million company. "We do not want to purchase companies for the sake of getting larger," says Jefferson. "We want to find the right companies. It's important we all have a common goal and corporate culture."

These commonalities are important, says Jefferson, because firms that join Dominion Holdings will retain their identity and operating autonomy. For instance, Available Business Group retained its name, and Fitzgerald remains president of the distributorship. "We're trying to maintain as much of the corporate culture of the companies we're buying as possible," says Jefferson.

While companies that are part of Dominion Holdings maintain autonomy, they often function as a whole. "By becoming a part of Dominion Holdings, distributors can operate as one company in many instances to better serve our customers," said Jefferson in a prepared statement last winter. The companies will share expertise on product lines, pool ideas on new technology and service offerings, and help each other branch into new geographic areas.

Already, companies have teamed up on projects. For example, Dominion Solutions recently received an order for instruction manuals, a job it considered producing in-house on its DocuTech. However, Jefferson says his distributorship's DocuTech didn't have a sophisticated enough front-end system to handle the project, so he sent the job to Available Business Group. The Chicago distributorship has a more powerful DocuTech. "Without spending thousands of dollars, we couldn't have handled the files," says Jefferson. "It was more beneficial to send it to Available than anywhere else."

Although teaming with other distributors has helped Jefferson, he recognizes that mergers and acquisitions aren't the answer for all industry companies. "I don't think consolidation is for every distributor," he says. "It has to be the right fit." Dominion Holdings does not have steadfast requirements for firms it acquires—for example, it doesn't target firms of a certain size. However, it does look for several criteria.

Primarily, Jefferson says Dominion Holdings wants companies with "the right corporate culture." This includes firms that provide excellent customer service, treat employees well and maintain profitability. "We target firms that are managed well and will continue to grow," says Jefferson. To date, the holding company's acquisitions have been in the East and Midwest, although in 1999 it plans to look at Western firms.

Time is one of the biggest hurdles to amassing companies for Dominion Holdings. "It's time-consuming to do a deal, to go through all the due diligence," he says. Jefferson, who is accustomed to achieving goals at a more rapid pace, says he has had to adjust to the sometimes slow-moving pace of acquisitions. In addition, he says it's been time-consuming to introduce acquired companies to products and services offered by Dominion Holdings' other firms.

Another challenge has been selecting a common computer system for the holding company's firms. "We need a system that meets our diverse needs," says Jefferson. "We're not looking for a program that's just sitting on the shelf out there." Dominion Holdings has currently made decisions on about two-thirds of its computer system, which will combine several custom modules, says Jefferson.

Future Outlook: Serving large, national customers is one of the long-term goals for Dominion Holdings. "I truly feel that in order to maintain a large market presence, you have to have multiple locations and a national channel of distribution," said Fitzgerald, a former member of DMIA's board, when he joined Dominion Holdings. "Today, large companies do business with large providers. We feel that by setting up a larger company, we are able to compete on a national basis."

Jefferson says Dominion Solutions was a strong regional distributorship prior to developing Dominion Holdings. But in each of the last several years, it lost at least one large account when the customer was acquired and its headquarters moved out of the Mid-Atlantic. "Hopefully, we'll be big enough and geographically diverse enough that we can be there pounding on the door when customers are acquired," he says. Dominion Holdings now offers national customers a variety of products and services, including commercial printing, networking services and a trademarked management system for self-seal products.

So what happens once Dominion Holdings reaches its goal of becoming a $200 million firm? Extending an initial public offering is one option, says Jefferson. "That may be the most logical thing to do," he says. "But we don't have a set, concrete agenda. It depends on the atmosphere and conditions of the industry at that time." Becoming a $200 million company "will take careful planning and a controlled effort by all involved," says Jefferson, so it's difficult to pinpoint what Dominion Holdings will do once it reaches that level. "I don't think anyone is visionary enough to look into a crystal ball and see what will happen," he says. "Our goal is to do what's right by the companies and the employees. If we do that, we'll continue to do well."

Susan Keen Flynn is managing editor of FORM Magazine.