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What is the Forms Distributor's Strategy for the '90s and Beyond?

Acquire, Merge, Diversify

BY KATHERINE LEUPOLD

Mergers, acquisitions and employee buyouts among manufacturing companies continue to make headlines. In one of the most recent and largest, the intended acquisition by a division of Maclean Hunter of Southam Inc.'s Business Forms and Specialty Printing Group will bring together two of Canada's largest communications companies. The purchase is expected to have repercussions in the U.S. mailer market and in the direct selling and distributor side of the Canadian printing industry.

Southam and Maclean Hunter aren't alone. Some manufacturing firms have been bought and sold or declared bankruptcy so many times in the last five years that it's hard to remember who the current owner is. These are the acquisitions everyone talks about because they involve large numbers of employees and capital equipment. Local citizens want to know what the deals mean because the plants often are vital contributors to their economy. Regionally, and sometimes nationally, distributors want to know how the merger will affect their ability to buy products and fill their customers' needs.

But increasingly in the past few years, another type of deal has been occurring with little fanfare-the acquisition of distributorships by other distributorships. Of course, these deals rarely affect as many employees as those in the manufacturing segment of the industry. And some are done quietly because a seller in financial straits does not want an announcement made.

But slowly, these acquisitions are changing the face of the forms industry too, and many believe their pace is accelerating. Jim Anderson, president of Corporate Finance Associates, an Indianapolis firm providing mergers and acquisitions consulting services to the business forms industry, says he has received more phone calls from distributor principals in the last eight to 10 months than he has received in four years.

Why Now?
One of the largest reasons for this trend is demographics. The heyday of the independent segment of the forms industry in the U.S. occurred in the 1950s and 1960s by most estimates. Sales reps in their thirties and forties left non-independent companies in waves to seek the American dream. Now many of them are preparing to seek the other part of that dream: a relaxing retirement. Even those who started firms in the 1970s are beginning to plan for retirement. Without children or employees with the willingness or talent to carry on their businesses, many are left with one option-to sell to another distributor, often in the same area.

That was the case for a Long Island distributor who sold his business to Seaboard Systems in 1990. The two companies were small distributorships that had started in the industry by selling pegboard exclusively. The companies were located about 10 miles apart but almost never competed in the same accounts. The principals had talked for a few years about a merger or an acquisition. In fact, both principals had considered a merger 25 years earlier but it never worked out, says Leonard Lambert, CFC, founder of Seaboard Systems. The selling principal's sole employee opted to seek work in another field, and Seaboard paid the principal for what amounted to a customer list.

Although retirement, and in some cases death, will continue to be a major cause of acquisitions, there are several signs that economic, technological and business trends also are influencing these decisions. Most distributor company principals are successful salespeople but not always successful managers. "In one- or two-man offices, principals struggle to concentrate on sales," says Tom Malcolm, president of Performance Graphics Limited in Waterloo, Ontario. "But they don't have as much time to do as much selling as they are capable of because there are so many distractions to pull them away from what they do best."

Increasingly, people who have tried to run a business on their own are choosing to merge or be acquired long before retirement age so they can concentrate on selling. "Before, you could make a lot of mistakes and still make money," says John Osborne, president and CEO of The Forms Management Co. in Wichita, Kan. "Now, you have to be as efficient as hell."

"Most distributors receive their greatest joy and their greatest reward from selling," says Malcolm. "If they can park their egos and admit that they don't need to be a manager or owner, they can work for someone else and sell." One distributor who recently added a company principal as a sales rep through such an acquisition says, "The man is like a kid in a candy shop. On the same volume, he is making more money and doesn't have any of the administrative duties."

Many independents say they would not want to enter such a deal. "It's true that the merger trend flies in the face of our industry's tradition of independent firms, but there are forces at work that make this trend inevitable," says Robert Rosen, a mergers and acquisitions specialist writing in NBFA's industry report FORMTRAC '92. Rosen echoes what some buyers of these companies have already found out: The sellers did not have any choice.

That's because life for the average forms distributor is not as easy as it once was. Technology is displacing traditional products. Keeping up with changes and remaining profitable takes a lot of time, and in many cases, capital to invest in new technologies. Buyers are narrowing their vendor lists, trying to get more out of those that they retain. "If you are just selling forms today, you are in serious trouble," says Larry Merriman, chairman and CEO of GBS Corp. in North Canton, Ohio, and a former member of NBFA's Board of Directors. "You have to have some kind of service, like a warehouse and bill as shipped programs." Although "partnering" arrangements between remaining vendors and end users started with large companies, they have begun to trickle down to small and medium sized businesses.

Merriman and Malcolm both say that meeting an increasing amount of government regulations takes up a lot of time for managers of all types of businesses. And Merriman cites another factor that is driving some people out of the forms industry. "It is not as much fun as it once was," he says. "It doesn't take a creative person to sell 1-part forms. If somebody is creative, this industry is not the vehicle for creativity that it used to be."

A sluggish economy in the U.S. and Canada has compounded these problems. And some people speculate that just as in the manufacturing side of the business, there are too many distributors chasing too few orders. And to some extent, the forms industry is following the general business trend to consolidate.

So with all this merger and acquisition activity, what size distributorships will be around in five years?

No one knows for sure. Industry watchers say that medium sized manufacturing companies and distributorships will become less and less prevalent. Already, some medium sized businesses are trying to grow big enough so they have the capital and infrastructure necessary to cope with rapid change.

"There will always be a lot of Mom and Pop companies because there will always be a lot of reps that want to pursue the American dream," says Richard Mullen, president of Eaton Forms Corp., a Dayton, Ohio, distributorship. And, it is reasonable to assume that there will always be small entrepreneurial companies to serve. Small forms distributorships, unlike medium sized firms, have the advantage of being able to operate on a shoestring, says Merriman.

Anderson agrees that there will always be a place for smaller distributorships. But, he says, there is a trend toward larger ones to ensure buying power. This is becoming necessary as the number of forms manufacturers decreases and many of those remaining stress the importance of partnering relationships, he says.

The Motivations of Buyers
There are company principals ready and willing to sell their businesses, but deals aren't made without willing buyers. Just as sellers have different reasons for parting with their companies, buyers have many motivations to undertake a merger or acquisition.

For Rich Stienstra, acquisitions of one-person distributorships have allowed him to grow his company without hiring hotshot salespeople or looking for new niches. Stienstra, president of Bridge Information Systems in Arlington Heights, Ill., says, "A lot of top producers sell on volume with low margins and don't make the margins necessary to support their salary structure." And, these reps are the type who leave and start their own companies.

Instead, Stienstra bought one company earlier this year when a principal was planning to retire. The principal worked for Bridge for a few months and still talks to Stienstra a couple of times a month. Stienstra also benefited from the purchase of a customer list from the estate of a local distributor in 1985. After Stienstra makes initial contact with the decision makers in the new accounts, he turns the accounts over to his sales reps. "Doing this really shows your employees that you have confidence in them," he says. "It's like giving them a bonus." And with an acquisition, he says, he gets an immediate return on his investment rather than waiting for a new sales rep to produce.

Acquisitions also open unexplored opportunities. When Stienstra purchased a one-man company in 1983, he added a line of jumbo envelopes the principal had been authorized to sell.

Malcolm, too, has identified mergers as a successful way to grow his company. When he paid the estate for what remained of a local distributorship, he gained several accounts. In one of them, the principal had done about $60,000 worth of business. After three years of account penetration, that client is now worth more than $1 million.

Malcolm hopes to grow his company in other cities through acquisitions of small distributorships. Performance is already one of the largest distributorships in Canada, and Malcolm is striving to make it even bigger. Because the independent segment is relatively new in Canada, Malcolm says it is easier to expand by buying companies with an existing customer base. "Then you have a group of customers that you don't have to educate about buying from a distributor versus buying direct," he says.

Unlike Stienstra, Mullen would rather not buy companies within his immediate area. He would prefer to have his sales reps take business away from competitors than buy it for what he believes would be a premium. Nevertheless, the company recently bought a small, local distributorship. "It was a very good fit," he says. "Their sense of ethics and high quality service mesh with ours." And, the company concentrates on very small businesses that Eaton reps had not pursued in the past. Mullen also gained three employees, including the company principal, which made the deal appealing to him.

Merriman's most recent acquisition was in Tampa, Fla., an area where GBS wanted to expand. Its Forms and Systems Division already had an office there, and the company's Labeling Systems Division had a packaging division in Clearwater, Fla., not far from Tampa. Managers thought the fastest way to grow would be to find another distributor in the area. They targeted one of their most prominent competitors and made the principal a vice president of GBS's Florida operations.

Other Deals
Other forms distributorships aren't the only businesses buyers have on their shopping lists. In the last several years, many of the largest distributorships have bought firms in related industries to diversify their companies.

Osborne decided to diversify after reading a 1987 industry report issued by NBFA discussing the rapid changes taking place in the industry. In 1988, he bought the first of three office products companies. "Diversifying is very different from consolidation," says Osborne, a former member of NBFA's Board of Directors. "The office products industry is an absolutely brand new world. It has taken three to four years to understand how it operates."

Merriman started diversifying with an acquisition in 1974. His firm purchased the office products division of Diebold, restructured it, sold part of it and developed it into GBS Filing Systems. The division manufactures color coded filing systems and related products. About five years ago, the firm bought the label division of Excelsior Marking Devices, which is known as GBS Labeling Systems. It expanded its services earlier this year when it acquired Horizon Packaging Corporation in Florida. Additionally, Merriman added two other divisions as start-ups, one offering computer systems, the other providing typesetting and design services.

In February, Associated Business Products, a large Santa Rosa, Calif., distributorship acquired Scanning Systems, a Minnesota division of HEI Inc. that specializes in optical mark readers. For years, ABP had been recommending Scanning Systems to its customers and had received referrals from Scanning Systems for forms business. ABP wasn't looking to buy a company at the time, but managers thought this would be a good fit, says principal Bill Edelen. Two national companies that sell optical scanning forms also sell equipment, he says, so the purchase improves ABP's competitive situation in that niche. Both ABP and its Scanning Systems division now sell optical mark readers and forms.

The purchase, ABP's first, was an attempt to diversify. "I think we are all chasing an increasing share of a decreasing market," says Edelen. "I think the smart distributors are diversifying. We almost have to."

Katherine Leupold is managing editor of FORM magazine.