Any well-heeled corporate manager can buy size, but buying growth demands at least as much entrepreneurial imagination as capital.
Swanton Corp. (#41) is building a position in the coal industry by acquiring financial service companies.
* Sea Galley Stores Inc. (#71) let the competition finance the East Coast expansion of its restaurant chain.
* Heritage Communications Inc. (#37) buys tax shelters to help fund its cable television growth.
* Two corporate mice, Healthdyne Inc. (#24) and Chemical Investors Inc. (#18), are riding corporate elephants they recently bought.
Acquisitions have accelerated the revenue and, in some cases, the earnings growth of dozens of INC. 100 companies, but don't look for a common style in their acquisition strategies. They range from high-risk to no-risk. They are the product of careful planning and of serendipity. Most of them have worked, but at least one hasn't. And they add up to this: Any well-heeled corporate manager can buy size, but buying growth demands at least as much entrepreneurial imagination as capital.
Anyone with $2.5 million, for example, could have bought the ailing Family Fish House chain of 31 restaurants on the East Coast. But it took $2.5 million and some imagination for Sea Galley Stores to buy the chain, keep the six locations it wanted, and sell off the remainder in twos and threes -- at a profit. Sea Galley, headquartered in Mountlake Terrace, Wash., grossed $3.2 million on the separate sales, more than it paid for the chain, and thus financed its 1981 East Coast debut with other people's capital.
This same low-risk, low-cost acquisition strategy has powered the expansion of Crime Control Inc. (#19) into new markets since 1978. Crime Control designs, installs, and services centrally monitored electronic alarm systems for business premises. It targets its acquisitions in high-growth, high-crime areas. "We knew," says treasurer James Clark Jr., "that Miami would be a good market, but when the riots broke out we didn't know whether we would survive to enjoy it."
Crime Control, headquartered in Indianapolis, enters a market by acquiring one or more local alarm businesses. The ongoing revenue flow services the bank debt that financed the purchase while Crime Control sets about converting the acquired companies' existing customers to lessees of more sophisticated, and costly, alarm systems.
Heritage Communications, in Des Moines, has spent about $62 million on nearly 20 acquisitions, primarily in the cable television industry, since 1978. It has also expanded through construction of new cable systems awarded by municipal franchise. Federal tax laws make the dual growth strategies complementary. "Rapid expansion in the cable television business results in losses. As a result," says Heritage vice-president Dave Lundquist, "we have unused tax benefits. So we acquire companies that are profitable. Now we can use our tax breaks against their earnings. It's sort of an internal tax shelter."
Heritage's acquisitions include some non-cable properties, which are nonetheless in the communications field. The same relationship is hard to divine among Swanton's three subsidiary groups: coal mining, financial and investment services, and retail garden and appliance outlets. Chairman Norraan F. Swanton, however, insists that the link is there.
Swanton's coal subsidiary operates and develops low-sulphur mines in eastern Kentucky. The financial subsidiaries, which Swanton built through acquisition, perform financial services for Wall Street firms, provide insurance premium financing, and, most significantly, package and market limited partnership investment programs for the coal subsidiary, which itself is several years away from full-scale production, according to Swanton.
"Coal," he says, "is capital-intensive. It takes a great deal of funding and patience, and its time has not yet arrived. So what I did was to use our financial expertise to create an investment vehicle to give us earnings and capital during the time of the mine development phase. When we get into the operating phase on that mine, it'll be much easier for us to be profitable."
But what about that other subsidiary, the garden center and appliance retailer? "Friendly Frost Inc.," Swanton says, "was an opportunity buy." The 39-year-old company generated $40 million in annual revenues, mostly from its retail outlets in metropolitan New York. It hadn't been profitable since 1976. Swanton paid $5 million for 56% of the company's stock last May and immediately peddled its subsidiary radio station for $8.5 million. With the proceeds, he paid off Friendly Frost's balance-sheet debt and had $4 million in working capital left over.
"The management in there was rotten," says Swanton, "a corporate corpse. We replaced the entire group." This year, Swanton says from his office on Manhattan's lower Broadway, the Friendly Frost subsidiary will turn a profit, another contribution to Swanton's financial staying power while it builds a future in the coal industry.
Fort Worth's Pengo Industries Inc. (#75), like Swanton, used acquisitions to build a revenue base while it was developing its main line of business, wire-line services for the then-booming oil and gas exploration industry. But Pengo's timing was off, and its acquisitions, instead of buoying revenues when hard times came, have been like stones in the parent company's pocket.
Pengo was spun off to stockholders of Gearhart-Owen Industries Inc. in June 1978. Part of the spinoff was an agreement that Pengo would not compete with its former parent for three years in providing wire-line services to oil and gas well drillers or in manufacturing wire-line equipment.
So, during those three years, Pengo used stock, earnings from its other oil-field equipment manufacturing and servicing lines, and bank credit to snap up more than two dozen businesses in the same or related fields. The newly independent company did well. In 1980, the year before its noncompetition clause expired, Pengo generated earnings of $4.7 million on $59 million in revenues with a healthy debt-to-equity ratio of less than 1 to 1. When the noncompetition clause expired in June 1981, says Pengo vice-president for corporate planning Richard Frank, the company had geared up, hired people, and was expanding its capacity. "We went from having no wire-line business to a $36 million annual rate in just a few months."
