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Phase Two:
Getting Big Fast:
Finding Hidden Value in Acquisitions
Terry Theye approaches his business the way the pros play pool. They can see the game being played out before them in time and space. If one shot is properly gauged and struck, it sets up ensuing ones that in turn create new possibilities. Without that ability to visualize, Theye would likely have made himself half a name as the fellow who sold a bundle of those obsolete word processors.
As Theye imagined it, his LBO of TFN was actually the first step toward transforming it into a public company with deeper pockets. It worked this way: With the proceeds from a planned IPO, Theye cashed out the merchant banker whose loan for the LBO had, in turn, cashed out Theye's earlier investor. On an operating level, the IPO provided vital working capital that allowed Theye to -- again -- change the business model.
What Theye saw before many of his competitors did was how fast the industry was consolidating, eroding margins and raising the need for cash. Now the company that began in 1975 as a sleepy little word-processing-equipment company would become an aggressive acquirer in the high-growth computer business. "In 1989 we were a $20-million company," recalls Theye. "We knew we needed to become a $100-million company in the next two years to survive."
Between May 1989 and September 1993 TFN went on an acquisitions binge, buying 11 other resellers. In the midst of that splurge, TFN went to the public markets twice, raising $20 million through an IPO in July 1991 and another $21 million in a secondary offering 18 months after that. Theye's hard years of labor had finally translated into something semitangible -- 90,000 shares of TFN stock, or 2.5% of the company. But he has sold none of that stake. For a time Theye was a paper millionaire as TFN shares rose to $18 in the spring of 1992, before sliding all the way back to $5 at the end of 1994. More to the point, Theye surpassed his $100-million, two-year target. In 1991 TFN revenues hit $139 million. Two years later they would soar to $702 million and produce a net profit of $9.3 million.
Theye's acquisition strategy was to scoop up viable competitors in cities throughout the Midwest to gain tighter market coverage and offset shrinking margins. The target area was rich with entrepreneurs who had jumped into the business, but with their sales and costs collapsing back on them, many lacked the will and the resources to continue the struggle. They were eager to gain a business partner with deeper pockets; several of them came aboard TFN as branch managers.
Theye knew he was buying more than market share and market coverage. In the good resellers, he saw hidden -- and hitherto undeveloped -- assets: people.
Even though computers were fast becoming a commodity, Theye and his managers believed that too much of a retailing mentality prevailed in the industry. As Dennis Hummel puts it, companies were content to let "pimply-faced kids earning $3.50 an hour" sell expensive, sophisticated equipment. Manufacturers drove that dynamic, he notes, going so far as to limit sourcing by awarding "authorized" dealers medallions, which would then be displayed in the dealers' store windows. Theye and Hummel, who concentrated on integrating TFN's acquisitions into the mother company, believed there was a bigger market in doing the opposite: sending sales and service people into the field. "It became evident to us that 'outbound' selling was more lucrative," says Hummel. Theye and Hummel realized they weren't going to get rich waiting for people to walk through the door and selling one computer at a time.
TFN's first major acquisition typified how Theye's vision conflicted with the status quo. In 1989 TFN bought the Thomas Brush Co., a $20-million reseller in Indianapolis. Hummel moved to Indianapolis for nine months to effect the transition at Thomas Brush, where he found a curious regimen. "Salesmen had to sign out to go make sales calls," says Hummel. "They even had to take turns vacuuming the store at the end of the day."
When obsolete merchandise came back from a customer, all ordering of new merchandise was halted until the sales force worked off that inventory. Company founder Thomas Brush, notes Hummel, had an obsession with inventory. "He worried about shrinkage. He moved all the inventory to his father's auto-repair shop and built these chicken-wire cages to keep it in," says Hummel. "This was two miles from the branch, and the sales reps had to keep running back and forth to get the stuff. You'd walk into that garage and there would be guys working on cars with the headers off. You couldn't hear yourself think."
Hummel went to Indianapolis and unlocked the asylum. He retrieved inventory from behind the chicken wire. He liberated the salespeople from the store and put them into the field to beat the bushes for customers. Out back, Hummel had pegged the technicians, casual in T-shirts and jeans, as "a very tight and talented crew." They knew a lot about computers. He made them dress up and put them out front, where they could talk to customers. By 1993 TFN had more than tripled Thomas Brush's volume, to $76 million, and that first big acquisition would prove a model for unlocking value from those that followed.
