Strength in Numbers
Consolidation may be the growth strategy of the moment. Paul Verrochi is building an empire by knitting together a highly localized mom-and-pop industry, and he's creating a national juggernaut in the process
Emerging Entrepreneur: An individual whose company is founded on solid infrastructures that promise continued rapid growth
Company: American Medical
1994 Revenues: $327 million
1994 Profits: $27 million
Number of employees: 6,210
Business: Nationwide ambulance service* * *
Robert J. Laikin
Company: Brightpoint Inc., Indianapolis
1994 Revenues: $169 million
1994 Profits: $4.6 million
Number of employees: 75
Business: Distributor of cellular-phone equipment* * *
Eric C. Cooper
Company: FORE Systems Inc., Warrendale, Pa.
1994 Revenues: $48 million
1994 Profits: $7.3 million
Number of employees: 284
Business: Manufacturer of high-speed computer networking products* * *
For a guy who knew nothing about ambulances four years ago, Paul Verrochi has come a long way. Since launching American Medical Response (AMR), in August 1992, he has built the country's largest ambulance company, now with $550 million in annualized revenues, some 10,000 employees, and operations in 26 states. And fueled by a $100-million credit line and $90 million from a stock offering last spring, expansion is going full tilt.
One of the most striking parts of Verrochi's story is that he has built a big, successful business not once but three times. Each business has been a consolidation play, and Verrochi's basic approach -- a "Pac Man strategy," one analyst calls it -- hasn't changed much. He enters a fragmented industry, acquires the best companies available, and knits them together to gain operating synergies and economies of scale. Over 24 years he and his longtime partner, accountant Dominic Puopolo, have engineered more than 150 deals.
Verrochi's entrepreneurial bug bit him early. In 1971, fresh out of the Merchant Marine Academy, he started a building-maintenance business. "My mother was appalled," he recalls. "Here I was -- a college graduate -- scrubbing toilets." He grew that company to revenues of $18 million, with 10,000 employees in six states, and then sold out to a British company. During a three-year earn-out, sales soared to $120 million as Verrochi scarfed up cleaning services from New England to Atlanta.
Act 2 was an asbestos-removal outfit called American Environmental Group. Starting with three merged companies and $8 million in sales, Verrochi took the business to $35 million in three years. He stayed on for two years after he sold it to Allwaste, a big public company, buying 15 more companies and building revenues to $106 million.
At 46 Verrochi is into his third and possibly final entrepreneurial act, with AMR, based in Boston. "I've already made enough money," he says. Not that he's complacent. As chairman, CEO, and development honcho, he's on the road several days a week, focused on dominating an industry projected to hit $10 billion by the year 2000.
The ambulance business wasn't even on Verrochi's radar screen in the fall of 1991, when he and Puopolo leased office space in Boston and cast about for a new consolidation candidate. When their banker suggested ambulances, Verrochi was intrigued. "I discovered there were 2,200 private companies in the field, mostly mom-and-pop operations," he says. "Some had consolidated regionally, but nobody had gone public, and venture capitalists were nowhere in sight, so it hadn't been picked over. It was undiscovered, which made it perfect for us."
With help from the industry's top consultant, Verrochi pulled together four top-notch ambulance operators -- two in California and one each in Delaware and Connecticut, with combined revenues of $96 million -- and melded them into AMR in August 1992. He and Puopolo spent $2 million to lay the legal and accounting groundwork and then financed the deal as an initial public offering on the New York Stock Exchange, raising $23.7 million. "That was the first time it had ever been done on that exchange, a consolidation like this, so it was classic," Verrochi says.
Since then Verrochi has put some 50 companies under AMR's roof. "Paul has brought this industry of age," says Earl Riggs, whose $55-million operation in the San Francisco Bay area was the largest of the founding four. "I'd been buying small companies around me for years, to get bigger and more profitable. I thought the industry needed to do that on a larger scale, and Paul's vision was national."
Verrochi's company-building strategy rests on several planks:
Market dominance. Verrochi opens a new territory by acquiring its strongest player -- his "beachhead" -- which is usually a company in the $7-million-to- $20-million range, although recently he bought Ambulance Systems of America, which is, at $80 million, New England's largest operator. He's picky, preferring companies that have been in business at least 20 years and have sound management, deep community roots, and dedication to quality service. And he looks for operators "whose egos are in check," he says, "so they'll be good partners." By and large, the operators stay at their posts, running the beachheads as staging grounds for the acquisition of smaller companies in the region. By financing the deals with a 50-50 combination of cash and restricted stock (the new partners can't sell their shares for two years), Verrochi gives his partners an incentive to help build the business. If AMR's stock price goes up -- and it's more than tripled since 1992 -- they reap the rewards. "All entrepreneurs want an exit strategy," Verrochi says. "This gives them a chance to take some money off the table and stay in the game. We take over the banking, which has consumed lots of their time, and insurance, and let them focus on building a region. The idea is to funnel more business through that beachhead chute. We bought a $7-million company in Mississippi, for example, and today it's doing $40 million. It bought up Monroe, La.; New Orleans; Jackson, Miss. -- gobbled up the whole area."
AMR corporate headquarters, in Boston, with a lean group of 25 employees, handles due-diligence chores for each acquisition, puts a price tag on the deal, and funds it, but it's the job of the beachhead operator to find candidates. Verrochi himself explores the character issue. "When you buy a company, you are taking on a partner," he explains. "You have to get inside each other's heads to make sure this will work on a personal level. I want to break bread with them, so I invite them to my house for a few days. I want my wife to meet them, because sometimes I get too caught up in the money side. She looks at the protection side -- she doesn't want me to get hurt. They see the kids, see them act up.
"It's a family thing," he says. "By the end, we know if it's a good fit. If anything feels wrong, we back off from the deal, and that's why we don't make many mistakes."
So far, the beachhead strategy has worked, giving AMR strongholds in California, Michigan, New England, North Carolina, Ohio, Oregon, Pennsylvania, Florida, Colorado, Illinois, Mississippi, Washington State, Oklahoma, and Hawaii.
Operating synergies. Each region runs as a separately incorporated business and cuts costs by centralizing such common functions as accounting, payroll, human resources, and purchasing. To get an idea of what AMR does systemwide, consider how American Medical Response of Connecticut Inc., the $15-million beachhead in New Haven, bought a $5-million company in nearby Bridgeport.
As Verrochi describes it, "They both had dispatch centers, chief financial officers, and safety and risk-management people. We made New Haven the hub. The old CEO in Bridgeport left, the CFO we didn't need, and communications and vehicle maintenance all went to New Haven. We took a business with $5 million in revenues and $200,000 in pretax profits, and raised profits to $800,000 just by eliminating redundancies. The goal is to lower the cost per trip. In today's health-care environment, you can't raise prices. Contracts are won and retained by companies that deliver the highest quality at the lowest cost."
Technology. AMR's municipal contracts for 911-call response require that its ambulances be at the scene within eight minutes at least 90% of the time, so they must always be ready to roll. A fully equipped ambulance costs about $100,000, and labor adds another $300,000 a year to each ambulance's operating budget -- a pair of paramedics is always on board. (The cost of an ambulance ride, from $250 to $750 depending on the location, is billed to a private or public insurer or to the passenger.) Collectively, AMR's 1,700 ambulances represent a huge cost center, and Verrochi is attacking it with high technology.
Earl Riggs, the California operator, already had a satellite-based dispatch system in place when he joined AMR and consolidated operations with a partner company in the Silicon Valley area. The two companies had 100 ambulances between them. But the global-positioning satellite system (GPS) enabled the new AMR West to cover the same territory with 86 vehicles, for a labor-cost savings of $4.2 million a year.
"Before, dispatchers would run the ambulances by zones," Riggs explains. "The GPS pinpoints the street locations of the ambulances every 14 seconds and updates the dispatch center accordingly. You can actually watch on the wall map as the ambulances move along the freeway, and the computer-aided dispatch automatically calculates travel times based on traffic patterns. Now we can send the ambulances closest to the call -- not in distance, but in time. So we're able to utilize them more efficiently."
Verrochi is capitalizing on GPS technology to trim the ambulance fleet companywide, but these are multimillion-dollar systems, and cost effectiveness demands critical mass. "We went into Denver and bought four companies, which gave us the heft to afford a GPS system," he says. "When you have 80 ambulances and can eliminate 10 or 15 of them, you can start paying for it." For now, only California and Denver have GPS capability, but AMR units in Chicago, Philadelphia, Mississippi, and Connecticut are slated for installations soon.
Since the advent of AMR, three other ambulance companies have gone public to emulate its strategy. But AMR is the behemoth in the field, and Verrochi is gunning for more. "There were 2,200 private companies when we started, and there are 2,000 left -- we have only 50," he says. "We have lots of room to grow."
Consolidation of fragmented industries is now a major trend, as witnessed by this year's winner in the Emerging Entrepreneur of the Year category. But it's nothing new. Consider that in 1898 there were more than 2,000 automobile manufacturers (actually, buckboard wagon manufacturers who were incorporating motors into their products) in the United States. "The life cycle of entrepreneurial firms is not that different today than it was 100 years ago," observes Tom O'Malia, director of the entrepreneur program at the University of Southern California. "What's new today is the consolidation of more mundane businesses."
Indeed, the Chicago venture-capital firm of Golder, Thoma, Cressey, Rauner Inc. (GTCR) is engaged in the consolidation of some 25 industries, including golf courses, rock quarries, temp agencies, funeral homes, security guards, and even coin-operated laundries in apartment buildings. "When you combine companies, you get true synergies and savings. By bringing together products and services, you also build market power. And also, of course, you can leverage good people and good systems through companies that are acquired," explains Bryan Cressey, a GTCR principal.
For the individual entrepreneur in a consolidating field, it's decision time. "You can either be part of it and use it as an opportunity to cash in your chips, or you can fight it and become more of a lifestyle business," O'Malia says. "If you fight, you are going to have to compete on a different level as consolidation goes through. You'll have to be in the service business instead of the product-delivery business, and you must add value."
Cressey, who has been financing consolidations since the 1970s (GTCR has about $400 million invested in such ventures), recommends that entrepreneurs first examine the consolidation's rationale. "If there are real savings and economies, then that probably will continue," he says. "But if benefits don't materialize -- and they don't always -- it will be status quo for a long time. The downside risk for entrepreneurs who hold out against smart consolidations depends on how good they are. If they are very good managers, there's not a big downside. But if they're in the middle of the pack, the consolidation wave of lower costs could roll over them."