CEO Brodsky explains how mergers and roll-ups can create great opportunities for the smaller companies that remain independent.
Industry roll-ups are hotter than ever these days--and they're creating enormous opportunities for the companies that don't join one
I have to laugh when I hear people say that big companies are taking over the world. You'd think it was getting harder for entrepreneurs to compete.
Listen, these are boom times for small companies--not in spite of the current wave of roll-ups and mergers but because of it. As big companies get bigger and new giants emerge from nowhere, they're creating the best opportunities I've ever seen for people who want to build businesses of their own.
Let me tell you what's happening in my industry, the records-management business. We have two giants, Iron Mountain and Pierce Leahy, which operate nationally, and thousands of small companies that serve local or regional markets. Most of those operations are run as a sideline to some other business, but a few small companies in each region are records-management specialists. My company, CitiStorage, is one of the specialists in the New York metropolitan area.
Our toughest competitors are the other regional specialists. They go after the same customers that we do, offering pretty much the same services and benefits at similar prices. Other small companies can't compete on our level, because they haven't made the necessary investment in technology, equipment, and people. As for the giants, they beat us in only one market segment: national accounts. But the regional specialists give us a run for our money every time.
So what's happened in the past eight months? The number of regional specialists in our area has dropped from four to two. One was rolled up into Iron Mountain, the other into Pierce Leahy. Now I'm rooting for someone to come along and roll up the third guy. When it happens, I'll take my management team out for a champagne dinner.
How can I feel so confident? Why aren't I worried that two of my competitors have the resources of giant companies behind them? Because those resources don't count for much in head-to-head competition for customers.
The truth is, it's much easier to compete against a big company than against a well-run small company--at least in my business. We beat the giants on service. We beat them on flexibility. We beat them on location and price. I can't recall a single customer (other than a national account) that we've ever lost to Iron Mountain or Pierce Leahy.
Don't get me wrong. They are both great companies with first-class operations and people, but they can't offer what we have: a highly focused small business with owners who are on the scene and actively involved.
We play that advantage for all it's worth. All prospective customers visit our main warehouse and meet with me, the founder and CEO. I tell them, "Anytime you have a problem, you can just call me." Sometimes the prospect will say that the big companies offer the same thing. I say, "Oh, really? Why don't you try calling their CEOs? See how long it takes to get them on the line. I wear a digital phone wherever I go. If I'm in the country, you can reach me."
The message is one of accessibility and personal service, and we constantly look for ways to reinforce it. Every new customer receives a thank-you note from me and my wife, Elaine, who owns the company with me and plays a key role on our management team. I myself try to visit each of our customers at least once a year. We name warehouse aisles after customers who place 10,000 or more boxes with us. We do all kinds of little things.
Beyond the symbolic gestures, we offer customers a degree of flexibility that the big companies simply can't match. Our salespeople, for example, have much more leeway than theirs do in negotiating prices and add-on services with customers. Suppose a small customer--one with fewer than 2,000 boxes--wants to use its own forms instead of ours to keep track of what it sends us. We say, "Fine." A big company can't afford to accommodate such requests from small customers. It would have chaos in its operations if it tried. And, besides, why bother? If you have 40 million boxes in your warehouses, you don't even notice when you lose a 2,000-box account.
The point is that our size is an advantage, especially in going after the small to medium accounts, which are the bread and butter of our industry. Our primary competition for them used to come not from the giants but from the three other regional specialists, whose owners ran their businesses much as I run mine. And that entrepreneurial edge is precisely what two of them have now lost by getting rolled up into the giants.
Some people will disagree with me, but I think it's inevitable that rolled-up companies become less competitive after they're acquired. Why? Because the culture changes. The priorities change. You gradually lose the qualities that made you successful in the first place.
I'm talking about all those little things that an entrepreneur discovers in the course of building a successful business--the thousand and one details that give the company its identity in the marketplace. Through constant learning, repetition, and reinforcement, you develop habits, procedures, ways of doing things that make customers happy and that employees feel comfortable with. It all adds up to a culture that is fundamentally a reflection of the entrepreneur's personality.
That culture can't last long after the ownership changes hands. I don't care whether the previous owner stays around or moves on. If things don't change, the acquisition won't work. What's the acquirer looking for anyway? Significant increases in earnings. That means merging duplicate functions, getting rid of extra people, closing down unneeded facilities, implementing new policies, and so on. In most cases it also means putting a much higher priority on the large customers who can make the biggest difference in your bottom line.
In a roll-up, moreover, the senior managers have a lot to think about in addition to customers. No matter how hard it tries, the company can't sell fast enough to increase earnings at the rate investors are looking for, and so senior managers have to be constantly searching for new acquisitions. As a result, an enormous amount of time and energy goes into issues that have nothing to do with serving customers or making sales.
What happens? Little by little, the rolled-up company loses focus. The original culture starts to erode. The head office makes the cuts and mandates the new procedures, which may be necessary to achieve the financial goals but which also reduce flexibility. Inside, people have their hands full dealing with the changes. Telephone calls aren't returned as promptly as before. Senior managers aren't as accessible. It's only a matter of time before some customers begin to feel dissatisfied.
That is, of course, good news for competing companies that remain independent. These days my company doesn't have to go looking for our rolled-up competitors' ex-customers. They come to us. They say they don't want to get lost in a big company, or they aren't receiving the level of service they're used to. I don't know whether that's true or not, but what counts is the perception, and we do nothing to discourage it.
Small companies like mine aren't the only ones benefiting from the merger and roll-up wave, however. In fact, the biggest beneficiaries may well be new entrepreneurs. Why? Because industry consolidation doesn't just open up markets. It also releases the most valuable resource a start-up can have: experienced people. They may have been laid off from the acquired company, or they may have left of their own accord, but they know the business, and at least some of them are ready to give it another shot.
That's what I call an opportunity for entrepreneurs. If I were starting a new venture, the first industries I'd look at would be those with the most roll-up and merger activity. Think about it. You'll find customers. You'll find people. You'll find everything you need except capital--and who knows? You may find that, too.
And then, if you work hard enough and grow fast enough, someone will come along and buy you out for more money than you've ever dreamed of.
I love America. What a country!
Norm Brodsky is a veteran entrepreneur whose six businesses include a former Inc. 100 company and a three-time Inc. 500 company. This column was coauthored by Bo Burlingham.