When good ideas go bad Featured

6:38am EDT November 30, 2004
In theory, the plan was brilliant -- combine a number of small players to leverage their collective expertise, take the entity public to raise capital, then use the money to acquire numerous other small enterprises and become a major player in the field.

There was only one problem --when the members of Industrial Distribution Group put their plan into action, it didn't work.

"Initially, our strategy was somewhat flawed," says Andrew Shearer, president and CEO of the 7-year-old IDG. "We were going to become a billion-dollar distributor in a short amount of time by acquiring many distributors. That model has not proven to be successful because of the integration challenges that exist."

Eight members (a ninth came later) of an informal organization called the Distributor Executive Network -- a collection of industrial distributor CEOs who got together quarterly to share with and learn from one another -- decided to create the new company, which went public in 1997.

"The name for it on Wall Street is a roll-up," Shearer says. "It took us about two-and-a-half years to bring it together. Essentially, we were nine private companies one day and one public company the next.

"The wholesale distribution industry is a very highly fragmented industry, and therefore, we believed that there would be some consolidation in the industry. Instead of being consolidated, we wanted to be the consolidators."

Consolidating provided economies of scale for IDG, which competes in the $300 billion maintenance, repair operations and production product market. In a nutshell, the company saves manufacturers and other industrial companies money by outsourcing their supply and storeroom activities. It proves materials to manufacturers and uses its own software and people to help customers manage, track and order these materials.

The new entity was designed to save money with suppliers, leverage expertise over a much wider geographic region and apply its knowledge to different industries. The theory was sound but the execution wasn't.

"Our model was very decentralized," Shearer says. "We were going to keep the faces and the entrepreneurial type of spirit that existed at those businesses. We were going to work to consolidate some of the back office efficiencies. We quickly realized we could not be successful as one organization and leverage the capabilities of a larger organization until we truly acted like one company."

At the time, Shearer was president of IDG York, the name his nearly 80-year-old family company had adopted after the roll-up. The problem with the new entity began at the top, says Shearer, IDG's third CEO.

"Leadership is a key to any organization," he says. "But it is even more critical to an organization that had come together the way IDG was formed. Having strong leadership with a clear vision mission and strategy is essential. We didn't have that.

"At that time, there was no doubt the organization was struggling. My responsibilities were essentially to turn around the organization and transform (it). There's no doubt you need to manage differently in a crisis. We were able to come out of that fairly quickly. Part of that was to reorganize the organization, make sure everybody (our associates) clearly understood the visions and the strategy, and try to communicate what their responsibilities were in helping the organization achieve our vision."

When Shearer assumed the top spot three years ago, there were 13 business units. One of his first tasks was to change the business structure, taking the 13 units and combining them to create four divisions.

"Each one of those division presidents is part of our leadership team," which is comprised of seven people responsible for managing the company, he says. "Until I took over (the CEO) responsibility, we had 15 or 16 people sitting around that table. For us to draw a consensus on anything was a challenge."

But that was then. Today, IDG boasts sales of nearly $500 million and employs more than 1,200 people. From its network of 18,000 vendors, the company distributes 400,000 products to nearly 22,000 customers, including Boeing, General Electric and Ford Motor Co.

Integration woes

Even with all the problems, IDG was able to complete one of its missions -- driving acquisition.

"In the first two-and-a-half years of our existence, we acquired 20 additional companies," Shearer says. "Since that time, we've been dealing with the integration of those businesses. I believe, now, we pretty much have that in hand."

It did, however, take some time.

"Initially, members of the management team understood what their roles were in the new company," Shearer says. "But as the company progressed, they realized that in order to demonstrate its capabilities and leverage a services-based solutions across the entire organization, to leverage volume with our suppliers and to give customers a consistent level of service, they needed to look and act like one company."

That required a merging of the different corporate cultures that existed at each of the divisions.

Says Shearer, "It was, indeed, a challenge to do that -- especially at all of those that were private companies before. The cultures were largely influenced by the owners of those businesses. Despite that, today, after being in existence for seven years, we truly are one company with consistent policies and procedures. We have a very consistent service level and approach to the marketplace, and our customers perceive us as one company, which we are."

One of the companies integrated was IDG York, which traces its roots back to 1923. Then, it was known as Shearer Industrial Supply, and it was the family operation that Shearer joined straight out of college before being named its president five years later. He says there are no regrets that the company founded by his grandfather has lost its individual identity.

"There's always that sentimental side," he says. "But what we all need to look at is that if we wouldn't have made that decision, where that company would be today. I can't tell you for sure there would be a Shearer Industrial today if we would not have made it a part of IDG."

IDG's struggles to integrate all of its entities were reflected in its stock price. Shares, which at the time of IDG's IPO were well above $20, had sunk to less than $2 by 2001, right about the time Shearer was tapped to lead the organization.

Since then, Shearer's moves to stabilize the company have gotten The Street's attention. After hovering in the $3 range until near the end of 2003, IDG's stock price has crept back up, and has been over the $8 mark for the last several months.

"There's no doubt there are significant differences in being a public company versus a private organization," Shearer says. "The majority of our associates today were never part of a public company until seven years ago. That dynamic is very different. We certainly have many more stakeholders that we need to educate as to what our business model is and get them to understand the organization and our capabilities.

"There is a lot of pressure that goes with that. A private organization essentially has to satisfy the owners and the bank, in some cases. In a down year, it may be OK just to make money or break even and not make the difficult decisions of, perhaps, reducing people because of the reduction in work load. The environment is very different. Therefore, you need to manage the organization differently under those two environments."

IDG has become an interesting footnote in public company lore.

"We were only the second company to ever voluntarily delist from the New York Stock Exchange," Shearer says. "There was a (Securities and Exchange Commission) requirement (prohibiting companies) from delisting from the New York Stock Exchange. They changed that ruling in October of last year.

"We felt it was beneficial from two standpoints. First, we felt there was benefit to our shareholders with the NASDAQ trading system. We also believe the New York Stock Exchange was looking to increase some of their listing requirements. That may or may not have had an impact on IDG, but we just felt in the best interest of our shareholders that it was the right move for the organization to move to the NASDAQ. Since that time, we are seeing better spreads and better quality institutions coming into our stock."

Full speed ahead

Shearer insists that the integration problems are now in the past. Today, he's focused on the company's original plan -- to leverage its network of suppliers, provide a broader geographic reach and move beyond the traditional manufacturing market.

"There's no doubt the services component of our business is the fastest growing," he says. "We've grown that business by greater than 20 percent the last four years. That's during a very difficult economic environment.

"Because the products we sell are heavily focused at the metal working industry and 98 percent of our revenues are here in the United States, and because the products are consumed in the manufacturing processes, if the manufacturing is reduced, then the need of those consumables items is reduced," he says. "There is no doubt it has an impact, but our market is still a $300 billion market."

Regardless, that hasn't stopped Shearer from looking for ways to expand the business.

"The potential for us is still significant," he says. "For us to leverage our services-based solutions to a broader range of customers, whether by geographic (region) or industries such as consumer products, food processing, pulp and paper, the significance is that it can truly transcend different industries and provide the same level of savings. It provides us with additional opportunities that we've truly never had before."

With its sharper focus, Shearer says IDG is seeking new opportunities and looking to help manufacturers deal with their ever-changing marketplace.

"Manufacturers are faced with an increasingly global economy, and therefore, they are looking at ways to reduce their costs," Shearer says. "Our service offerings really are focused at a central need of those customers -- 'How do I outsource these different components of my business and get not only a lower cost, but also an increase in the service that is provided?' That's what our services component is focused on, and that is why we've had the success that we've had over the last several years."

And, with the global economy pushing margins down and forcing owners to re-evaluate every segment of their business, Shearer sees opportunities.

"You will see IDG develop a clear competitive advantage in our ability to satisfy those customer requirements," he says. "And because of that, we will gain incremental market share over our competition in our ability to provide those services and help our customers reduce costs, thereby significantly gaining market share in a rapidly growing market."

All of this has Shearer looking toward the future with an opportunistic eye.

"We will look at new customers and new industries, such as utilities consumer products, pulp and paper, as well as other industries that we can bring the same type of cost savings that we're currently providing to our current customer base," he says.

How to reach: www.idglink.com or (404) 949-2100