The Cardinal rule Featured

12:35pm EDT May 26, 2004
Robert Walter, a mechanical engineering graduate, started his professional career in 1971 as an engineer at a large corporation.

He didn't like it.

Six months later, Walter left and bought his own company.

"I just wanted to find and run my own business," he says. "I never thought too deeply about the level of success. And I could never have envisioned what transpired over the past 30 years. When I purchased a food distribution company in 1971, I could have no way of knowing we would become such an integral player in the health care industry."

Like any budding entrepreneur, Walter did his homework. He researched how to raise money, write a business plan and other Business 101 essentials. Looking back, he admits that what should have been his two greatest weaknesses -- youth and inexperience -- actually worked in his favor.

"I had never started a business before, so nothing seemed insurmountable," he says. "I had no preconceived ideas of how it should work."

Walter spent a considerable amount of time studying business in the library, but also hit the streets and talked with successful business owners.

"As a result, I raised the capital necessary to purchase the company that would become Cardinal Foods," he says. "I found a way to work through each new challenge. This doesn't mean that I didn't make mistakes. But I learned from them and tried not to make them twice."

It definitely was no mistake when Walter decided to shift the company's focus from wholesale foods to health care. He says he looked around and believed there was little room to grow in an already crowded wholesale food industry. But, he realized the company's distribution expertise could be leveraged in a different marketplace.

"The food distribution industry had already consolidated by the time I entered the market in the early '70s," Walter says. "We had a great business, but opportunities for growth were limited, whereas the pharmaceutical distribution industry was fragmented and had tremendous growth potential. Around 1980, we decided to apply our core distribution skills to the pharmaceutical industry, and soon thereafter, purchased The Bailey Drug Co."

Over the next 15 years, Walter invested heavily in Cardinal's new drug distribution business.

"Through greater automation, innovative logistics changes and a focus on our customers, we are now responsible for distributing a major portion of the nation's drug supply," he says.

While that sounds impressive, it is an understatement. Cardinal Health distributes 2.5 million pharmaceuticals every day -- a statistic Walter does not take lightly.

"We take very seriously the important role Cardinal Health has to ensure the safety, cost-effectiveness and easy access to pharmaceuticals in this country," he says.

And Walter's efforts over the past 10 years have underscored that belief, helping Cardinal Health grow considerably, diversify its products and services portfolio, expand to offer drug development, delivery, packaging and manufacturing services to health care and biotechnology companies. His company has become a global leader in the health care industry, boasting annual revenue of $56.7 billion and 55,000 employees worldwide.

Fostering entrepreneurship

Despite his position as the founder and head of a multibillion dollar world leader, Walter remains steadfast in his dislike for large corporations. He has spent the last three decades fighting bureaucracy in his organization and working to maintain the atmosphere of a smaller, more nimble company.

"We still operate with this entrepreneurial spirit today," Walter says proudly. "We try to keep bureaucracy to a minimum. We take calculated risks. And we tend to be relentless in efforts to improve. I believe it is good to have a healthy fear of the future, and that notion keeps us on our toes."

Walter, who has been compared to Wal-Mart founder Sam Walton, keeps this entrepreneurial spirit alive by focusing on customers and the company's employees.

"I'm very proud of the success of Cardinal Health," he says. "But what is most gratifying is to see how thousands of people have worked so hard to shape the company into what it is today. We have a culture geared toward success and helping customers."

Tony Rucci, Cardinal's chief administrative officer, says this is a common mindset among the company's senior executive team.

"We are always on guard when it comes to maintaining our culture," Rucci says. "We talk about it at executive committee meetings. We ask, 'Have we done anything too bureaucratic? Are there too many approval levels?'"

And, Rucci says, preserving the entrepreneurial culture is a primary consideration when evaluating potential acquisitions.

"We spend even more time and energy to determine whether a company we are interested in acquiring is a fit with our culture and values than any other factor," he says. "We have walked away from deals that fit our strategic and financial criteria but aren't a cultural fit."

Ascending the health care food chain

For most of its life, Cardinal Health focused on its biggest strength- distribution. But Walter has relied on acquisitions as his primary means of achieving growth.

"Cardinal has been extremely active," says Rucci. "Especially in the last 10 years."

But Walter doesn't discount the company's ability to delve deeper with existing relationships.

"We have acquired a number of companies (nearly 100)," he says. "But we have also experienced strong organic growth in key business segments."

It was just about 10 years ago when Walter and his executive team decided to diversify.

"Acquisitions have helped diversify the business and grow in important markets," Walter says. "In 1995, we made an important decision to diversify our business and provide more value to health care customers than just distribution services. At the time, this was a real strategic challenge."

Walter says about the time the company started this transition, its earnings were $60 million, exclusively from drug distribution. In its most recent fiscal year, earnings had increased to about $2.5 billion. More important, Walter says, 60 percent of those earnings came from businesses Cardinal built to complement the drug distribution side. Today, the company has four business segments -- provider services, pharmacies, manufacturing,g and research and development - each of which make a strong contributions to the company's bottom line.

Walter's acquisition strategy has ensured that the companies Cardinal acquires blend in well with the existing corporate structure.

"Our strategy is simple," Walter says. "First, an acquisition must be a strategic fit in the health care industry. We see a lot of interesting proposals, but if they fall outside health care, we aren't interested. Second, the company we acquire must have a culture and values that fit with Cardinal Health. We are an ethical, performance-driven company, and we want to match with people that share those values. And third, it must make financial sense for our shareholders. We look for market leaders, which typically aren't bargains. But that's OK, as we expect to add value to the acquired company."

Rucci puts it another way.

"The companies blend easier because they share similar values," he says. "And because of those values, we can trust the newly folded company's leadership to choose to do the right things. That is the key that distinguishes our strategy and why we've been so successful integrating companies we've acquired."

But this strategy is not without its challenges. Rucci says even as Cardinal continues its growth mode, it is in the midst of a radical shift in its drug distribution model.

Previously, because of its size, Cardinal enjoyed deep purchasing discounts from the big pharmaceutical companies.

"We could buy product and hold it, then sell it at a later time," says Rucci. "As a result, we realized gains because of price increases."

But recently, he says, drug manufacturers have reversed their policies, saying that too much product has been pushed into the distribution channel and, therefore, are no longer allowing advance purchasing. To counter this trend, Cardinal is transitioning to a fee-for-service business model.

"We have met with 63 of our largest suppliers and shown them the improvements we can offer," Rucci says. "Faster service and more information. We have found that they are gratified with what we are offering."

Despite this business model transition, don't look for Walter's acquisition appetite to dwindle. Rucci says the health care industry is expected to grow, comprising up to 18 percent of the country's Gross National Product over the next 10 to 15 years. Cardinal's financials (the company expects this year's cash flow to be $1.3 billion) have put it in great position to purchase more companies. And Walter is confident that his acquisition strategy will translate into more successful purchases.

"I believe our track record speaks volumes," he says. "We have an excellent history of successful acquisitions, which has helped us build market leadership and deliver great value to customers." How to reach: Cardinal Health, (614) 757-5000 or

The Walter file

Born: 1945, Columbus

Education: Bachelor of science, mechanical engineering; MBA, Harvard Business School

First job: Engineer with a large corporation.

Career moves: Tried a large corporation (left after six months); in 1971, started the company that became Cardinal Health

Boards: American Express, Cardinal Health, Viacom, Battelle Memorial, Ohio University

What is the biggest challenge you've faced in business?

Our challenges today are around attracting and retaining great people, ensuring we have a motivated and diverse work force, staying abreast of the changes in our vast industry and challenging ourselves to always look for ways to increase the value we can bring to customers.

What is the greatest business lesson you've learned?

The seller always knows more than the buyer. We started Cardinal Health as an acquisition, so I've always been comfortable acquiring companies.

What I learned early was that the seller always knows more about their business than the buyer ever will. For this reason, it is important to pair with market leaders and ensure there is a strong cultural fit between the two organizations. Through nearly 100 acquisitions over more than 30 years, I've tried to never forget this simple rule.