Small Business

Snapping Up the Spoils of Ruptured Rollups


Brad Daniel knows that timing really can be everything. By the late 1990s, he had built his florist business into a chain of five stores across South Florida. Then in 1998, he decided to cash out. He sold the business for $130 million to industry giant Gerald Stevens, which had spent the prior two years buying 300 flower shops nationwide.

Stevens quickly overexpanded, however. Saddled with a punishing debt load, it filed for Chapter 11 bankruptcy protection in October, 2001. So Daniel swooped back in. The 32-year-old entrepreneur bought a premier flower shop in Fort Lauderdale at a price he says was less than half of what Stevens acquired it for. "Gerald Stevens wanted to do too much too fast," Daniel says.

FAILING FORMULA. Daniel isn't the only entrepreneur to decide to make another go of it. So-called rollups -- in which an industry consolidates as a large player goes on an acquisition spree -- boomed in the 1990s. Notable players ranged from H. Wayne Huizenga's AutoNation dealership chain to funeral kingpin Service Corp. International.

Now, as many of the once high-flying rollups are crashing and burning, some former owners are suffering big losses. But a few are nimbly stepping in to buy back their old companies for as little as 10 cents on the dollar. "It's a bonanza for smart players with cash," says Steven L. Pottle, a partner at Atlanta law firm Alston & Bird who has handled rollup purchases and liquidations.

It wasn't supposed to turn out this way. By cobbling together mom-and-pop businesses into national chains, rollups were designed to create bigger, more efficient companies that could trim office costs, boost purchasing power, and gain enough recognition to raise capital for further expansion. Indeed, Booz, Allen & Hamilton estimates that during the late 1990s, investors pumped $30 billion into rollups through private investments, stock offerings, and the like.

CRUSHED BY DEBT. Few of those investments paid off, however. Cost savings never materialized because conflicting back-office systems proved hard to meld, and professional practices such as accountancies and medical outfits were reluctant to work together. In addition, rollups grew too fast and used too much debt to expand. Jeffrey R. Manning, a managing director at investment bank Legg Mason who deals with troubled companies, estimates that since 1996, rollups that had initial public offerings raised only $3.6 billion in equity -- while assuming $10 billion in debt. Debt payments often devoured their earnings.

Today, 18 major rollups launched in the late 1990s have either filed for Chapter 11, restructured, or folded, according to Legg Mason. Some, like Huizenga's AutoNation, survived. But the list of rollup bankruptcies includes his other company, NationsRent, a construction-equipment leasing outfit, as well as railroad operator RailWorks.

Many of the entrepreneurs who sold out got burned as the shares issued to purchase their companies plunged in price. Stock in NationsRent fell from $8 at the height of its acquisition campaign in 1998 to 5 cents by last year. In other cases, acquirers failed to pay bills, leaving original owners who stayed on to deal with unpaid workers and dwindling services.

BACK IN THE PICTURE. Not everyone is a loser in this bust. Attorneys say savvy entrepreneurs nationwide are sifting through the assets of failed rollups. Some are finding gold. Take Andrew Laakman, 32, Narendra Rocherelle, 33, and Nicholas Wilder, 29. They sold their startup Webshots, which had 13 million registered users for its online photo-sharing service, to Excite@Home, making themselves instant millionaires.

When the high-speed-access provider filed for liquidation late last year, the three pulled together a rushed bid to buy back Webshots. "Excite dragged its feet for a bit, but we stuck to our price," says Laakman. It didn't hurt that no one topped the bid. Webshots is already reopened for business. "We were profitable before Excite, and we believe it can be profitable again," says Laakman.

Then there's Orthopaedic Surgery Associates, which was bought out by BMJ Medical Management in 1996. At the time, doctors couldn't get enough money to hire receptionists, says Brandon Luskin, one of the company's orthopedists. But, after BMJ filed for bankruptcy protection in 1997 and then began liquidation last year, Luskin and his seven original partners bought back their practice at a lower price.

HAPPY RETURNS. Another case in point: Bruce Henderson, a Louisville electrical contractor, bought back his original company of the same name from faltering rollup Bracknell last November. Henderson, 51, won't say how much he paid -- other than it was "several million dollars less" than what he sold it for. "None of Bracknell's top executives came from the construction industry," he says. "That became a real liability for them."

Fortunately, experience is one of the key assets of these businesses' original owners. And for many, reviving companies that had withered under rollups is wonderful, the second time around. By Charles Haddad and Brian Grow in Atlanta


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