Century Business Services, Inc.

Century Business Services, Inc.

6480 Rockside Boulevard South, Suite 330
Cleveland, Ohio 44121
U.S.A.
Telephone: (216) 447-9000
Fax: (216) 447-9137
Web site: http://www.cbiz.com

Public Company
Incorporated:
1987 as Stout Associates
Employees: 4,900
Sales: $523.6 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: CBIZ
NAIC: 541210 Accounting, Tax Preparation, Bookkeeping, and Payroll Services

Century Business Services, Inc., with its headquarters located in Cleveland, Ohio, offers a range of outsource business services to small and medium-sized businesses, including accounting and tax preparation, employee benefits, payroll, property and casualty insurance, and consulting. As it rolled up more than 200 local firms in the late 1990s to create a network of service providers, Century allowed its acquisitions to continue to operate under their original names, but the company has since made efforts to use CBIZ as a recognizable brand name. Century has operations spread across 33 states, the District of Columbia, and Toronto, Ontario, Canada.

Canadian Origins: 1940s-80s

Century and its founder, Canadian entrepreneur Michael DeGroote, took a circuitous route to the business of outsourcing backroom operations. DeGroote was born in Belgium in 1933, then immigrated to Canada with his parents in 1948 when they sold their farm and settled in southern Ontario. To help support the family he soon had to drop out of high school and work in the local tobacco fields. When he was 18 he managed to scrape together enough money to buy a surplus army truck and earn a living by delivering manure from dairy farms to the tobacco fields. He further displayed his entrepreneurial spirit a year later when he acquired four gravel trucks and launched a full-fledged trucking business. In 1958 a uranium boom struck northern Ontario when the U.S. government placed a large order for the metal, and DeGroote was able to take advantage of the need for trucks to become a millionaire in his early 20s. A few years later, however, the U.S. government canceled its order and in 1958 DeGroote at the age of 25 was forced to file for bankruptcy. Undaunted, he moved to the city of Hamilton, where he was able to borrow $75,000 from a bank to make a down payment on a small trucking company owned by a man named Laidlaw. DeGroote would transform Laidlaw Transport Ltd. into a major Canadian corporation, transcending any ambitions its founder might have ever held for the business.

DeGroote inherited 21 trucks from Laidlaw and a business that generated $400,000 in annual revenues. A little more than ten years later, Laidlaw owned and operated 200 trucks and boasted $5 million in revenues. As DeGroote grew the business he followed similar goals and employed many of the same techniques he would later put to use in developing Century. He established a target of 25 to 30 percent growth each year, and rather than achieve that number internally he chose to acquire existing operations. He targeted poorly run trucking companies or ones that were inadequately funded and bought them at reasonable prices. In the process, he displayed an uncanny knack for rooting out the best candidates. Following the recession of the early 1980s he also revealed a willingness to adapt to changing conditions and pursue other opportunities. Realizing that trucking was a cyclical business, he moved Laidlaw into areas that he considered recession-proof: schoolbusing and waste disposal. No matter how poor the economy, he reasoned, people would still need to have their children transported to school and garbage hauled to the dump. Again he made the transition through acquisitions, so that in 1985 Laidlaws school bus operation accounted for nearly half of all revenues, waste disposal another 40 percent, and trucking fell to just 8 percent. In 1985 the company topped $550 million in annual revenues and booked a net profit of $58.7 million. Moreover, Laidlaw was the largest school bus operator in North America and the fourth largest garbage collection company.

DeGrootes Brief Retirement: 1990

In 1988 DeGroote sold his stake in Laidlaw to Canadian Pacific for $499 million in cash and Canadian Pacific stock. Although agreeing to stay on as CEO and chairman of the board, he decided to retire to Bermuda in 1990. He quickly grew bored, however, and soon reentered the waste disposal business. DeGroote was approached by Texas businessman Tom Fatjo, Jr., who was looking for investors for a new company, Republic Waste Industries, and agreed to become involved. Fatjo soon departed and Degroote was installed as chairman, president, and CEO of the business. He brought in a former Laidlaw lieutenant to run the day-to-day affairs while he once again scouted for acquisitions to grow the business. The downturn in the economy of the early 1990s, however, revealed that garbage was not as recession-proof as he had once assumed. The entire industry, including Republic and Laidlaw, was severely hurt. Moreover, the hazardous waste portion of the business was beset by its own troubles. In 1995 DeGroote turned over control to a former competitor, now friend, Wayne Huizenga, who had made Waste Management into the worlds largest garbage business. After selling out in 1984 he went on to transform a small chain of video rental stores into the highly successful Blockbuster Video. DeGroote, who through his friendship with Huizenga was able to get involved with Blockbuster at the outset, invested $15 million and made an estimated profit of $350 million to $450 million. After leaving Blockbuster, Huizenga was looking for a shell company for dealmaking and settled on Republic. Both he and DeGroote invested more money into the company, which Huizenga renamed Republic Industries and quickly grew into a multibillion-dollar company.

In preparation of Huizenga taking over Republic, DeGroote spun off the hazardous waste portion of the business as well as a 1992 acquisition, Stout Environmental Inc., which had fared poorly and resulted in a one-time charge of $2.6 million. DeGroote now changed the corporations name to Republic Environmental Systems Inc. (RESI), which eventually became Century Business Services. He was able to convince Huizenga to invest in RESI, his reputation on Wall Street all but guaranteed to boost the companys stock price, which, in fact, grew from $4 to $36 within the year. A higher price in turn allowed DeGroote to use RESI stock as a way to fund acquisitions. With DeGroote as chair, the company was based in Blue Bell, Pennsylvania, but it only remained involved in the hazardous waste disposal business for a short period of time. In 1996 RESI merged with a Cleveland-based holding company, International Alliance Services, Inc., and its Century Surety Group subsidiary, insurers of hard-to-place lines of insurance and bonds. RESI assumed the International Alliance name and moved its headquarters to Cleveland. The plan at first was to expand, through acquisition, beyond the disposal of hazardous wastes into insuring the risks of transporting both hazardous and non-hazardous wastes, as well as to add other associated businesses. The company also planned to grow nationally, expanding on its base of Cleveland-area customers. One of these acquisitions was SMR & Co., a Cleveland consulting firm that focused on tax-related matters. Its head, Greg Skoda, was hired by International Alliance to become its chief financial officer in December 1996. Through acquisitions he had already turned SMR into one of the fastest growing U.S. companies by creating an outsourcing operation of backroom functions for smaller businesses. During the interview process with International Alliance, a strategy emerged to combine outsourcing with insurance products, so that the company would hold the distinction of being the only firm capable of administering a benefit plan and also insuring it. DeGroote was hesitant at first to embrace the business outsourcing model, but in many ways it fit into his previous experience. The services were widely needed, the industry was ripe for consolidation, with many small companies operating in limited markets, and the economy-of-scale benefits that could be realized were substantial. Not only would International Alliance cut overhead costs by combining smaller firms, it would be able to network their services so that it could provide a one-stop shopping approach for a wide range of backroom operations.

From International Alliance to Century Business Services: 1997

After launching an acquisition binge in 1997 International Alliance sold off the original RESI hazardous waste operation to focus on its growing slate of outsourcing businesses. In November 1997 the company also tacked away from its insurance heritage, as a number of old-guard International Alliance top executives were swept aside in favor of DeGroote and a stable of new vice-presidents and directors. DeGroote now became president and CEO in addition to retaining the chairmanship of the corporation, while Skoda became a point man on acquisitions, relinquishing his CFO role to become executive vice-president. To better reflect its new emphasis, the company changed its name to Century Business Services, Inc. It continued its aggressive program of acquisitions in 1998, snapping up accounting, payroll, and benefits companies. By June of that year it owned more than 100 offices in 28 states. Only 18 months earlier, when RESI and International Alliance merged, it had operated just five Cleveland-area business service firms. Now it was giving giant American Express Co. and its American Express Tax and Business Services unit serious competition in becoming the largest business services provider for small and medium-sized businesses. Not only did American Express Tax and Business Services have the advantage of American Expresss deep pockets, it also had the American Express name to trade on. While its rival required acquisitions to adopt the American Express name, Century was at a disadvantage because it permitted new companies to continue operating under their old names. Moreover, Centurys growth was very much tied to its high stock price.

Company Perspectives:

Our Mission: To provide an integrated offering of CBIZs core professional services in each regional market, incorporating the services of CBIZs national practice areas and utilizing technology to enhance our product offering and streamline service delivery.

In the fall of 1998 the price of Century stock experienced a major drop when the company came under fire from critics, in particular Massachusetts research firm Off Wall Street, which was known as an active short seller. It maintained that Centurys acquisitions were too spread out and unable to produce the kind of cross-selling opportunities that its management promised. Off Wall Street also claimed that Century was far from circumspect in its buys, rarely rejecting a possible acquisition. Moreover, the research firm questioned Centurys aggressive accounting, such as booking the revenues of an acquisition even before the deals were finalized, which in turn helped to keep Centurys stock price artificially high and fuel even further acquisitions. With his company accused of being a house of cards, and watching the price of Century stock steadily decline, DeGroote responded vigorously. He told major shareholders and stock analysts in a conference call that Century was the victim of deliberate lies and that some research analysts were intentionally warping the companys numbers. More important than his words, perhaps, was his announcement that he was going to purchase one to two million shares or more of Centurys common stock. DeGrootes actions had the desired effect, and the stock price quickly rebounded.

In 1999 Centurys rate of making acquisitions slowed dramatically, characterized by management as a pause for digestion. The companys stock price also sagged, making it difficult to use stock to fund purchases. In order to help build growth internally and better compete against more recognizable American Express and H&R Blocks business services subsidiary, Century initiated a branding effort, utilizing its CBIZ ticker symbol used on the NASDAQ. A pair of high-tech subsidiaries were the first to use the name, becoming CBIZ Technologies. Such an effort, however, was not enough to stem a rising tide of difficulties facing Century. In the fall of 1999 it hired Merrill Lynch to help find a buyer, a search that was called off by the end of the year. In the meantime Centurys accounting practices were again called into question, and on December 28, 1999, the company was forced to revise the way it accounted for goodwill, the amount above the book value of an acquisition. Century was amortizing that amount over 40 years, but upon advice from the SEC agreed to shorten it to the more standard 15 years. Because of the change, the company announced at the end of January 2000 that instead of earning profits of 12 cents to 14 cents a share in the fourth quarter of 1999 it might lose as much as two cents. On that same day, President and Chief Operating Officer Fred M. Winkler suddenly retired. It was bad enough for an accounting company to suffer this kind of embarrassment, but a few weeks later the situation would border on disastrous when Century reported that in fact it lost 6 cents a share for the quarter, and 34 cents on the year. After reassuring Wall Street analysts about the validity of its numbers, Century had suffered severe damage to its credibility, requiring drastic measures. Several members of senior management were immediately terminated and DeGroote stepped down as CEO.

As a result of its accounting missteps, Century also faced lawsuits from some of the former owners of its acquisitions, who had been paid in large part by stock that was now severely devalued. Nevertheless, numerous firms that joined Century remained satisfied with their decision. They maintained that the ability to offer Centurys array of services actually brought in more business and attracted larger clients. But of more importance to Century was finding strong leadership that could help repair the breach in trust that now existed with investors. The corporations lead director, Joseph Plumeri, succeeded DeGroote and Winkler but by September 2000, as Centurys stock price fell below $1, he was gone as well. In October, Century hired Steven Gerard to serve as its CEO and charged him with reversing the companys performance and restoring its image. Although not familiar with the accounting industry, he was a well seasoned executive, experienced in turnarounds, boasting strong Wall Street ties. He served as chairman and CEO of Triangle Wire & Cable, Inc., overseeing its restructuring. He also had seven years of experience as vice-president of the securities division of the American Stock Exchange and 16 years with Citibank N.A., where he rose to the position of senior managing director.

Gerard quickly took steps to overhaul Century. Acquisitions were put on hold as he came to grips with the assortment of businesses that had come into the fold in the previous two years. Some were sold off, others closed, and a number were merged with other Century operations. Administrative functions were also consolidated, a significant factor in slashing corporate overhead by 25 percent in 2001. In addition, Gerard took aggressive steps to reduce debt and over the course of 18 months cut it from $147 million to $50 million. He remained committed to expanding the company, establishing three key objectives: improve the growth rate of existing businesses, take advantage of the network to create cross-serving opportunities, and pursue acquisitions. By the spring of 2002 Century was ready to once again grow externally. This time, however, the company focused on filling key gaps, targeting select servicesincluding accounting, business solutions, payroll services, benefits and health, and property and casualty insuranceand targeting select markets, such as Atlanta, Denver, Miami, Minneapolis, New York City, and the Washington, D.C. area. Century also renewed its efforts to extend the CBIZ brand, launching a print and radio advertising campaign in ten key cities, where consolidation of local acquisitions had already begun. Century began this effort without DeGroote as chairman. In October 2002 he resigned, citing health reasons, and was immediately replaced by Gerard, who now served as CEO and chairman of Century.

Principal Divisions

Business Solutions; Benefits and Insurance; National Practices.

Key Dates:

1995:
Michael DeGroote spins off Republic Environmental Systems Inc. (RESI).
1996:
RESI merges with International Alliance Services, Inc. and assumes its name.
1997:
Company name is changed to Century Business Services, Inc.
2000:
Steven Gerard is named CEO.
2002:
DeGroote resigns as chairman, replaced by Gerard.

Principal Competitors

Automatic Data Processing, Inc.; Ceridian Corporation; ProBusiness Services.

Further Reading

Cornell, Ryan, CBiz Out to Shed Its Heavy Load, Crains Cleveland Business, August 6, 2001, p. 2.

Creative Accounting at Century, Business Week, February 21, 2000, p. 142.

Higgins, Will, Who Is Michael DeGroote?, Indianapolis Business Journal, June 9, 1986, p. 1A.

Mayers, Adam, Mikes Midas Touch, Toronto Star, September 27, 1987, p. Fl.

Serres, Christopher, Century Rides Express Route for Growth, Crains Cleveland Business, June 22, 1998, p. 3.

, CEO Claims Century Stock Victim of Analyst Lies, Crains Cleveland Business, November 2, 1998, p. 1.

, Struggling Cbiz Tries Executive Shakeup, Crains Cleveland Business, March 6, 2000, p. 1.

Siklos, Richard, DeGrootes Third Act, Financial Post, June 28, 1997, p. 12.

, Waynes World, Financial Post, June 15, 1996, p. 16.

Ed Dinger

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