FoxMeyer Health Corporation
FoxMeyer Health Corporation
1220 Senlac Drive
Carrollton, Texas 75006
Fax: (214) 446-2836
Sales: $5.17 billion (1995)
Stock Exchanges: New York
SICs: 5122 Drugs, Proprietaries & Sundries
The second-largest wholesale drug distributor in the United States, FoxMeyer Health Corporation functions through two operating units, FoxMeyer Corporation and Ben Franklin Retail Stores, Inc., a chain of general variety stores. In 1986, FoxMeyer was acquired by National Intergroup, Inc., a holding company created by National Steel Corporation to facilitate the entry into businesses other than steel and aluminum production. During the ensuing decade, the steel and aluminum properties were divested, leaving the former steel giant with FoxMeyer as its chief revenue source. In 1994, FoxMeyer Corporation and National Intergroup, Inc. merged, creating FoxMeyer Health Corporation.
Throughout much of its first 20 years of business, FoxMeyer was a pawn, albeit an enormously large pawn, caught in the contentious corporate affairs of its parent company, National Intergroup, Inc. (NII). During the decade that spanned FoxMeyer’s conversion from an independent company to a subsidiary company to a publicly owned subsidiary, NII underwent more sweeping changes, changes that revolved around FoxMeyer and its wholesale drug distribution business. In the years leading up to NII’s purchase of FoxMeyer, NII ranked as one of the largest steel companies in the United States, then the company diversified, quickly taking on the characteristics of a conglomerate before shedding its steel and other variegated assets to emerge during the 1990s as a company reliant on one primary source of revenue: the wholesale drug business operated by FoxMeyer. Within a decade, a steel company with more than a half century of experience was transformed into a wholesale drug distributor, representing a metamorphosis that charted the rise of FoxMeyer.
Before FoxMeyer and NII officials convened together to discuss their corporate marriage, the predecessor to FoxMeyer operated on its own for nine years, the formative years of the company’s development into a national wholesale drug powerhouse. The company was incorporated in 1977 for the express purpose of acquiring Fox-Vliet Drug Company, a drug distributor based in Wichita, Kansas, that had first opened its doors in 1903. Fours year later, in July 1981, the company completed a major acquisition, purchasing St. Louis, Missouri-based Meyer Brothers Drug Company, the second of a series of acquisitions that would greatly amplify the company’s stature. Once Meyer Brothers Drug Company was added to the fold, annual revenues nearly doubled and expansion into the midwestern United States was achieved. Following the acquisition, the company adopted a new name, incorporating the first two words of the company’s first two acquisitions to create the FoxMeyer name.
FoxMeyer Corporation went public two years after the acquisition of Meyer Brothers Drug Company, making its initial public offering of stock in July 1983. After completing the conversion to public ownership, FoxMeyer was less than three years away from its acquisition by NII, but in the interim the company did not remain idle; instead FoxMeyer completed a number of acquisitions that strengthened its standing in the eyes of NII executives and engendered explosive growth. Two drug wholesalers were added to the company in fiscal 1984, Cincinnati Economy Drug Company, a $35 million-a-year business, and Lincoln, Nebraska-based Lincoln Drug Company, with $16 million in annual sales. More acquisitions followed, including Yahr-Lange, Inc., an $80 million-a-year wholesale drug distributor with facilities in Wisconsin and northern Illinois, and I.L. Lyons Ltd., a New Orleans, Louisiana drug distributor with annual sales of $90 million. In 1985, the company purchased Kansas City-based McPike, Inc., a drug wholesaler that was collecting $90 million a year in sales. FoxMeyer also purchased two computer products and service companies in the years preceding its acquisition by NII: TBL Inc. in fiscal 1994 and PharmAssist, Inc. in fiscal 1985, which together serviced nearly 2,000 pharmacies scattered across 29 states.
National Intergroup’s Emergence in the 1980s
As FoxMeyer entered 1986, it was experiencing rapid growth, growth largely realized through an acquisition program that with each passing year had significantly increased its sales volume and made the company a tantalizing asset for an interested buyer. In less than eight years, FoxMeyer had developed itself into the third-largest drug distributor in the country, becoming a flourishing and rapidly-growing company that was attracting $1.5 billion in sales by the beginning of 1986. Elsewhere, there was a company on the lookout for a thriving enterprise of FoxMeyer’s type, a company that was attempting to break out of a mold formed during more than five decades of existence as a steel producer. That company was NII, and in early 1986 its acquisitive eye would stop and rest on the fast-growing wholesale drug distributor known as FoxMeyer Corporation.
NII was in many respects the creation of Howard M. Love, who would spend the 1980s as one of the most closely watched business leaders during the decade. Love was promoted in 1980 to chief executive officer of National Steel Corporation, then the sixth-largest steel company in the United States. National Steel Corp. traced its roots back to the 1929 merger of Great Lakes Steel Company, Hanna Iron Ore Company, and the Weirton Steel Company. The company operated exclusively as a steel concern following the merger that created it, remaining a one-faceted enterprise until 1964, when National Steel Corp. opened its first metal service center. Four years later, the company entered the aluminum industry, developing this new business segment into a significant contributor to its overall sales. By the end of the 1970s, steel and aluminum were driving National Steel Corp.’s growth, but in 1979 the company began to diversify beyond its two primary businesses, branching into new areas to lessen the company’s exposure to the historically cyclical steel market. No individual embraced the concept of diversification more tightly than the person named as National Steel Corp.’s chief executive officer in 1980, Howard “Pete” Love.
The vehicle for Love’s diversification plans was formed in 1983, a holding company that would serve as a corporate umbrella under which a variegated range of businesses would be controlled and help engender an international industrial and financial services conglomerate. That company was NII, its creation approved by National Steel Corp. shareholders in September 1983, when they agreed to receive one share of NII for each share of National Steel Corp. they held. Concurrently, National Steel Corp. became a wholly owned subsidiary of its new parent company, Nil
The push toward diversification began in earnest for the newly formed NII in 1984, just as FoxMeyer was beginning to bolster its position in the wholesale drug distribution market following its initial public offering. In September 1983, Love addressed a press conference organized to publicize the creation of NII, telling the reporters in attendance, “I don’t see steel ever being less than 50 percent of the company. It is our core business and we intend to keep it on that basis.” Four months later, however, things began to change. In early 1984, NII reached an agreement in principle with the United States Steel Corporation to sell the steel giant’s largest business group, National Steel Corp. Though the deal ultimately fell through, major divestitures were completed before the year was through that stripped the company of significant steel operations. NII sold Weirton Steel to Weirton Steel’s employees and sold 50 percent of National Steel Corp., the company’s original business, to a Japanese company, Nippon Kokan KK.
1986 Acquisition by National Intergroup
More changes were in the offing for NII, as Love endeavored to reposition the company to avoid the capricious steel market. In an interview with American Metal Market, a national trade publication, Love hinted at what the future might hold for NII, saying, “We will probably become a three-legged stool. One segment in the steel, aluminum, and distribution business, another in financial services, and the third is yet to be acquired.” The third, as-yet-to-be-determined leg that NII would rest on would be FoxMeyer and eventually the wholesale drug distribution business operated by FoxMeyer would be the only leg supporting NII
After acquiring Permian Corporation, a Houston-based oil distribution company, in 1985, NII acquired FoxMeyer in March 1986. That same month, FoxMeyer in turn acquired Ben Franklin Stores Inc., a chain of 1,300 five-and-dime stores, and then six months later the company acquired Lawrence Pharmaceuticals, a Jacksonville, Florida-based wholesaler. These two additions strengthened what already had represented a valuable asset for NII, giving the company a sturdy foundation in the wholesale distribution business. By the time NII acquired FoxMeyer, the drug wholesaler controlled 400 Health Mart drugstores, which combined with the addition of a retail chain, Lawrence Pharmaceuticals, and the $1.5 billion FoxMeyer collected sales each year, propelled Love’s diversification program decisively. What looked good on paper, however, did not perform well in reality, as Love, his executives, and NII shareholders quickly discovered in the years following the acquisition of FoxMeyer.
Lackluster Late 1980s
Before the dust had settled from the move into the wholesale drug business, NII was reeling from the affects of its far-flung and ambitious diversification program. By early 1987, the company was experiencing dire financial difficulties. Oil prices had plummeted, hobbling Permian Corporation’s business, FoxMeyer had not performed up to expectations, recording a 50 percent decline in profits in 1986, and the chain of Ben Franklin stores were plagued by problems arising from its merger into FoxMeyer. Saddled with $600 million in debt, NII was floundering, raising the ire of shareholders who pointed their accusative fingers at the company’s chairman, chief executive officer, and orchestrator of the diversification program, Howard Love. As the late 1980s progressed, NII’s condition did not improve and by 1990 the frustration and anxiety pervading the NII organization reached a climax.
As NII entered the 1990s, the company’s financial performance was woeful, a trait not developed overnight. Between 1984 and 1990, NII posted six consecutive years of net per share losses, a record that needless to say did not impress the company’s shareholders. The company, by this point, had abandoned its diversification plan, opting instead to shed businesses that no longer fit with the company’s future plans. In 1989, NII sold the bulk of its aluminum business, then in 1990 reduced its stake in National Steel Corp. to 13.33 percent, leaving FoxMeyer as the source for 85 percent of the former steel company’s total sales. With its fate resting primarily on FoxMeyer’s business, NII appeared to be heading in one, clear direction after more than a decade of pursuing a host of eclectic business interests, but in 1990 a dissident shareholder group led by Centaur Partners, L.P., a New York investment group, won several important seats on NII’s board and removed Love from command. In the wake of Centaur Partners’ ascension, Permian Corporation was sold, then FoxMeyer itself was slated for divestiture, a move that would strip the company of nearly all its revenue-generating power.
FoxMeyer was put up for sale in August 1990 and remained on the auction block until March 1991, but an acceptable offer never surfaced. Six months later, in August 1991, an alternative solution was found, and a public offering of a percentage of FoxMeyer’s stock was put on the market. The public offering reduced NII’s stake in FoxMeyer to 67 percent, lessening the nearly $3 billion-a-year drug distributor from the deleterious debt problems weighing down its parent company. After rumors of takeover of FoxMeyer in 1992 died down, the massive distributor of pharmaceutical and health and beauty aids experienced the latest in a lengthy series of major corporate changes. In October 1994, FoxMeyer Corporation merged with NII, creating a new company named FoxMeyer Health Corporation that, despite the years of turmoil surrounding it, entered the late 1990s with high expectations for future growth.
During the 1980s, the wholesale drug industry in the United States grew 300 percent, giving participating companies the opportunity to achieve robust growth. At the same time the wholesale drug industry was expanding meteorically, the number of competitors vying for a share of the ever-increasing business dropped, plunging 40 percent during the decade. Growth continued in the 1990s, with further industry-wide contraction expected to occur as the decade progressed. Enviably positioned as the second-largest drug wholesaler during the mid-1990s, FoxMeyer Health Corporation was expected to gain a lion’s share of the wholesale drug industry’s business in the years to come and put to rest the difficulties characterizing its first decade of existence.
Ben Franklin Retail Stores, Inc. (67.2%); Ben Franklin Transportation, Inc.; FoxMeyer Corp. (80.5%); FoxMeyer Realty Company; FoxMeyer Software, Inc. (80%); Intergroup Services, Inc.; M&A Investments, Inc.; National Aluminum Corporation; National Intergroup Realty Corporation; National Intergroup Realty Development, Inc.; National Magnesium Corporation; National Steel Products Company, Inc.; Natmin Development Corporation; Natoil Corporation; NII Health Care Corporation; NI World Trade, Incorporated; Oceanside Enterprises, Inc.; Riverside Insurance Co., Ltd. (Bermuda); Starcom International, Inc. (80%)
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Biesada, Alexandra, “Love’s Labors Lost: Cursed Is the Son of a Famous Man Who Tries to Live Up to His Father’s Image,” Financial World, May 1, 1990, p. 30.
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——, “The Best-Laid Plans of Howard Love,” Business Week, August 10, 1987, p. 74.
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—Jeffrey L. Covell