National Intergroup, Inc.
National Intergroup, Inc.
1220 Senlac Drive
Carrollton, Texas 75006
Fax: (214) 446-4221
National Intergroup, Inc. (NII) is one of the largest drug wholesalers in the United States, through its principal operating unit, FoxMeyer Corporation. It is also a wholesaler to a franchiser of variety stores through its Ben Franklin unit.
The company has made a significant transition from steelmaking to merchandising. It was originally incorporated in 1929 as the National Steel Company, a business that was the result of the merging of the Great Lakes Steel Company, Hanna Iron Ore Company, and the Weirton Steel Company. As a result of the slump in the steel industry in the late 1970s and the unpredictability of the steel and metals business in general, a diversification plan was developed by Howard M. (Pete) Love, National Steel’s chairman and son of long-time company executive George Love. The program called for the creation of NII as an umbrella holding company that would control various operating companies formed in the wake of National Steel’s restructuring. In September 1983, National Steel’s stockholders approved a plan under which they received one share in NII for each share of National Steel they held, and National Steel became a wholly owned subsidiary of NII
In 1984 NII sold Weirton Steel to Weirton’s employees and sold 50% of National Steel to Nippon Kokan K.K., now NKK Corporation. Also that year, NII formed a new subsidiary, GENIX, which offered software and computer consulting services. NII also purchased the Permian Corporation, a crudeoil gathering and shipping concern for $88 million in cash and three million shares of common stock.
The main thrust of Howard Love’s diversification plan was for NII to move into the wholesale Pharmaceuticals business. He reasoned that wholesale Pharmaceuticals had none of the problems of the steel business. Large numbers of workers were not necessary, the business was not vulnerable to foreign competition, and it did not require large amounts of capital investment that the steel business did.
In 1985 Love proposed a merger with the Bergen Brunswig Corporation, the second-largest distributor of health-care products and other drugstore-related items in the United States. The Bergen Brunswig merger never came to fruition. While the deal was pending, NII suffered major losses from its speculation in aluminum futures. Bergen Brunswig, perhaps fearing there were other problems at NII, called the deal off.
Love remained undaunted in his diversification plans, and in 1986, after borrowing heavily to fund new acquisitions, NII purchased the United States’s third-largest drug distributor, FoxMeyer Corporation. With sales in excess of $1.5 billion, FoxMeyer controlled 400 Health Mart drugstores and was growing rapidly. FoxMeyer in turn acquired the Ben Franklin Stores Inc., a chain of 1,300 5C-and-lOC stores, and Lawrence Pharmaceuticals Inc., a regional drug distributor. In total, the deals cost NII $654 million.
The acquisitions of Permian Corporation, FoxMeyer, and Ben Franklin Stores created immediate problems for NII. Oil prices plummeted, causing major difficulties for Permian. FoxMeyer went through a price-cutting war in the pharmaceutical business and was also burdened with large start-up costs in a new hospital-supply venture; it also abandoned a plan to sell computers to pharmacists for handling prescriptions. In 1986 FoxMeyer profits sagged 50% to only $10 million. Ben Franklin Stores were plagued with major problems as attempts to convert the chain’s computers to FoxMeyer’s systems cost huge amounts of money and created confusion. Ben Franklin’s sales fell when orders from the retail stores went unfilled. In the process, the company closed 43 Ben Franklin stores.
By early 1987, NII found itself in serious financial straits. Falling oil prices continued to take their toll on NII’s oil transportation and acquisition unit, the Permian Corporation. The company’s steel units were experiencing operating problems, made worse by expensive labor contracts and cultural clashes with NKK. The company was technically in default, with $600 million in debt and annual interest payments of $90 million. Seeking financial relief, the company’s board voted to sell half of the Permian Corporation to the public. Howard Love cut corporate overhead by 25%. NII’s bankers, however, pulled out of a loan agreement due to the failed predictions FoxMeyer’s performance. Love had to find new loans; they had much stricter covenants.
The financial debacle was compounded by personnel problems. Howard Love’s heir apparent, James Haas, indicated he wished to leave the company. After an extensive search, NII chose Laurence Farley to succeed Haas as president at the end of 1988. Haas remained chief executive officer of the Permian Corporation. Farley, as chief executive officer of Black & Decker, led that company’s recovery. He had joined NII as chief financial officer in February 1988 and took responsibility for FoxMeyer the following July.
Farley’s first year at the helm of NII brought about some positive results. He organized a new group of bankers, pushed through a write-down of one of NII’s European aluminum mills, and began to focus his attention on FoxMeyer, which at the time represented 85% of NII’s $3 billion in annual sales, but had profit margins that were half the industry average. Farley, however, did not remain president for long, resigning in April 1989. NII was in its fifth year of operating in the red. There were reports of conflicts between Farley and Love.
James S. Pasman Jr., a former Aluminum Company of America vice chairman, replaced Farley. Pasman had also assisted in the restructuring of Kaiser Aluminum & Chemical Corporation. At the time of Pasman’s hiring, the drug wholesaling industry was showing a 15% increase in revenues. FoxMeyer had experienced a 20% increase in annual revenues. Pasman’s focus became obvious. While not ignoring Permian Corporation or Ben Franklin, Pasman upgraded FoxMeyer. At the same time he began to explore the possible sale of NII’s steel and aluminum subsidiaries.
Further pressure was on NII to begin to show profits, as its five-year-old agreement with NKK, NII’s partner in National Steel, was close to expiration. In the agreement with NKK, NII was prohibited from selling its half interest in National Steel to a third party. The agreement also stipulated that NKK could buy NII’s share of National Steel at a very low price if an attempt at a hostile takeover ever occurred. With the agreement time coming to an end, it was one of Pasman’s major challenges to put National Steel back into a profit mode before an unfriendly takeover attempt could occur by one of the company’s disgruntled shareholders. After seven years of losing money, there were many unhappy NII shareholders, some calling for Love’s ouster.
Late in 1989, NII sold its aluminum rolling and extrusion divisions. Early in 1990, it sold its 54.5% share of an aluminum smelter. Also in 1990, it reduced its holding in National Steel to 13.33%, with NKK increasing its share. FoxMeyer’s wholesale drug sales increased 21 % to $2.4 billion, and with a new emphasis of selling arts-and-crafts items, and the company’s Ben Franklin unit showed a modest operating profit. In the fiscal year ended March 31, 1990, NII reported profits of $55.7 million compared to a net operating loss of $15.7 million in the previous year.
In 1990 Centaur Partners Group, a dissident shareholder group that held 16.5% of NII, won several important board seats, with Howard Love among the losers. The new board sold Permian Corporation to Ashland Oil and explored the possibility of selling FoxMeyer. NII, however, was not satisfied with the bids it received for FoxMeyer, which had improving sales and profits. Instead of selling the entire company, in late 1991 NII put 30% of FoxMeyer’s common shares up for sale to the public. NII also moved its headquarters from Pittsburgh to Carrollton, Texas, a Dallas suburb.
FoxMeyer Corporation (70%).
Beazley, J. Ernest, “Steelmaker Suffers Diversification Blues,” The Wall Street Journal, June 30, 1988; Miles, Gregory, “National Intergroup: How Pete Love Went Wrong,” Business Week, March 6, 1989.
—William R. Grossman