PRG-Schultz International, Inc.
PRG-Schultz International, Inc.
Incorporated: 1996 as Profit Recovery Group International, Inc.
Sales: $356.9 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: PRGX
NAIC: 541219 Other Accounting Services
Atlanta-based PRG-Schultz International, Inc. specializes in recovery audit services, using proprietary software and well-honed methodology to scour clients' books—invoices, purchase orders, receiving documents, databases, and even correspondence files—to find overpayments, missed discounts, and rebates. The company receives a percentage of the money it recovers, charging companies no other fees for its services. A recovery audit can take as little as three weeks and as long as a full year to complete. Early customers were in retail, such as discounters including Wal-Mart, department stores, and drug and supermarket chains, but today PRG-Schultz works with a broad range of industries, including aerospace, chemicals, consumer electronics, healthcare providers, and pharmaceuticals. The company's clients include nearly 90 percent of the nation's top 25 retailers, almost half of the Fortune Global 200, and 54 companies that comprise the Fortune 100. The largest company in the world in its field, PRG-Schultz works with clients in more than 40 countries. Efforts launched in the late 1990s to diversify service offerings failed to take hold, leading the company to return to its roots, accounts payable services, although the company continues to provide tax recovery services as well. PRG-Schultz is a public company, listed on the NASDAQ.
PRG-Schultz was formed in 2002 after Profit Recovery Group International Inc. acquired Howard Schultz & Associates, although the latter was the older of the two firms—and the first company in the United States to provide accounts payable recovery services, founded by Howard Schultz in 1970. Schultz received his inspiration for the business during the late 1960s when he was hired by a large department store as its controller and was charged with the task of clearing up a massive accounting problem. The retailer's payment processing system had become overwhelmed, delaying the payment of bills. In order to meet pending deadlines, the accounts payable department had been forced to ignore its usual verification process in order to cut the necessary checks. Upon taking over, Schultz initiated an audit, which located and recovered about $40,000 in overpayments. He made it a standard practice to conduct audits on his employer's books, recovering money that would have been lost equal to many times his salary. Shrewdly he decided to quit his salaried position and continue to do the audits, but on a contingent basis. Unlike other accountants who performed similar functions on a part-time basis to earn extra money, he recruited the services of other accountants and in 1970 formed Howard Schultz & Associates, Inc. (HS&A) to take on other clients and become the first full-time profit recovery company. In the first month alone, the company recovered more than $250,000.
In the early years the profit recovery business was labor-intensive, requiring auditors to sort through vast amounts of paper records. Nevertheless, the young company was able to unearth a large enough number of overpayments to attract clients and grow the business. In 1975 Howard Schultz took his concept to Canada, and five years later entered the U.K. and Ireland markets. At this stage an increasing number of retailers became more computerized and turned to electronic data inter-change (EDI). Although it sped up the bill-paying process, EDI also led to a new breed of errors that went undetected because of an increasing lack of human oversight. "There is a belief out there that if something is listed on a computer printout, then it has to be right," Schultz told the Dallas Morning News in a 1992 profile. "I've found that I've been very successful in finding overpayments in that environment … because no one is checking their work." In order to audit electronic accounts, HS&A developed the industry's first audit-specific software programs, unveiled in 1987. Clients turned over their computer tapes to HS&A auditors, who then ran the tapes through the program to compare purchases with historical data and other criteria to flag potential errors that required closer examination. Like the company, the auditors were not paid a salary. Rather, they received a percentage of the money they recovered. "That keeps them from getting bored," Schultz told the Dallas Morning News. In 1987 the company also topped the $100 million mark in annual recoveries for the first time.
HS&A made further inroads in Europe, in 1988 opening offices in the Benelux region, then in 1993 entering France. Two years later the company moved into the Far East. The company continued to get better at finding overpayments, with recoveries increasing about 13 percent a year during the 1990s. Moreover, waves of mergers and consolidations led to the downsizing of accounts payable departments at many major companies, opening up even greater opportunities for HS&A and other profit recovery companies. In 1996 HS&A was the top company in its field, generating $60 million more than its closest competitor, Atlanta-based Profit Recovery Group International (PRG). Over the next few years, however, that ranking would be reversed.
Longtime company President, CEO, and Chairman John M. Cook first became aware of the potential of a profit recovery company in the late 1980s when he was the chief financial officer at Caldor Stores and hired a small recovery auditing firm, Atlanta-based Roy Greene Associates. But Cook had developed a penchant for the field much earlier in his business career. During the early 1960s he worked his way through Saint Louis University, holding a variety of jobs, including working part-time in the accounting department of a local department store. While working on the accounts of one of the company's parking garages he noticed some discrepancies. Told to ignore them by his supervisor, Cook pored over the books on his own time and was able to document a consistent revenue shortfall that ranged from $700 to $900 a day, the result, it turned out, of a longtime employee raiding the register. The department store offered him a job after he graduated in 1964 and he became an internal auditor. Cook later took a position with May Department Stores and gained experience setting up systems to minimize losses either through fraud or simple clerical errors. Cook left May to become involved in a start-up, but returned for a second stint in 1982, joining May's Kaufmann's Department Store division as vice-president of control. He then became chief financial officer at another May division, Caldor Stores.
Cook was well aware of the large number of accounting errors caused by computer systems. Although impressed by the results of Greene's recovery audit at Caldor, Cook was convinced he could do an even better job if he were in charge, especially if he could develop a recovery audit method that worked in a purely electronic environment. In 1989 he quit Caldor to buy 20 percent of Roy Greene and become president and chief operating officer at Roy Greene. His agreement also allowed him to acquire the rest of the business. To back the $1 million loan he needed for the buy-in, Cook used his home as collateral. In 1991 Cook bought the business outright and he and John M. Toma, a colleague at Caldor who had gone to work for Greene before Cook, cofounded PRG. Two months later he spotted a chance to add customers from different markets and acquired another small audit recovery firm, Bottom Line Associates Inc. In its first full year in business, PRG recorded revenues of $17.7 million. The company also spent heavily to develop the kind of EDI-auditing software Cook had in mind. Like Schultz before him, Cook initially focused on retailers and drummed up business by charging no fees and only making money if the firm recovered money for the client.
Cook was quick to look to foreign markets to fuel growth. As early as 1991 he set up The Profit Recovery Group Mexico and The Profit Recovery Group UK. The company's first international client, a U.K. retailer, was signed in 1993. In that same year, PRG set up operations in Canada, France, and Asia. By the end of 1995 foreign business accounted for one-fifth of all revenues, which totaled more than $56 million for the year. Also in 1995 the company greatly expanded its U.S. business by acquiring competitor Fial & Associates.
To fuel further growth, PRG became the first publicly traded recovery audit company, completing an initial offering of stock in March 1996, raising $50 million. Some of that money, about $3 million, was spent to upgrade the company's computer hardware, and another $5 million funded the work of 50 information technology personnel, including eight computer programmers, working on even more advanced auditing tools. Preparing for the future, PRG also formed new subsidiaries in Australia, Belgium, Germany, The Netherlands, and New Zealand. Being a public company that was transparent about its finances proved useful in signing international clients, who were reassured about the company's financial footing. At the end of 1996, during which the company generated revenues of $77.3 million and recorded net income of $6.7 million, PRG was virtually debt-free and had nearly $17 million in cash on hand.
The long-term plan was to move into new markets and add services to become a one-stop shop for clients. In 1997 PRG targeted the healthcare industry, acquiring a pair of companies heavily involved in the healthcare recovery audit business: Newport Beach, California-based Hale Group, and Houston-based Accounts Payable Recovery Services, which also brought with it energy clients. The acquisition of another California company, Shaps Group, gave PRG a foothold in manufacturing/high-tech auditing. Another 1997 purchase was TradeCheck, LLC, an auditing company that specialized in ocean freight expenses and helped PRG launch its Logistics Management Services unit. PRG also grew internationally in 1997 by acquiring Financier Alma, S.A., a Paris-based tax auditing firm, whose clients were likely prospects for PRG's accounts payable services.
PRG-Schultz is committed to making our clients worldwide more profitable, improving the potential of our employees, and the value for our shareholders. By creating partnerships with our employees, our business partners, our clients and their suppliers, we meaningfully improve our clients' internal controls and financial performance. Our passion for creativity and innovation, and a disciplined approach creates value for our clients in ways no other firm can.
PRG's aggressive pattern of growth continued in 1998, as revenues nearly doubled 1997's total, increasing from $112.4 million to $202.8 million, while net income topped $18 million. Much of that growth was due to eight acquisitions. The addition of Precision Data Link, The Medallion Group, and Industrial Traffic Consultants bolstered the Logistics Management Services unit, so that it could handle a full range of freight auditing services, whether they be ground, express, or ocean freight. In 1998 PRG also acquired Loder, Drew & Associates, which focused on commercial and industrial firms, and Robert Beck & Associates, focusing on grocers. In Europe, PRG acquired France's Novexel S.A. and Belgium's IP Strategies S.A., both of which specialized in European Union government grant procurement issues. In the Pacific Rim, PRG acquired Australia-based Cost Recovery Professionals, a retail accounts payable auditing form.
PRG closed out the 1990s on a high note, reaching $1 billion in the amount of money it recovered for its clients, resulting in a 44 percent increase in revenues in 1999 to $350 million and net income that doubled to $39 million. PRG was doing especially well with nonretail customers, such as high-tech industries, healthcare, financial services, government agencies, and manufacturing and distribution. During 1999 the company completed a third offering of stock, selling 3.5 million shares at a price of $34 million, money that was put to use in making further strategic acquisitions, such as the purchase of Atlanta-based Integrated Systems Consultants, Inc. and Payment Technologies, Inc. The acquisition of Ireland-based Meridian VAT Corp., a leader in the Value-Added Tax recovery field, provided entry to 13 more countries, including Japan. As a result of its strong performance, PRG received its share of accolades, named as one of Fortune magazine's 100 Fastest Growing Companies. Personal honors came as well to Cook, named "Ernst & Young LLP Entrepreneur of the Year" in the Financial Services Category.
Acquiring HS&A in 2002
Even as PRG was enjoying a strong 1999, there were questions arising from some quarters about the company's accounting practices and growth potential. A critical report published in a December 1999 hedge-fund subscription newsletter by Off Wall Street Consulting Group in Cambridge, Massachusetts, led to a sell-off in PRG's stock. Management was able to reassure investors and the stock price rebounded, but missed quarterly projections in 2000 led to further decreases in the price of PRG stock. The company took advantage of the situation to buy back a large portion of its stock, but it was becoming apparent that the one-stop shopping plan was not working, the combined business model requiring too much capital and effort from management to be viable. Management hired consultants Bain & Company in the fourth quarter to develop a realignment strategy, which called for the company to divest Meridian and the communications, logistics, and freight divisions in order to focus on the core accounts payable business. It was in the context of this back-to-basics philosophy that in 2002 PRG reached an agreement to acquire HS&A in a deal that closed in early 2002, creating the world's largest recovery audit service provider by a wide margin, some 14 or 15 times larger than its nearest competitor. To pay for the deal, PRG issued nearly $160 million in stock to HS&A and assumed about $37 million in debt. As a result, 72-year-old Howard Schultz and his son Andrew became two of the largest PRG shareholders. They subsequently sold a major portion of those shares to a pair of private equity Firms, Berkshire Partners LLC and Blum Capital Partners LP, which held a combined 27 percent stake in PRG.
PRG now assumed the name PRG-Schultz International, Inc. and had to contend with difficult economic conditions in many of the industries it served. Recovery auditing services had long been considered recession-proof, but that idea was now being put to the test, as PRG-Schultz learned the obvious lesson that when companies do less business there are less mistakes to be found. The company turned in what Cook considered a solid performance, but in 2003 had to contend with continuing poor economic conditions, exacerbated by the Securities and Exchange Commission's inquiries into vendor-supplied promotional allowances that made many clients cautious about pursuing audit claims. As a result, PRG-Schultz saw its revenues slip from $447 million in 2002 to $376 million in 2003. Business continued to fall off in 2004 and PRG-Schultz found itself the recipient of unsolicited offers to buy the company. Management felt that in fairness to its shareholders it should seriously consider the offers, and so in October 2004 it hired CIBC World Markets as a financial advisor to consider strategic alternatives, including the possible sale of the company.
When the results of 2004 were tallied, PRG-Schultz recorded another drop in revenues, to $356.9 million, while losing $71.5 million. Nevertheless, by June 2005 the company concluded that it was still not in the best interests of shareholders to sell the company. Rather, management expressed confidence that PRG-Schultz was on the verge of realizing new growth opportunities in both the United States and internationally. In a separate announcement, Cook declared his retirement, although he agreed to stay on as chairman, president, and CEO until his successor was in place.
PRG-Schultz USA, Inc.; PRG-Schultz France, Inc.; PRG-Schultz Canada, Inc.; PRG International, Inc.; PRG-Schultz UK, Ltd.; Howard Schultz & Associates (Asia) Limited.
- Howard Schultz forms Howard Schultz & Associates, Inc. (HS&A).
- HS&A expands to the United Kingdom.
- John M. Cook and John M. Toma cofound Profit Recovery Group International Inc. (PRG).
- PRG acquires Roy Green Associates, Inc. and Bottom Line Associates, Inc.
- PRG is taken public.
- PRG acquires HS&A, becoming PRG-Schultz International, Inc.
- Cook announces his retirement.
Connolly Consulting, Inc.; Broniec Associates Inc; Hewitt Associates, Inc.; The Corporate Executive Board Associates Inc.
Alva, Marilyn, "Scandals Don't Bring Auditor Down," Investor's Business Daily, September 13, 2002, p. A07.
"Blueprint for Success," Shareholder, Fall/Winter 2000, p. 5.
Coolidge, Carrie, "Finders, Keepers," Forbes, December 25, 2000, p. 74.
Geer, John F., Jr., "Profit Recovery Group: Greener Eyeshades," Financial World, August 12, 1996, p. 25.
Pallarito, Karen, "The 'Lost Profit' World: Payment Recovery Firms Target Lucrative Healthcare Industry," Modern Healthcare, June 16, 1997, p. 36.
Patrick, Stephanie, "Schultz Recovers Millions in Client Overpay ments," Dallas Business Journal, November 27, 1998.
Utley, Michael, "Scoring on Errors," Dallas Morning News, August 10, 1992.