U.S. Office Products Company
U.S. Office Products Company
Sales: $2.61 billion (fiscal 1998)
Stock Exchanges: NASDAQ: Ticker Symbol: OFIS
SICs: 5021 Furniture; 5112 Stationery & Office Supplies; 5149 Groceries & Related Products, Not Elsewhere Classified; 7334 Photocopying & Duplicating Services; 7389 Business Services, Not Elsewhere Classified
Starting from scratch in 1994, U.S. Office Products Company grew, by purchasing companies, to command annual revenues of more than $2.5 billion within three years. Unlike the five other major office products consolidators in the late 1990s, U.S. Office Products allowed the acquired companies to preserve their names and identities. In essence it planned to be a one-stop enterprise capable of meeting all the product and service needs of a small business. In early 1998 the company reversed course by spinning off four divisions into independent companies. Nevertheless, U.S. Office Products remained a giant enterprise, offering more than 33,000 brand-name products in the fields of office supplies, office furniture, and other office products (including coffee, beverage, and vending products and services). It also owned Mail Boxes Etc., the world’s biggest franchiser of business communications and postal service centers.
Merging Six Companies into One, 1994–95
U.S. Office Products was founded in October 1994 by Jonathan Ledecky. Ledecky had been a manager/consultant for Steelcase Inc., a large manufacturer of office furniture, until one month earlier, when he bought General Office Products Co., a Minnesota-based company owned by Steelcase, for $4.5 million. By the time U.S. Office Products went public in February 1995, Ledecky had acquired five more contract stationers: companies that sell office supplies under contract to corporate and commercial clients. The new company thereby started public life as the sixth largest in its field.
The other five companies, all privately owned, were chosen to give U.S. Office Products immediate coverage in different areas of the United States east of the Mississippi River. They were Andrews Office Supply and Equipment Co. of Washington, D.C. (founded 1896); Burgess, Anderson & Tate Inc. of Zion, Illinois (founded 1903); Dameron-Pierson Co. of New Orleans (founded 1904); DeKalb Office Supply of Atlanta (founded 1952); and The Office Works Inc. of Lancaster, Pennsylvania (founded 1977). These companies, plus General Office Products, had combined revenues of $76.5 million in fiscal 1994 (the year ended April 30, 1994) and net income of $1.1 million.
Although the acquisitions and consolidation were simple in concept, Ledecky said the execution of the plan was “like herding cats” because he had to get the executives of the acquired companies to agree on the compensation to be received once shares of U.S. Office Products were sold to the public. The valuation agreement eventually called for half-payment to the owners in U.S. Office Products stock and the rest in the form of half the offering proceeds, amounting to cash equal to about seven times the combined earnings of the acquired companies. Another quarter of the proceeds was earmarked to pay the debts of these companies. Then Ledecky had to sell his plan to Wall Street. He was turned down by 42 investment houses before gaining an underwriter for the stock offering in Mabon Securities, a firm which needed business badly and was defunct within a year.
All six companies kept their names, management, and operational independence in what was billed as U.S. Office Products’ “decentralized management strategy.” In this way the companies retained their identities in their local markets while cutting costs by pooling their buying power to get better prices from suppliers. The public offering of 3.25 million shares of common stock raised slightly more than $30 million, after expenses, for some 40 percent of the company at $10 a share. Management retained about 40 percent of the rest of the shares, with Ledecky the largest single shareholder.
Acquiring Over 200 More Companies, 1995–97
A month after the merger was complete, U.S. Office Products purchased Milwaukee-based H.H. West Co. for $17.5 million in cash and stock. By the end of the year the firm had made 31 more acquisitions, including a controlling interest in New Zealand’s second largest office products company. These companies, which had combined annual sales of about $800 million, consisted of two kinds: relatively large regional office-supply firms, called “hubs,” and much smaller companies, called “spokes,” purchased purely for their client contacts. By April 1996 the number of acquired companies had reached 52 and included businesses that sold coffee and other “break room” supplies, office furniture, and business machines as well as stationery.
Ledecky said he was moving rapidly because the office products industry was consolidating so quickly that there was only a “brief window of opportunity” to acquire remaining independent dealers. During the fiscal year ended April 30, 1996, U.S. Office Products had revenues of $701.9 million and net income of $8.7 million. But Ledecky envisioned U.S. Office Products as an $8 billion company by the year 2000. On June 6, 1996, he announced the purchase of 48 more companies, including four Starbucks Coffee suppliers, for a total of $348 million, almost all in stock. The newly acquired companies had total annual revenue of $775 million.
The announcement was enthusiastically backed by investors, who bid U.S. Office Products stock to $41.62 per share, more than four times the original offering price. In July 1995 the company had made its second offering, raising about $50 million by selling 3.5 million shares at $14.25, and in February 1996 it had brought in another $140 million by selling six million shares at $23.25 a share. About the same time it also issued $125 million worth of bonds convertible to stock. In addition, it registered 10 million shares in the fall of 1995 and another 19 million in May 1996, and it announced in October 1996 that it planned to issue 30 million more. This stock was not sold to the public; it was reserved for the purchase of companies.
Ledecky said his goal was to sell as many office products as possible through a single distribution channel, but he split his acquisitions into five divisions for different product lines. The coffee and beverage division included 15 coffee companies and was providing coffee service to about 1.6 million people in offices across the country when, on October 1, 1996, U.S. Office Products announced it had signed an agreement to become the only full-service supplier of Starbucks coffee to offices in the United States and Canada. This deal was described as “a smash success” in an April 1997 Washington Post story.
The pace and scope of acquisition also was rapid in other areas. U.S. Office Products entered Australia in August 1996 and Great Britain three months later, when it took a 49 percent interest in Dudley Stationery Ltd., the second largest contract stationer in the United Kingdom. It entered the print management and technology solutions fields in October 1996 and the corporate travel business in January 1997.
In February 1997 U.S. Office Products sold 10 million more shares of stock to the public at $33 a share. Shortly thereafter, however, investors looked at declining profits for the third quarter of the fiscal year and decided the company—whose roster of acquisitions reached 165 by the end of fiscal 1997—had come too far, too fast. On April 9 trading volume in the stock reached a staggering 8.6 million shares, and the price fell to half the peak six months earlier.
Despite this investor disquiet, Ledecky stayed on track, agreeing, in May 1997, to purchase Mail Boxes Etc. [see IDCH 18], franchiser of 3,300 stores in the United States providing mailing, packing, shipping, and copying services. The price was estimated at $267 million in stock. Although Mail Boxes had 1996 revenue of only $59 million, it was the fastest-growing nonfood franchiser in the nation, and its acquisition provided U.S. Office Products the opportunity to offer its products to a new customer base—the small-office and home-office markets. Ledecky said U.S. Office Products planned to use its central purchasing system, which was supplying its office-product dealerships, to distribute packing and mailing supplies to Mail Boxes branches at lower prices.
U.S. Office Products reported revenues of $2.84 billion and net income of $58.7 million for the fiscal year ended April 26, 1997. The company’s long-term debt was $387.3 million at the end of July. In September the company announced the acquisition of 12 companies in the United States, Canada, and New Zealand with combined annual revenues of $70 million. Two months later U.S. Office said it had completed the acquisition of 17 companies in the United States, Canada, Australia, and New Zealand with combined annual revenues of about $169 million. At the same time Ledecky resigned as president and chief executive officer of the company to devote more time to other entrepreneurial activities. His successor was Thomas I. Morgan, previously the company’s chief operating officer.
Shedding Four Divisions in 1998
U.S. Office Products had nine divisions at the end of 1997: office supplies, office furniture, coffee and beverage service, Mail Boxes Etc., Blue Star (the New Zealand office-supplies operation), school supplies, corporate travel, print management, and technology solutions. But in January 1998 the company announced it would spin off the latter four divisions into separate public companies and focus on its core office-supply and services businesses. The divisions that were shed accounted for about 40 percent of U.S. Office Products’ revenues, and stock in them was to be distributed to shareholders of the parent company in the form of a tax-free dividend. Morgan said written agreements would be developed with the new companies to promote continued cross-selling.
Simultaneously, U.S. Office Products announced that a New York investment firm, Clayton Dubilier & Rice Inc., had agreed to pay $270 million at $8 a share for a quarter-interest in the company, with the proceeds, plus bank loans, and high-yield debt, to be used by U.S. Office Products to repurchase about 28 percent of its 133 million outstanding shares of common stock at $27 a share, payable in cash and stock in the spun-off companies. (The value of U.S. Office Products stock had been affected by a 3-for-2 stock split in November 1997.) Ledecky said he would step down as chairman of the company on the completion of the restructuring, which was accomplished in June 1998.
Since buying back more than one-quarter of its stock would cost $1 billion, U.S. Office Products was planning to take on an additional $800 million in debt. The company announced in March 1998 that it was meeting with potential lenders and investment banks to support both this effort and the refinancing of its existing $500 million credit facility.
For fiscal 1998 (the year ended April 25, 1998), U.S. Office Products reported revenues of $2.61 billion and net income of $67.2 million, including income of $27.3 million from discontinued operations.
Andrews Office Supply and Equipment Co.; Blue Star Group Limited (New Zealand); Burgess, Anderson & Tate, Inc.; CK Coffee, Inc.; Coffee Butler Acquisition Corp.; Dameron-Pierson Company, Ltd.; Dudley Stationery (U.K.; 49%); General Office Products Company; The H.H. West Company; Mail Boxes Etc.; New World Vending, Inc.; The Office Works, Inc. Sharp Pencil Holdings, Inc.
Day, Kathleen, “Keeping Its Nose to the Grind,” Washington Post, October 2, 1996, p. C3.
Knight, Jerry, “The Curious Case of the Missing Stock Surge,” Washington Post, April 21, 1997, Washington Business section, p. 29.
——, “New Offering Has U.S. Office Products Thinking Bigger,” Washington Post, October 14, 1996, Washington Business section, p. 31.
——, “Reversing a Strategy,” Washington Post, January 14,1998, pp. D9, D12.
——, “U.S. Office to Buy Mail Boxes Etc.,” Washington Post, May 23, 1997, pp. G1–G2.
Pressler, Margaret Webb, “Billion-Dollar Baby,” Washington Post, April 8, 1996, Washington Business section, pp. 12–14.
——, “Ledecky’s U.S. Office Products to Split in 5,” Washington Post, January 14, 1998, pp. D9, D12.
——, “Lessons for Leadership,” Washington Post, January 19, 1998, Washington Business section, pp. 12–14.
——, “U.S. Office CEO Cedes Two Titles,” Washington Post, November 6, 1997, p. D2.
——, “U.S. Office Products Buys 48 More Firms,” Washington Post, June 7, 1996, pp. F1, F5.
——, “U.S. Office Products Buys More Stationers,” Washington Post, December 13, 1995, p. F3.
Troy, Mike, “USOP to Spin Off Four Divisions,” Discount Store News, January 26, 1998, p. 6.
Welsh, Jonathan, “U.S. Office Products Plans to Spin Off Four Operations,” Wall Street Journal, January 14, 1998, p. B6.