Winds of change
Three years after merger, shareholders look to new CEO to get Premier Farnell plc back on a profitable growth path
By Susan L Srikonda -- Industrial Distribution, 1/1/1999
Three years ago the acquisition of Cleveland-based Premier Industrial Corp. by Farnell Electronics plc of Britain sent tremors through the distribution industry --some analysts sharply criticized the hefty $2.8 billion price tag, while others dubbed the merged companies a 'formidable combination.' But talk of the merger quieted quickly in America as the industry's attention was repeatedly turned to rapid-fire acquisition and consolidation announcements throughout the channel.Soon, only the shareholders, the insiders and customers were watching as the newly-formed Premier Farnell plc struggled with growing pains that resulted in plunging share prices, the departure of CEO Howard Poulson and declining sales. The company has recently welcomed a new CEO, John Hirst, who is expected this month to unveil the results of a six-month strategic review and plans for getting the company back on a path of consistent profitable growth.
In the shadow of this corporate turmoil, the Industrial Products Division -- which represents approximately 20 percent of Premier Farnell's total sales -- continued to operate largely as it had before the acquisition. But the winds of change have also picked up for IPD this fall. Terry Taylor abruptly left his position as IPD's chief executive on Nov. 5 and was immediately replaced by Peter Costello, managing director of PF's Product Manufacturing Division and previously general manager of Akron Brass, a PF subsidiary which produces firefighting equipment. On Nov. 10, Taylor was appointed president of Briggs-Weaver, Inc. in Tex.
Hirst accepts the challenge
Premier Farnell plc's John Hirst describes himself as "intent on building a team." This 46-year-old CEO's challenge is to create common goals and values that will wed the geographically separated and operationally distinct divisions of the company. It's a challenge that has thus-far not been met.
At the time of the acquisition in January 1996, the combined annual sales of Premier and Farnell, estimated to be nearly $1.7 billion, created the world's third largest electronics distributor with solid footholds in North America and Europe. But 1997 sales fell to $1.2 billion, a figure the company expects to repeat in 1998. Despite declining sales in both the industrial products and electronics divisions, Premier Farnell maintained its position in the top ten of Industrial Distribution's Top 100 Distributors list in 1997 and 1998.
In addition, shareholders watched as the stock collapsed from $25.25 per share in December 1996 to a mere $9.35 on January 28, 1998, the day after former Group CEO Howard Poulson abruptly left. A variety of market factors -- including a slowdown in the semiconductor market, the strength of the sterling and fallout from the Asian crisis -- may have contributed to the decline in stock value, but the company's inability to successfully integrate Premier and Farnell bears the brunt of the blame.
Throughout the past three years, Poulson, Mort Mandel -- Premier founder and PF deputy chairman who oversaw day-to-day operations after Poulson left -- and now Hirst have all maintained that the underlying business is healthy and that the decision to merge the two companies was sound. The burden of proof falls to Hirst.
"It's true and evident that we have not delivered value to the shareholders," says Hirst of the company's performance to date. "The company has destroyed value over the last two years for a whole host of reasons. But the real key for this business, for everybody in it, for the customers and the shareholders, is to put all that behind us and say 'Do we have a strong set of businesses that can be a platform for development and growth?' And the answer to that is 'Yes.' And we need, for everybody's benefit, to get on with the future and building the businesses and improving our performance rather than looking over our shoulder."
One British analyst says that in order to restore investors' confidence in the company, PF will need to come up with a new marketing strategy, provide the internal incentives that will lead to stabilized and ultimately improved sales, and fill key posts like the open CEO position at the Newark Electronics catalog distribution division.
Though to date PF's business units have operated quite separately, Hirst is intent on building a team from those businesses and encouraging the businesses to share best practices, expertise and strengths. In November, Hirst appointed a Group director of strategic marketing and planning and a director of information systems and technology. Hirst also expects to hire a Group director of human resources to oversee the quality and training of employees.
Hirst speaks with energy and enthusiasm about his new post and the potential of this multi-national company.
"I'm much happier to have a North American business as well as a European and international business together than I would be if I was taking on this job without either of those legs," Hirst says. "Now I couldn't say that so far we have made the best of the combination, but I'm pretty clear that there are benefits to be brought and we are setting up pretty rigorous and systematic programs at work to make sure we do get over those things ... In our Group, we have more opportunities than you can possibly cope with all at once, and our task is to, as we are doing now, list all the opportunities and choose the most important and tackle those in the priority order."
IPD singled out
The Industrial Products Division's profits have mimicked those of its parent company - dropping from $253 million in 1996 to $247.6 million in 1997 and projected to hold steady for 1998. And so it falls to Peter Costello, as the new division CEO, to raise the sales growth. He'll begin where Terry Taylor left off, concentrating on new product development, strengthening the teamwork between telesales and outside sales and expanding those efforts, and finally geographic expansion.
Costello will concentrate his sales and marketing focus on the opportunities for growth that IPD has not yet realized and will strive to reach a minimum sales growth of 10 to 15 percent.
"I'm a firm believer that a company needs to be market driven," Costello says. "So my focus is to bring this [division] to what I would consider to be a market/sales driven company. There's always room for improvement. We certainly want to expand our telesales effort and that's in conjunction with the outside sales. We certainly need to expand our new product introductions and we need to grow or put more emphasis on our marketing approach, and by that I mean our exposure in the marketplace, whether it be through trade advertising, sales promotion, that type of thing."
One thing that IPD doesn't struggle with, Costello says, is creating brand recognition: the company occupies a unique niche in the MRO market.
"We view ourselves as a specialist in the industrial distribution industry," Costello says. "We're not in competition with a Grainger. That's not our strength. That's not our focus."
It's difficult for IPD's customers to shop around for price, said Taylor in an interview prior to his departure. That's because IPD designs and distributes unique, high-end products suited to the severe service and adverse conditions common to maintenance and repair applications. The products are only available from Premier.
"The thing that's so different about us and our competitors is that the products are different and they perform differently," said Taylor. "We are not selling branded products that you can go out and say 'Let me shop IDG and see how much they want for it and then I'll go to MSC.' We're not interested in becoming the world's leader in marketing fasteners. We're only interested in that top section of fasteners. It's the high-performance, value-added portion of the marketplace that we target. We don't try to make it up on the volume, so to speak."
IPD's broad product line includes items such as specialty fasteners, cutting tools and abrasives, Supertanium cap screws, specialty lubricants and greases, adhesives, welding supplies, electrical repair products and even industrial and institutional cleaners. Each of the products IPD sells are designed by the company's research and development team, but are manufactured outside. The company contracts with independent manufacturers who work according to IPD's specifications and under strict exclusivity agreements, allowing them to command a premium price for their product and giving them an automatic distribution channel.
IPD has held ISO 9001 certification, recognizing its design capabilities, since May 1997 and has had A2LA certification since 1992, certifying its technical competence in the field of mechanical testing.
This design-and-distribute approach to the market enables the company to create a loyal following of customers like Larry Sader, senior manufacturing engineer with the GM Truck Products Center in Pontiac, Mich.
Sadar originally sought out IPD to solve an application problem he was having with some GM plant robotics applications that resulted in loose cables and jumpers. "The company definitely does the research and knows where the problems are," Sadar says, "so they go after the problems and come up with an answer that satisfies your needs. We tried their products and with great success eliminated a lot of downtime that would normally occur." Sadar now includes IPD products in his mechanical design specifications.
Taylor said IPD's focus on severe service MRO product applications positions the company well for the future of the industrial distribution industry.
"Five to 10 years ago, if you went into a major manufacturing facility, you'd see the electrical maintenance department, the mechanical maintenance, the hydraulic repair and pipe fitters and there'd be no end to these things," Taylor says. "Now you go in and you see a sign on the door that says 'Maintenance.' These people are multi-crafted, multi-tasked and they rely on their supply base to give them the technical expertise, to teach them or coach them on how to make the repairs correctly, quickly and safely. That's been a big change and that's right up our alley."
The majority of IPD's customers are American, although the company has had some European presence for nearly 20 years and recently named Nick Ross to head IPD's European division. Still, the merger with Farnell opened possibilities for international expansion that have not yet been realized and provide another opportunity for growth.
Global marketing measures
In addition to IPD's focus on research and development efforts, the company is equally committed to its marketing efforts, which figure prominently in its plan to get back on a path to consistent profitable growth. The collection of efforts includes plans for electronic commerce, a new cache of catalogs and, of course, the traditional outside sales force. But the centerpiece of the company's recent marketing efforts is its state-of-the-art telemarketing center housed a 10-minute drive away from the Cleveland headquarters. Direct marketing is the future of IPD.
Costello's goal is to strengthen both the outside sales and inside direct selling efforts and make sure they are working together to serve the customer well and to fully cover the market.
Inside the telemarketing center is a product training room, row after row of workstations, space for sales training, a quiet room where stressed-out employees can go to relax, tables piled with new products for employees to examine hands-on, a lunch room, and the brains of the operation, the computer room.
The telesales approach here is sophisticated. Customers like Ernie Hofelmann, construction supervisor at the Wallkill Correctional Facility in Wallkill, N.Y., are tracked through 'profile screens' that indicate the customer's personal interests -- like a vacation spot mentioned during a sales call -- and business information like the types of products used and a facility description. Brian Thomas, IPD's industrial telesales manager, says his salespeople use the information to establish relationships and to approach the customer from a point of knowledge.
Hofelmann buys from IPD over the phone because it saves him time. "I deal with many different vendors and some of the salesmen who come knocking on the door take up as much as two hours of my time," he says. "Dealing with the Premier people over the phone, I don't waste a lot of time but I can still find out the information I need about the products. If I have a maintenance or construction problem that I need a product for but I don't know what's out there, they're very helpful with that."
Within the last 3 1/2 years, the telesales staff has jumped from 30 to over 100 and Thomas plans to add staff soon.
"We don't know what the final number will be," Thomas says. "We do know that the potential to grow telesales and to automate the environment to operate electronically is nearly limitless. If language is not a barrier, we can reach anyone on earth from our call center just by altering our hours of service. We're only limited by our own imagination. It's a legitimate way of selling industrial merchandise to a busy industrial customer."
It's service initiatives just like this -- combined with a range of quality products and knowledgeable sales teams backed by strong internal support -- that will create the simple-sounding solution Hirst says is the key to improving the company's short term performance: happier customers.
COMPANY SNAPSHOT
Premier Farnell plc, Industrial Products Division
Headquarters: Group- Wetherby, West Yorkshire, England IPD- Cleveland, Ohio
Founded: 1940, Premier; 1966, Farnell
CEO: John Hirst, Group; Peter Costello, IPD1998 expected Sales: $1.2 billion ($247.6 million, IPD)
Web sites: www.premierind.com
NYSE symbol: PFP
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