How the West was won
Oregon's General Tool & Supply Co. and Arizona's Industrial Tool and Supply Co. join forces
By Susan L. P. Srikonda -- Industrial Distribution, 7/1/1999
These days headlines announcing the latest acquisitions by the industry's mega-acquirerers are a weekly occurrence. So it's easy for smaller mergers between companies like General Tool & Supply Co. and Industrial Tool and Supply Co. to escape the limelight. But while the merger of these two companies -- with combined revenues of approximately $53 million -- may not turn heads, owners Bill Derville and Rick Parlett see their new partnership as a way to strengthen their place in an industry where size matters.In January, Industrial Tool and Supply Co., led by Parlett and headquartered in Tucson, Ariz., became a division of General Tool & Supply Co., led by Derville and headquartered in Portland, Oreg. The two men view their partnership as a merger much more than an acquisition and both count diversified markets, greater buying power, and financial strength among the benefits of their association, despite a $35 million disparity in annual sales and 1,000 miles between the two companies.
Making a match
The merger of these two companies was, in a sense, a natural progression of the relationship that has developed over many years between Parlett and Derville to become a cooperative relationship between their respective companies.
The two owners met more than 20 years ago through the National Industrial Distributors Assoc., which is now the Industrial Distributors Assoc. Their initial connection was simply the shared experience of being distributors in the western part of the U.S. They shared a common interest in the problem that has long vexed Western cowboys and entrepreneurs alike: conquering the vast space around them.
"For a distributor in Michigan or New England that does $9 million a year in annual sales," Parlett says, "it's highly likely that their furthest account is not more than 50 or 60 miles from where they're based because there's a lot more concentration of industry. But with us, in order to do the volume that we do, we go 250 miles to the south and east, and probably 150 miles to the north, because you're chasing customers."
In more recent years, the two companies and their owners have been closely associated by their memberships in I.D. One, a national sales, marketing and purchasing cooperative. The companies' membership in I.D. One is an association that has permeated nearly every level of each company as their respective employees -- from inside sales to accounts receivable -- have worked together to share ideas and inventory.
"Through that [I.D. One], the employees and the upper management of both companies really got to know each other," Parlett says. "The more we looked at and talked to each other, the more we realized that we ran our businesses very similarly. We share a similar commitment to our employees and our vendors. We were operating on the same type of computer system. We shared a lot of thoughts on where the market is going. We have a lot of the same major product lines. Basically it just made a lot of sense from all those perspectives."
The spirit of cooperation that exists between the two companies, Derville says, is a good part of the reason that their employees have been so receptive to the merger.
"Everyone is excited about it and feels it's a good fit," Derville says. "Our employees have been very receptive. They recognize there's a lot of work involved, but everyone is very positive."
Facing the competition
As individual distributors, both Derville and Parlett say they face increasing competition from larger players in their respective territories -- which is part of the reason this merger made sense for both.
General Tool is a large player in the Portland market and has branches in Seattle, Wash., and Lewiston, Idaho. For Derville, the merger offers a greater geographic reach as well as entry into the Phoenix electronic market and a foray into the mining industry.
"The most important reason [for merging] is that it changes us from a Northwest regional distributor to a West Coast regional distributor," Derville says. "Many of our customers are discussing having us handle their locations in the southwestern states, and this positions us to be a player in the entire western region. It also makes it possible to sell to companies in Mexico because Industrial Tool is already servicing portions of Mexico."
Industrial Tool and Supply, which will continue to do business under that name for commercial purposes, also can't escape competition. The company has a branch in the Phoenix area and has on-site stocking locations with two area copper mines, Phelps Dodge Morenci Inc. and the Chino Mines Co.
"We have national competitors, local competitors in our size range and a whole myriad of little niche players," Parlett says. "More and more of our competitors are branch facilities of national or very large regional distributors and fewer and fewer of our competitors are in the size range that we are."
Parlett acknowledges the fact that his company has a lot to gain financially from its new association with the larger General Tool & Supply, but he also notes that the merger has financial benefits for both entities.
"As a $50 million plus a year distributor, we certainly have a lot more purchasing power than we used to have. It helps us in this division certainly more than it helps them, but there are several product lines that are important to them where we have given them significant help," Parlett says. "And technology is a big issue. It doesn't have a linear relationship as to how much it costs, based on the size of your sales. And the technology that we're going to need to develop is going to cost very little more than it would cost each of us individually."
Strength to strength
Parlett says that he and Derville judge the success of their businesses by four similar measures: profitability, the satisfaction level of employees, how well relationships with existing customers are maintained, and how well relationships with vendors are maintained.
Talk with either of their customers and that commitment is apparent.
Ed Lundeen, project manager for Phelps Dodge Mining Company in Morenci, Ariz., the largest copper mine in North America, looks to ITS to help the mine fulfill its goal of having production, operating and maintenance materials stored close to the point of use. Lundeen says he's "hard pressed to see the down side" of Industrial Tool's merger with General Tool.
"As our employees are placing orders directly, they're delivering the items directly to the point of use," Lundeen says. "We save transit time to the warehouse, we save time waiting for things to be done. We've eliminated purchase orders because we do everything by procurement cards. We're looking at electronic commerce, that's where we're moving with them next."
Portland General Electric is a demanding customer for General Tool & Supply, but Dana Anderson, buyer analyst, says the company has met their demands well for more than 10 years.
"We give our suppliers a list of specific items that we expect them to have on hand if we have a major storm," Anderson says. "And during a storm they have to be on call 24 hours a day in case we need supplies. The service end of it is very important. They also have to have competitive pricing or we won't even consider them."
ESCO Corp., a steel products manufacturer headquartered in Portland, Oreg., depends on its systems contract with General Tool to keep its on-site inventory levels and its number of vendors at a minimum, says buyer RosaLei Machen.
"We don't consider General Tool a vendor; they're our partner," Machen says. "We care about their survival and we know they care about ours. So we know they're going to get the best products at the best price possible. It pleases me that they've acquired another company. It's a matter of survival and I certainly want them to survive: they do a fantastic job of taking care of me."
The ability of both of these companies to meet the demands of their customers has won the confidence of manufacturers like Cooper Tools and Precision Twist Drill. Representatives of both manufacturing companies are supportive of the merger.
Rob Siek, director of sales for Precision Twist Drill, notes that Parlett sat on the company's original distributor advisory board and that Derville sits on the board currently.
"This merger is unique from the trends we've been seeing over the last 18 months or so in that it's not a huge conglomerate doing the buying," Siek says. "To me this seems more like a specific targeted fit of two similarly functioning companies that want to benefit from each other's strengths. Overall, I think it's a great fit."
"Typically, there are unique strengths or synergies that drive a successful manufacturer/distributor relationship," says Mike Fallon, Cooper's vice president of sales and marketing. "General Tool and Industrial Tool both had significant strengths. The merger presents the opportunity to leverage the combined strengths of both distributors and hopefully grow each substantially.
"Mergers are inevitable," Fallon says. "Competition is fierce and most distributors are looking to find strength in numbers."
And so while this particular merger may not have inspired screaming headlines, it seems to make sense in today's demanding industrial marketplace. And for the two men at the helm, it boils down to a synergistic approach to market: "We think that this is going to give us more strength in the future," Parlett says, "and it's going to help us address some of the longer range issues better together than we could have addressed them individually."
COMPANY SNAPSHOT
General Tool & Supply Co.
Headquarters: Portland, Oreg.
Principals: Bill Derville, President
Rick Parlett, President of Industrial Tool and Supply division
Year founded: 1929, GTS; 1952, ITS
1998 sales: $44 million, GTS; $9 million, ITS
Employees: 117, GTS; 35, ITS
Branches: Seattle, Wash.; Lewiston, Idaho; Tucson and Tempe, Ariz.
Product categories: General line industrial tools and supplies; electronics; cutting tools
Web site: www.generaltool.com
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