Northbrook, Ill. — Integra Integrated Procurement Solutions became the latest in a string of Industrial Distribution's Top 100 Distributors to fall on hard times when it filed for bankruptcy protection on March 12. Integra, Questron Technology Inc., Pentacon Inc., and Industrial Distribution Group are all rollups that have experienced financial problems in the last year.

As part of its Chapter 11 bankruptcy proceedings, Integra was set to auction its assets on April 17, 2002. The company's attorney cited slow integration of recent acquisitions, the economic downturn and Integra's credit problems.

Although Integra vice president of merchandising Jake Fegely confirmed the filing, the company would not comment on the bankruptcy case.

Questron also filed for Chapter 11 bankruptcy protection but the company plans to be purchased by a division of Sun Capital Partners, Inc. and continue to service its customers through the bankruptcy proceedings and beyond, said CEO Dominic Polimeni. Pentacon and IDG have both announced restructuring plans and claim to be on the road to profitability.

Integra reported $217 million in revenues in 2000 with 34 branches and nearly 500 employees. The company was ranked 40th on ID's 2001 Top 100 Distributors report. Formed in 1998 as Industrial Distribution Partners, the company changed its name and attempted to become a key provider of integrated supply services. Its rollup strategy included acquiring specialty distributors in safety and rubber products along with general mill supply distributors.

Integra built a management team that included industry leaders like former Ross-Willoughby Co. president Ron Cory and Bud Pritchard, former president of Ross-Willoughby's Carolina Division. Cory retired and Pritchard left Integra in 2001.

Besides Columbus, Ohio-based Ross-Willoughby, the initial Integra divisions included J. Fegely & Sons, Easton, Pa. and KSC Supplying Industry, Fargo, N.D. Integra's specialty divisions were started with acquisitions of Rubber-World Connection, Landisville, Pa.; Scheibert Safety Co., Indianapolis, Ind.; Allar Automotive, Sterling Heights, Mich.; and most recently, Sanders Tools and Supplies, Itasca, Ill.

One employee who joined the company with the KSC acquisition said Integra didn't communicate to employees the impending problems. But there were signs of trouble several weeks before the Chapter 11 filing.

"We had trouble getting product in early to mid-February," he said. "We went on hold with our vendors on February 28."

He said he expected that of all the locations, only the specialty divisions might survive the bankruptcy.

"The rest of us are being liquidated," he said.

Tom Hudak, vice president of sales for the industrial channel at Stanley-Proto Industrial, one of Integra's top 20 creditors, said Integra's demise may be a sign of more to come.

"The broader issue is, how do manufacturers and distributors align themselves closer?" he said.

He said gross margins will continue to compress in the industrial channel, transaction costs are too high, and there are too many suppliers in the system.

Kennametal IPG is another Integra vendor. Vice president of sales Ty Taylor said the company is committed to distribution and works with its associates to help make them profitable.

"We are disappointed by the news [about Integra]," says Taylor. "They had a very good program and the failure snuck up on us."

Though he noted that certain distributors have experienced difficulties, Taylor said Kennametal has not changed its stance with any of its distributors and will continue to support its partners' efforts to grow through consolidation.

But the bankruptcy of Integra will make distributors think twice before acquiring, says Pembroke Consulting president Adam Fein. He says the drivers of consolidation are still prevalent, pointing to an increased desire to develop more sophisticated businesses and customer demand for national accounts or integrated supply.

Fein said he doesn't think the Integra debacle is a sign that consolidation will slow, though it may change how consolidation is done.

The rollup strategy is essentially flawed, Fein said, because the idea is to buy up companies in an acquisition frenzy with little thought about running them successfully for the long term.

"[There were] some good companies acquired by Integra," Fein said. "Integra was able to buy them, but was not able to run them."

CIBC World Markets senior analyst Holden Lewis agrees. He says rollups are a difficult business model requiring companies — and the people who make up those companies — to work together effectively.

Rollups are highly leveraged, require high amounts of working capital and need to attain scale, said Lewis. He said many of the distribution rollups remained rather small considering their degree of leverage. In addition, he said many of them were largely involved in integrated supply, which often increases the need for working capital.

"Rollups, in their current form, are not what people are looking for," said Lewis. "Rollups are tricky even in the best of times. When the market sours, the weaknesses come to the forefront.

"I expect to see future acquisition that is more strategic in nature," Lewis continued. "When companies acquire, it will be to gain new products and new capabilities."

Fein agrees. "Successful consolidators are building something," he said. "They have a strategy for running the business."

Fein named Airgas and Interline Brands as examples of consolidators that have done a good job of integrating acquisitions into their main business. The unsuccessful ones bought whatever they could and hoped it all fit together. Rollups, much like the Internet stocks, were overvalued during the 1990's and that, along with the economic cycle, has caught up with them, Fein said.

"The industrial distribution industry is much more complicated than most people believe," said Fein. "To actually be successful as an industrial distributor takes a lot of skill. Many rollups were founded by people from outside the industry who thought they could do it better."

He said many rollups were formed with good businesses and that out of the ashes successful companies may emerge. There just may be a lot of pain along the way.