Jeff Gau
In what some in the document imaging space consider an earth shattering announcement last week the news broke that Marco, Inc., a $200+ million dealership based in St. Cloud, MN, was acquired by Norwest Equity Partners of Minneapolis for an undisclosed sum. This deal could go down as a game changer for the industry because as far as we know this is the first time a dealership, and a mega dealership at that, has been acquired by a private equity firm as opposed to another dealer or an OEM.
To get a better handle on this development I interviewed Marco CEO Jeff Gau who discussed the reasoning behind the acquisition and what it means to Marco, its employees, its customers, and by extension, the rest of the document imaging industry.
Are you tired of talking about this acquisition yet?
Gau: I’m not. We’re a large employer in our community so of course it was headlines in our [local] papers. But I haven’t heard anything negative. It’s gotten a lot of positive press and feedback because so many people benefitted from it and we were able to retain our presence in our community.
While I worried about alarming the community and our employees, the good news is we were prepared, we had a good plan, we communicated well, and [the reaction to the acquisition] validated that we did the right thing.
From what I read the timing was right to make this move. For readers who may not be familiar with why the timing was right, can you explain why?
Gau: The cliché, “timing is everything” really plays in our particular case for a few reasons. We have a long track record, ten years of very strong performance and our compound annual growth rate is in the double digits year over year. As you know you sell when you’re doing well, not when you’re not doing well. So timing from a performance standpoint was good.
We’ve done a good job of transforming the business from a copier company to an IT services company. We did that effectively and put ourselves in a leadership position in both the VAR channel and the copier channel. That’s a good place to be in if you’re thinking about selling the company.
Mergers and acquisitions are big right now [and part of our business model]. There is a lot of money available, it’s cheap money, [and people] are looking for strong investments, so the timing was right for M&A activity.
Ultimately, the way we were structured wasn’t equipped for the long haul any longer. (Editor’s note: Marco has an Employee Stock Ownership Plan (ESOP).) Another reason is our ESOP is a mature ESOP. We’ve been lucky to have 50 percent annual average increases in our stock prices over the last 10 years. That drives up the value, which is a good thing, but also creates a future repurchase obligation on the part of the company. We operate debt-free right now. We use all of our cash to buy companies and that has a good ROI. But as the larger shareholders, who tend to be the longer tenured people, look towards retirement five, six, seven years out, which is probably around the time of my departure, that’s going to put the company in a less desirable position than today if you’re buying back stock from shareholders with cash and which doesn’t have a good return. That was an element we were going to have to deal with and we could resolve the problem now while I still have some run time left as the CEO and because of all the things that are favorable for us right now. That’s what we chose to do.
The timing on the performance front, our business model, merger and acquisitions activity, and because of the maturity of our ESOP looming with the repurchase obligations, that’s why it was good timing.
Why do you think Marco was attractive to Norwest Equity Partners?
Gau: When these companies who aren’t in our industry are looking to make a significant investment they like [a company] with a strong leadership team. I’m proud of our leadership team. We’ve been together for many years and execute well on our business plan. I think it starts with that.
They like our culture and if you look on our website you’ll see we’ve won a lot of workplace awards. We validated our culture well and they had a chance to come on site and they love the fact that our people love our company. Obviously, they liked our financial performance, but what they really liked about it is that it had a lot of recurring revenue. We’re about a $215 million company. About half of our revenue is professional services and a high percentage of that is contract and recurring revenue streams. They like that.
I also think the opportunity for continuing acquisitions. They can accelerate that, and more importantly they love the upside of organic growth. What I mean by that is when we buy a copier company we typically leverage their customer base, their contracted customers, and we bring the rest of our IT services to the client in an effort to grow our share of that customer’s spend and to expand our marketplace.
We haven’t done as good of a job as we should of growing every market we’re in. It’s an investment to do that. You have to bring in highly skilled personnel. It’s a big commitment. We’ve done it well in about three, maybe four of our markets, but we’ve got a ways to go in some of our other ones. The point is we have a lot of opportunity to execute on the organic side. They like that.
They like the way we structure our Managed IT, our Managed Print, our cloud services, our hosted voice, and our carrier services. That portfolio of recurring revenue services they really like because we’re executing well on them and [growing by double digits]. Those are the key factors.
Would you have still made the same decision if the company did not have an employee stock option plan and was just privately held rather than employee owned?
Gau: That was probably 50 percent of the decision. It was a very attractive offer for the company and I liked what the investors were bringing to us.
Was selling to another dealer or OEM ever an option, I’m thinking your size precluded the former option?
Gau: No dealer was going to be capable of buying us. We took a look at manufacturers, but what the strategic buyers liked about this and what we liked about this is we can keep our brands.
If you sell to a manufacturer you limit your access to the other brands. That would probably not be good for our business model. We have four primary brands, HP, Sharp, Konica, and Canon, and Samsung to a lesser degree. If we sell to one of those manufacturers or a different manufacturer, it jeopardizes those other relationships.
Our relationships with our manufacturers are strong and they all support this model. They all were made aware of it and there again frankly, the financial buyer had a better handle on how to value our business than maybe the manufacturers did. I think it fit better in their independent portfolios and the pursuit to grow our company and take it to another level. They see over the next four, five, six years, whatever the timeline that we’re going to work towards becoming a billion dollar company.
Do you think you’re blazing a trail here being acquired by a private equity firm?
Gau: We knew when we did this it was going to be unique to our industry. I don’t know of anyone else who has done this. We’re still an independent dealer. We’re still privately held like we were before, so when we go to acquire businesses, and we’ll be announcing several in the coming months, they like our independence.
If I’m looking at acquiring a Kyocera dealer and I’m not a Kyocera dealer that’s okay. The industry is going to see that we’re serious about growing and we are going to be active in larger acquisitions and I feel we’re in a good position to do that the way our ownership is structured.
You’ve acquired other businesses throughout the course of your career at Marco, what’s it like being on the other side?
Gau: Change is great as long as it’s happening to someone else and this time it was us.
I’m comfortable because we’ve done acquisitions before. We understand what to do to make the employees understand from the buy side why we’re doing it. That helped us do a good job of communicating the message to employees. We explained the transaction to them—everything except the sell price—and they understood why. I think it helped us because we understand the potential disruption. We understood the due diligence process and this one was on steroids when you’re this large of a company working with an investment firm. And we came out clean throughout the audit processes.
So employees have handled it well then?
Gau: Employees work here because they like our company and our culture and they still like our company and our culture even though it’s not going to be an employee owned scenario anymore. We did put a generous 401K match in play. Will it offset [the ESOP]? Probably not, but it is a commitment to carrying forward with a financial commitment on our end to take care of our employees in retirement as well.
I sleep well at night knowing the process was well received, fair for all involved, and we look to the future with a huge opportunity.
Has this been transparent to your customers too?
Gau: Norwest in their process had to call some of our key clients and I was proud to hear our key clients explain our company to the buyers. They supported it, they endorsed it. Business people understand why you have to make decisions like this.
So when you get quoted saying it’s going to be business as usual, it’s going to be business as usual?
Gau: It is. We had our first board meeting and we presented our budget just as we were planning to do and it got the green light and we’re moving forward. They bought us to grow the business; they didn’t buy us to integrate us and roll us up, and gain efficiencies by cost cutting. They’re going to gain a return by growing the size of this thing. They see us four times as big as we are now and I agree with them. If you’re an employee here, it’s a nice opportunity to be at the front end of a growth curve.
I’m going to have a boss now, so for myself and our CFO there’s going to be a little more reporting and governance there. But as far as employees and customers are concerned I can’t put my finger on what would change.
Now that the deal is final, what’s next for Marco beyond all this growth?
Gau: We’re going to expand our geography significantly and we’re going to continue with our aggressive acquisition strategy. We’re going to expand the size of the acquisitions we’re doing and we’ll still keep buying the $5, $10, $15 million dealers like we do now. I’ve had a lot of inquiries from people inside the industry because now they know we’re serious about accelerated growth and that’s been helpful in prospecting for new acquisitions.
You’ll see us expand in the copier and printer space and deeper into the IT Services piece because NEP brings some expertise in that area. We have a lot of expertise to help us in the assessment of some of those and recruitment for those companies. Organic growth—we’ll be building our business model out across some of our existing markets and some of the more prominent markets in Omaha and Des Moines, the Chicago area, and in Madison, Wisconsin. We like those secondary and tertiary markets, but you’ll see us move into some of the major markets too.
