Return on Warranties: $1.2 Billion
Wednesday, August 9, 2006
N.E.W. Customer Services Cos., started 23 years ago by a law student trying to pay his bills, was sold yesterday for $1.2 billion. The little-known Dulles company, which over the past five years has become the biggest independent provider of extended-service warranties for thousands of consumer products, was bought by a Boston private equity fund.
N.E.W. has more than tripled in value in two years, making hundreds of millions of dollars for its financial backers and senior management under Chairman Fred Schaufeld, who founded it using his credit cards -- and dropped out of law school.
Although the company did not release revenue or profit figures for the past year, company executives say revenue has grown more than 35 percent in each of the past three years, which would put its annual revenue at about $400 million.
The new owner is Berkshire Partners LLC, a Boston private equity fund that specializes in investing in private consumer products companies. Los Angeles firm Freeman Spogli & Co. also invested.
The seller was not Schaufeld but a private equity group led by venture capital firm TH Lee Putnam Ventures, which bought the firm two years ago in a deal that valued N.E.W. at $370 million.
Schaufeld said he and his senior management will retain a stake in and continue to manage N.E.W. Schaufeld, who sold a large part of his ownership in the 2004 TH Lee buyout, declined to say how much of the company he had retained.
N.E.W. is an administrator of extended-service warranty and replacement contracts, selling them through dozens of retailers such as Wal-Mart, Best Buy, Lowe's and Ritz Camera. It covers most consumer products that can malfunction or break, including microwaves, Game Boys, bikes, iPods, power drills and printers.
A typical contract can cost anywhere between a few to several hundred dollars and kicks in after the manufacturer's warranty ends. The extended warranty will allow a product to be replaced or repaired for several months to years in the future, depending on the type of product.
N.E.W. has 3,000 employees, most of them at six U.S. call centers. About 123 employees work at its headquarters near Dulles International Airport.
Schaufeld, 46, started the company when he was an American University law student. His first customer was a now-defunct electronics store in Rockville. Trying to earn money for tuition and living expenses, he took a job selling extended warranties for another company.
"I did some research on the laws covering this business and realized the company was breaking every one of them," Schaufeld said. "I knew there had to be a better way to do this."
Founded in 1983, N.E.W. -- the company's old name was National Electronics Warranty -- was financed by Schaufeld's credit cards and money from family and friends. Profitable early on, its growth has accelerated since 1999, when Schaufeld began hiring a crew of seasoned sales, operations and financial executives. It raised its first venture capital in 2000 in a small deal led by Bethesda's Novak Biddle Venture Partners.