Lessons for Leadership
By Margaret Webb Pressler
It was just that magnetism that allowed Ledecky, 39, to build a $4.5 billion company in three years: but he wasn't just selling office products, he was selling Jon Ledecky. Employees and investors backed the ebullient, bespectacled entrepreneur with hundreds of millions of dollars, largely on faith in his clear vision. His plan was this: to create a company that would provide offices with one-stop-shopping for everything they needed, from paper clips to computers to plane tickets.
Last week, though, Ledecky essentially admitted that his vision needed correcting -- that despite his rhetoric and chest-thumping, it was not the best strategy to roll up, under one roof, a varied group of companies selling a wide array of sometimes vaguely related office services. After spending three years branching out into furniture, coffee, technology, travel, print management and even school supplies, the company announced last week it would split into five companies, each publicly traded and each narrowly focused.
Along the way Ledecky had convinced a lot of people, including those at the more than 200 companies he bought, but in the end Wall Street didn't buy his concept and the company's stock languished.
"Wall Street didn't understand the globality of what I was trying to provide -- I was trying to provide a one-invoice, one-phone call service for offices," Ledecky said over a nonalcoholic beer at one of his most frequented spots, the Four Seasons Hotel near his office in Georgetown.
"And you know what? Wall Street is never wrong," he said. "The market was right about there being too many disparate moving pieces at U.S. Office Products."
Analysts and investors said Ledecky's decision to split up the company will increase value for shareholders in both the core office products business and the four spun-off companies. Yet for so long Ledecky had insisted that his approach was superior, and droves of investors believed him. Some critics say shifting strategy now could hurt his credibility -- a crucial element when investors buy into a business largely because of the person involved.
That reputation will be tested in Ledecky's newer ventures. Though he is keeping his investment in District-based U.S. Office Products Co., Ledecky is leaving his chairmanship and board seat to pursue another District-based start-up he took public last month. He announced earlier this month that he will go into the facilities management business -- consolidating companies that provide a variety of services to retail and office building owners, including pest control, landscaping and equipment maintenance. Consolidation Capital raised $500 million on Wall Street, but some real estate executives still argue that Ledecky might be doing the same thing he did with U.S. Office Products -- rolling up too much, too broadly.
"Can you walk in the door to a professional owner of real estate and say, `I can provide everything that you're buying on all those 20 or 30 line items [with] one-stop shopping and I can do a better job?' And that's a big question mark," said Nate Isikoff, chairman of Carey Winston Co., a Chevy Chase-based commercial real estate firm and major property manager. "To get to it you have to assemble a lot of different services and ultimately see if you can make them so effective as to be able to deliver what an owner or manager needs and wants."
Ledecky insists the breakup of U.S. Office Products has little bearing on his new undertaking because the dynamics of the facilities management business are different from selling office products.
Real estate executives and analysts agree that as office buildings are bought up by a few national real estate investment trusts -- and as national retail chains emerge -- there is a need for companies that provide services to those buildings in a unified way. For Ledecky, this is the key difference: marketing services to a narrower, if more institutional, customer base will be far easier than selling office products and related services to thousands of small and medium-size businesses nationwide.
"The typical customer that I had in office products, I had to stimulate to show why it makes sense to buy coffee, furniture, computers, et cetera, from me," Ledecky said. REIT executives, however, are "clamoring for someone to do this."
Even Isikoff concedes that there is an appetite on the part of property owners to "find fewer providers who can do a top-notch job." He only questions, "if one could carry this to the ultimate conclusion that one company should . . . be the one service provider."
But the problem with U.S. Office Products' structure went beyond Wall Street's recalcitrance. It went beyond the challenge of "cross-selling" products between divisions. Simply having that many divisions under one roof was getting unwieldly, company employees and executives said.
U.S. Office Products President Thomas I. Morgan touted the benefits of splitting into five companies in a conference call with analysts on Friday. As a more focused company, he said, "we're able to do a lot more with the existing team -- we'll be able to focus on the key issues."
So if focus is that important for U.S. Office Products, which will retain its closely related furniture and office-coffee businesses, why is it any easier for Consolidation Capital to put elevator engineers and janitorial services in one company?
Ledecky is committed to the one-stop-shopping concept, and says the benefits of consolidation are evident in the growth of U.S. Office Products' operating income as a percent of revenue -- a benchmark of profitability that grew from 2.9 percent three years ago to 6.2 percent in the last quarter. He even defends his decision to go into the businesses that are being spun off, saying those industries were ripe for consolidation and that being part of U.S. Office Products helped them mature to the point where they were ready to be spun off.
But, he said he'll do many things differently at Consolidation Capital than he did at U.S. Office Products.
"I'm surrounding myself with a very talented team of executives and operators" from the beginning, he said. "I will not try to grow a business from zero to $2 billion with seven people, which is what I did with USOP, and I burned people out in the process. I've learned a lot of lessons. That's the biggest one."
Ledecky said he didn't have much choice about that because the company had only $8 million and no lines of credit after going public. So he slowly hired professional managers only as the company grew.
Ledecky took his search for management expertise to the next level last week, when he announced that after splitting into five entities, that the respected New York investment firm of Clayton, Dubilier & Rice Inc. would buy a 24.9 percent stake in U.S. Office Products for $270 million. The investment firm, he said, could provide "adult supervision" his baby needed. Ledecky, meanwhile, will move on.
"I had the ability to look behind the mirror and see where the weakness was in this company," he said. "That weakness was me."
Several investors say they trust Ledecky to do the right thing with his other investment because he recognized that he needed to change direction and did it quickly.
"He is up there at 100,000 feet . . . and yet in a minute admits that he maybe needed to be on a different strategy and is willing to look at it and move forward," said Matthew King, who two years ago sold the business he co-owned to U.S. Office Products, largely for stock that was nearing its peak price. He is now a vice president for the company's office products division.
Not only are the five pieces of U.S. Office Products expected to be rewarded by Wall Street, but the company also offered to buy back 28 percent of its shares at $27 apiece -- higher than the stock has been except for a brief, two-week period in mid-1996.
"He's done everything right, as far as creating value for shareholders," said Jim Smith, portfolio manager for Pilgrim, Baxter & Associates, a Wayne, Pa.-based mutual fund management firm that invests in fast-growing public companies. "The fact that the market hasn't chosen right now to put a rich conclusion on that is in our mind neither here or there."
Several entrepreneurs who sold their companies to Ledecky along the way -- 96 percent of whom still are working for U.S. Office Products, the company reports -- said they are happy they invested in Ledecky's vision. Not only did they sell their companies for good prices, they also got to keep their jobs.
Among Ledecky's most passionately held business tenets is that if you buy a good company with good management and a good name, you should keep its employees and its corporate identity. Of the six major office products consolidators, all except U.S. Office Products buy firms, wipe out their names, and often their management, to create a single, national identity. Most of those companies, including Corporate Express Inc. of Denver, have released disappointing earnings and seen their stock plummet even further than that of U.S. Office Products.
Ledecky's approach riles his competitors. A senior industry executive called U.S. Office Products the brainchild of "an extraordinarily clever financial manipulator."
"Each one of us has gone about, in different ways, at different paces, to change the individual models [of companies we've acquired] to make them more productive and efficient," the executive said. "And that is very painful work. It is very difficult work. It is the kind of work that a stock market manipulator doesn't like doing. But at the end of the day, that's where successful roll-up strategies will come together."
Don't tell that to Milford Marchant, president of Price Modern Inc., a Baltimore office products firm that was bought by U.S. Office Products in January 1996. Marchant is still president of his company.
"We were just relieved that we [sold to] a company . . . that wouldn't make us put on the corporate smock and take down our name and take away our parking space," Marchant said. "We built these companies and we wanted to take them to the next level."
Marchant would love to see the value of his stock holdings rise, having accepted a large amount of U.S. Office Products stock to sell his company, but he said he is not frustrated or upset that that hasn't happened yet. He is expecting big financial returns at some point, though. "Probably not in the next 90 days, and that's okay, but a year from now, definitely," he said.
All of the changes Ledecky is making point to his nascent transformation from entrepreneur to world-class investor, said Edward J. Mathias, a U.S. Office Products board member and managing director at the Carlyle Group, a Washington investment firm.
In addition to his stakes in U.S. Office Products and Consolidation Capital, Ledecky owns 1.3 million shares of stock in District-based U.S.A. Floral Products Inc., another roll-up of which he is non-executive chairman. He will have large stakes in the four companies spun off from U.S. Office Products. And industry sources say another roll-up is about to go public in which Ledecky will hold close to 2 million shares at about $20 apiece. Including that, his stock holdings are valued conservatively at about $200 million.
Ledecky had no money in 1994 when, as a consultant for furniture manufacturer Steelcase, he negotiated a deal to sell one of its divisions -- and personally netted $1 million from the transaction. Using advances from his credit cards, a small investment from Mathias and financing from Steelcase, he was able to buy a Minnesota office products company owned by Steelcase that soon became the basis for U.S. Office Products -- and a multibillion-dollar empire.
Ledecky is a "strategic thinker" who "sees patterns and relationships that other people don't see," Mathias said.
"It is not unthinkable that five to 10 years from now, people will talk about Jon in the same way that they talk today about [George] Soros, [Warren] Buffett and some others," he said. "He has the drive and he has the ability and now he has the platforms."
What he has learned to do is carefully allocate his time and reputation, then surround himself with top-notch people to shepherd his interests, Mathias said, which he called "signs of real professional and personal growth."
Ledecky looks at it more humorously. "The last three years have been like dog years," he said. "I think I've matured 21 years."
But professional development is not the only maturation process driving Ledecky. He will turn 40 next month and he still is single, something he openly admits he's not especially happy about.
"I have sacrificed my personal life. I have been married to U.S Office Products -- seven days a week, 18 hours a day," he said.
The sacrifice struck him especially hard, he said, during his daily 10-mile run in the midst of nonstop negotiations with Clayton, Dubilier & Rice during the Christmas holidays. Near the Washington Monument, as he rushed by with his Walkman on, a toddler looked up and smiled at him. A few minutes later a huge flock of geese took off at once from the tidal basin. "It sounds corny, but as I'm running, it just kind of hit me, these two things are just as important as what's going on here," he said.
Breaking up U.S. Office Products will not just simplify the company, "it will simplify my life," Ledecky said. He plans to focus more on his charitable and philanthropic interests -- and on having a life outside work.
That's what he says, anyway; longtime friends and associates are somewhat skeptical. After all, he still has Consolidation Capital, U.S.A. Floral, an advisory role to U.S. Office Products and its spinoff companies, and the new roll-up coming out soon.
"There's no evidence that he's curtailing his business activities," Mathias said, chuckling at the idea of Ledecky stopping to smell the roses. Nevertheless, he conceded, "there's no question that the way in which he operates is evolving."
A LOOK AT . . .
Jonathan J. Ledecky put everything he had -- $1.25 million -- into U.S. Office Products when he took it public in February 1995. Here is what his stock is now worth in the three companies he has created.
Company Friday close Shares held Value(in millions) Consolidation
Capital $19.50 4.5 million $87.75
USA Floral $17.75 1.31 million $23.25
Products $17.68 3/4 2.99 million $52.89
Total 8.8 million $163.89 million
SOURCE: SEC documents.
A GROWTH OF US OFFICE PRODUCTS ...
Jonathan Ledecky took his company on a dizzying three-year odyssey of consolidation before deciding last week to split it up.
Total number of companies acquired:
Makes first acquisitions: office supply companies
Gets into the coffee service and furniture businesses
Enters New Zealand
Enters school supplies market
Announces entry into janitorial market, but deal is canceled and division is not formed.
Enters technology solutions and print management businesses
Enters corporate travel business
Announces purchase of MailBoxes Etc.
Enters Great Britain
Announces plans to split into 5 companies:
1. Office products, furniture, coffee
2. Corporate travel
3. School supplies
4. Print management
5. Technology solutions
SOURCE: Bloomberg News, Washington Post reports
© Copyright 1998 The Washington Post Company