Alco Standard Corporation

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Alco Standard Corporation

825 Duportail Road
Valley Forge, Pennsylvania 19482
U.S.A.
(215) 296–8000

Public Company
Incorporated: November 24, 1952 as Rainbow Production
Corporation
Employees: 18,400
Sales: $4.161 billion
Market value: $1.045 billion
Stock Index: New York
While the history of Alco Standard as a corporation began in 1952 with the Rainbow Production Company (which became Alco Oil and Chemical Corporation after acquiring a company of that name in 1956), the history of Alco Standard, the highly diversified conglomerate, began in 1960 with the formation of V&V Companies, a holding company established by Tinkham Veale II and two associates.

Veale began V&V Companies with his younger brother George and a classmate, John Vaughan, at the age of 47, at which time he was already a millionaire. In 1941 Veale graduated with a degree in engineering from Case Institute of Technology. He then married the daughter of A.C. Ernst of Ernst & Ernst accounting, who in turn helped Veale and some college associates buy into a wartime manufacturer of specialty engineered goods in Cleveland. Ernst tutored his son-in-law in the ways of what Veale himself calls “wheeling and dealing”, and Veale was able to retire in the late 1940’s when he and his associates dissolved their investment team. Veale invested the capital his first venture generated and became a millionaire by 1951.

He stayed out of the business world for the next ten years. While he did keep an eye on his investment portfolio and served on the board of directors of Alco Oil and Chemical from 1954, Veale spent most of this time breeding and racing thoroughbred horses. Then in 1960, after beginning to feel a need for additional challenges, he and his associates formed V&V; their first investment was Alco Oil and Chemical.

V&V purchased a large minority share of Alco, and realized reasonable profits from its investment until 1965 when the two companies were merged to form a larger company. Alco had changed its name to Alco Chemical in 1962 to reflect increasing specialization, but after joining forces with V&V, the company name was changed to Alco Standard.

By the time Veale and Vaughan became group vice presidents of the newly formed company in 1965, Alco had already made some acquisitions of its own in the chemical field. Miller Chemical and Fertilizer and Union Fertilizer were the company’s earliest acquisitions, followed in 1962 by Higgs and Young and Goulard and Olena, distributors of fertilizer and agricultural materials. These early attempts at expansion were successful, but had brought company profits of only $250,000 a year on sales of $5 million; its shares at that time sold for 13¢.

Meanwhile, V&V had made other investments of its own including Modern Equipment Company, Gas Machinery Company, and RMF. These two groups formed the basis for Alco Standard’s impressive expansion over the course of the 22 years since the merger in 1965. Before serious growth could begin, however, Alco faced difficult times. The early 1960’s brought financial trouble to Alco, and only skillful financial handling kept the new company from bankruptcy. At one point, a 1 for 6 reverse split of Alco’s stock was necessary to bring the price per share up to $3. This served to boost available capital to the point where Veale was able to purchase three small companies with Alco convertible preference shares. He then made use of these companies’ cash reserves to support further acquisitions. By 1968 profits has risen to $12.5 million on $140.4 million in sales, and the price per share had risen to $1.17 after a 2 for 1 split, this time in the right direction.

This sort of growth can be credited directly to Veale’s rapid but very careful acquisitions. He bought only into private management-owned companies with sales in the $5 to $10 million range. The management of many of these companies was kept on and given considerable autonomy, with Alco acting as a board of directors only. The success of many of these operations has been attributed by Veale to Alco’s extensive profit-sharing program, through which his managers own a great deal of stock in the company. In fact, Alco management owns 45% of the company’s common stock while Veale himself controls only 11%. By 1968, 52 separate companies had been acquired in this manner and Alco’s interests had been expanded into four distinct areas—chemical, electrical, metallurgical, and distribution. It is this last area which has developed into Alco’s largest and most profitable division.

In the mid-1960’s, several Supreme Court anti-trust decisions forced many big American paper manufacturers to divest themselves of paper merchants they had acquired during the 1950’s. Many of these were sold to their own management and as a result the paper distribution business was fragmented and inefficient. In 1968 Alco acquired Garrett-Buchanan of Philadelphia and used it as a base upon which to build the only national paper distribution organization of its time. Many similar acquisitions were made, adding to the size and profitability of this growing division, and by 1970 Alco’s distribution business had grown to the point where outside help was sought in management. Ray Mundt, now president of Alco, was brought in from Kimberly Clark to manage the fast-growing division because he had the industry experience needed for the job.

Mundt saw an immediate need for centralized management of his division and was able to implement his plan to create a new company within Alco. Unisource, the national paper distribution operation Veale had imagined, was set up as an operating company for all the smaller distributors. Larger warehouses and computerized ordering, warehousing, and delivery made Unisource the most efficient and cheapest distributor in the United States. By 1981 Unisource alone generated $36 million in income for Alco on $963 million in sales.

The success of Unisource prompted Alco to move into other distribution areas. In 1969 distribution of specialty steel products was added, followed by auto parts, liquor, and glass containers. A health supplies distribution operation was added in 1977 and saw a dramatic rise in profitability within its first four years. By 1981 sales had risen from $83 million to $422 million and profits had gone from $2.8 million to $13 million. Altogether in 1981,$78.5 million were generated in distribution from $1.9 billion in sales accounting for 60% of Alco’s profits and 75% of its sales.

Alco’s earnings were expected to continue to rise at a rate of 10% or more, but 1983 brought margins that had sunk 2.1% and lowered return on equity. Even though Alco’s profits as a whole rose, Veale, who was by then chairman, and Mundt, by then president and chief executive officer, were not happy with the situation. The problem was not in their successful distribution divisions, but in manufacturing. 23 of Alco’s producers of plastics, rubber, specialty products, capital equipment, and chemicals, which constituted about 45% of Alco’s total manufacturing operations, formed the crux of the problem. They were operating well enough and had good cash flow but were not able, due to the cyclical nature of their businesses, to expand at the rate that other Alco operations had achieved.

In 1984 Alco merged these smaller firms into a single operation named Alco Industries and sold the new company to its managers. Alco still retains a 19% equity in the firm, but has little to do with the company’s operation. Without abandoning manufacturing entirely, Alco was able to decrease its dependency on its manufacturing operations to 15% of its sales and less than one third of its profits.

Restructuring of Alco’s operations followed this divestiture closely. In 1984 Mundt divided the remaining companies into eight distinct segments including paper products, pharmaceuticals, and food equipment. Each group manager reports directly to Mundt. This new structure was designed to allow Mundt to oversee the over 180 companies owned by Alco while still leaving him free to pay special attention to paper and health products distribution, which remain Alco’s strongest divisions.

Since that time Mundt has made six new acquisitions in the paper distribution market, including Saxon Industries, a struggling international distributor valued at $378 million. Alco was able to buy the company which was under backruptcy protection, for only $148 million in 1984. This purchase was a marked departure from Alco’s usual policy of buying only companies with sales under $10 million, but as Alco’s vice president for acquisitions is reported to have said, “when you are in the paper distribution business, it is not often you find an opportunity to increase yourself by 40%.” Alco’s only worry in paper distribution is of possible antitrust difficulties.

In the meantime, Mundt is busy expanding Alco’s distribution operations in other areas. In 1983 seven office-products distributors were brought in. The revenues of these companies totaled over $70 million in 1982 and there has been little but growth since then. Pharmaceutical products, Alco’s second fastest-growing operation, has expanded to fill third place in the industry, behind McKesson and Bergen Brunswig. Moves into electrical products distribution are planned, as is expansion of Alco’s food equipment division.

Mundt believes that Southeast Asia’s new attraction for fast food restaurants will provide a ready and expanding market for the food equipment division which does a great deal of business with the major companies involved. Other plans for change include possible divestiture of Alco’s unprofitable coal business, which is suffering from low coal prices brought on by similarly low oil prices.

Mundt’s future plans for Alco would seem to be more of the same. Distribution has proved consistently profitable for the company, and its president is moving toward further expansion of that end of the business in preference to manufacturing. The company’s revenues have continued to rise steadily through the 1980’s, although net income dropped suddenly in 1985. This was accompanied by rapid reductions in Alco’s debt, however, and may not be indicative of hard times ahead.

Principal Subsidiaries

ATI; Alco Foodservice Equipment Co.; Alco Health Services Corp.; Alco-Plant City, Inc.; Alco Standard Petroleum Corp.; Alco Venture Capital Co.; Alexander Mercer & Hunt Co.; Allegheny Wholesale Drug Co., Inc.; Bearing-Belt & Chain Inc.; Big Drum, Inc.; Brown Drug Co.; Carpenter/Offutt Paper, Inc.; Devonshire Corp.; Hampshire Corp.; Kilroy Structural Steel, Inc.; Otto Konigslow Mfg. Co.; MDR Corp.; MLC Leasing Co.; Modern Business Systems, Inc.; Northwest Industries, Inc.; Paper Corporation of America; Partners Securities Co.; Ed Phillips & Sons Co.; Relco Financial Corp.; Reynolds Products, Inc.; Rita-Ann Distributors, Inc.; Spectra Office Concepts, Inc.; United Wine & Spirits Co., Inc.; Upshur Coals Corp. The company also lists subsidiaries in the following countries: Bermuda, Canada, Cayman Islands, England, France, New Zealand, Spain, Sweden, United Arab Emirates, and West Germany.