Financial Services



Green Tree Wants to Get the Message Out

Focus, 06/28/1989, 2244 words.


Horses as Investments

Focus, 06/03/1987, 2815 words.


Investment Banking: The More Things Change, the More They Stay the Same

Focus, 05/27/1987, 2287 words.


Home Equity Loans: Is It Worth Betting the Ranch?

Focus, 04/08/1987


Accounting Firms Are Not Just Number Crunchers Anymore

Focus, 02/25/1987, 2934 words.


Financing: Sunny and Warm, at Least Short-Term…

Focus, 11/26/1986


How Middle Market Companies View Their Commercial Banks

Focus, 10/15/1986, 2263 words.


Mortgage Banking Companies Are Hot – Who’s Selling, Who’s Buying, and Why?

Focus, 10/15/1986, 1619 words.


Philip Kendall Pushes Packard Press to Become a National Leader in the Competitive Financial

Printing Industry

Focus, 06/11/1986, 1957 words.


Harrison Building Fire Puts Construction Insurance in New Light

Focus, 11/07/1984 (ghostwritten for client)



Green Tree Wants to Get the Message Out

By Brice Donovan (a.k.a., Thomas Derr)




Pg. 54


Philadelphia, PA, US -- A little more than 200 years ago, the Philadelphia-based Mutual Insurance

Company began offering an innovative program to let homeowners take out property insurance with a one-time payment, instead of dealing with continuous monthly premiums, as has become today's norm.


But thanks in large part to modern tax laws, that 200 year-old idea -- known as "perpetual insurance" -- is catching on again.


Daniel F. Crough, President and Chief Executive Officer of the Mutual Assurance Company (also known as "The Green Tree Company") calls perpetual insurance "an excellent financial planning tool" -- especially for higher income individuals and two wage earner families who are looking to save a little on their yearly tax bill.


UP-FRONT DEPOSIT: Basically, here's how it works -- consumers who sign up for perpetual insurance pay a one-time, up-front deposit that represents the cost of the entire homeowners policy. The exact amount of this one-time deposit will, of course, vary depending on the value of the residence. This deposit can be handled in a number of ways. One option is to pay the entire sum at once. The advantage to consumers who choose this option is that they avoid the annual premium charge which a conventional policy features, as well as the accompanying federal and state income taxes on such a policy.


In one example Crough uses, a homeowner pays an annual premium of $476 for $160,000 of coverage. In addition, he faces federal income taxes (at 28 percent) of $191 and state taxes (at 2.1 percent) of $14. Under a perpetual insurance policy, that homeowner could get the same coverage for a one-time upfront deposit of $4,940. But according to Crough, the homeowner registers a 13.8 percent gain because that is the amount he would have to earn before taxes on his $4,940 deposit to pay the conventional $476 premium.


But a homeowner doesn't have to come up with the full amount of the deposit in cash in order to take advantage of the perpetual insurance benefits, Crough adds. Many policyholders opt for a down payment of only 10 percent, and finance the balance with a home equity loan. Thus, while the deposit continues to grow each year, the interest on the loan is still fully tax deductible (subject to the provisions and limits of the Tax Reform Act of 1986).


And there is one final benefit -- in both cases, the deposit represents an asset that is fully refundable whenever the insurance coverage is terminated.


LACK OF AWARENESS: If that sounds complicated to you, you're in good company.


According to Crough, one of the biggest challenges his people face in selling the perpetual insurance policies is education. "People simply are not educated to understand the perpetual insurance concept,"


Crough says. "People don't think about putting down a large deposit for their homeowners insurance. And a lot of people won't consider doing it even if you can demonstrate that they will save money over a number of years."


That's a barrier that has always existed for the perpetual companies, he adds. By way of contrast, the conventional homeowners insurance which The Green Tree sells through independent agents is doing quite well -- with a growth rate of approximately 50 percent over the past few years, Crough says.


Another key challenge to be overcome is the fact that people generally do not shop for homeowners insurance.


"For most people, homeowners insurance is something you get and you stay with," Crough explains. "A lot of people pay for it through their mortgage payments -- so they don't even think about it. So selling new policies has always been difficult."


The trick is to catch the would-be policy buyer at precisely the right time. And one of those times is when the consumer is buying a new house -- because that is when they will have to change their homeowner's insurance.


"We want to get people at the psychologically appropriate moment to sell them homeowner's insurance," Crough says.


THROUGH MORTGAGE LENDERS: One part of that strategy will involve acquisitions of new businesses. In fact, as of this writing, The Green Tree is in the process of negotiating to acquire a small homeowners insurance company based in Columbus, Ohio.


According to Crough, what makes this would-be acquisition particularly attractive is that the small insurance company sells homeowners insurance through mortgage lenders.


"They have access to new mortgage applicants at 10 of the 30 largest mortgage lenders in the United States," Crough says. "As soon as a person applies for a mortgage, that information is available to the insurance company. They immediately prepare a rate quotation, and send it out to the applicant." And they are closing a fairly high percentage of those sales, he adds. What The Green Tree would like to do is add the perpetual insurance product as an option to those new mortgage applicants, as well as to other customers who already have existing mortgages.


REACHING HOMEBUILDERS: Another major marketing thrust will be made at homebuilders, Crough says. "The idea is to see if we can persuade homebuilders to build the homeowners insurance right into the house, so when they finally sell the house, the homeowners insurance comes with it."


Crough says a parallel can be drawn with homebuilders who, several years ago, began offering a 10-year warranty with their new homes.


"Basically, that said if anything goes wrong with the house during the next ten years, the builder would fix it," Crough explains. "That gives the builders who have the warranty a competitive marketing edge over other builders." And because the cost of that ten-year warranty is built into the cost of the house, it often appears to be an even greater economic advantage for the buyer, he adds.


"So here the question is -- will the homebuilders be willing to add this into the cost of their houses? Is there enough advantage to them so we would not have to pay a commission either to the builders or the insurance arm of their trade association?"


To find the answers to those questions, Crough has set up a meeting with the National Association of Home Builders (NAHB), based in Washington, D.C. If the association endorses the concept, it would then be up to Crough and his associates to market the concept to individual homebuilders.


"We would have to put together a sales force to go out and make the sales to these individual builders," he says. "They would then advertise their developments or their homes as having this extra thing that other homebuilders don't have -- homeowners insurance that is already built-in."


Without the "blessing" of the trade organization, it probably would not be feasible to set up a sales force to call on individual homebuilders, Crough adds.


In the past, The Green Tree has tried to push perpetual insurance in conjunction with a number of other organizations -- most notably the Philadelphia Bar Association and Atlantic Financial. But these efforts consisted only of direct mail campaigns, and yielded somewhat less than satisfying results.


 Crough attributes the mediocre showing to a mailing kit which he says was "not the kind of quality kit we would like to have for this product," as well as to the low response rates direct mail typically garners. And given the public's general lack of understanding about perpetual insurance, that low response rate was probably further magnified, he says.


Other marketing thrusts have been more successful. Radio commercials that raise name recognition of The Green Tree name seem to have worked well. Crough also has committed to improving the quality of his perpetual insurance advertising materials. And the company recently had a videotape produced which is designed to explain to various groups just how the perpetual product works.


"Also, in order to make the product more attractive, we've recently created a new pricing tier for the more preferred risks so their deposit requirements are lower than they have been in the past," Crough says. "We've also put in the very latest forms for the policy itself so we have state-of-the-art kinds of forms for the policy."


COMPUTER LINKS: As part of that new marketing thrust, the firm has developed a plan to include the perpetual insurance products as part of the CompuServe interactive home computer cable service.


"This would enable someone with a home computer to dial up on the modem, plug in, and get an explanation of homeowners insurance so they can see how our term insurance compares with perpetual insurance," Crough says. "At the end, they can put in all the information particular to them that will give them a rate quotation. And, if they want, they can print out an application form on their printer to send in."


Crough also has ordered interactive computer kiosks that will enable passers-by to access computer information similar to what is available on CompuServe, and even get a rate quotation. The difference is that the kiosk will only feature perpetual insurance information, and it will not offer a print-out.


Crough has ordered three kiosks to begin with -- one for home shows, one for a bank lobby, and one for a suburban shopping mall. At the same time, the company will be able to gain additional information about the people who work the kiosk. Each kiosk holds about 2,000 sets of information on a disk. This information can be picked up manually by a Green Tree employee, or downloaded directly to corporate offices via telephone line.


DATA PROCESSING IS KEY: Tied in with all these new marketing initiatives is a stronger commitment to the firm's data processing capabilities, Crough says.


Crough admits his company's past information processing capabilities have not been especially effective. However, he believes this will change with the recent addition of Russell Brundage, an international computer expert who was president of Colonial Penn's data processing corporation at the same time Crough was CEO of the company.


"Over a twenty year period, he took Colonial Penn from a batch processing mode to on-line, real-time transaction data processing," Crough says. He estimates it will be about a year and a half before The Green Tree and its affiliated companies are up to speed from a data processing standpoint.


The data processing capability is key for two reasons, explains Crough. First, from a pricing standpoint, an insurance company has to have good, effective information processing so it can be sure it is getting the right price for its product. The second reason is target marketing. The company also needs to be able to pick the names and addresses of the people in the areas where it feels it will have the best chance to sell its product.


"Primarily you need it to keep track of your policies," Crough says. "It issues your policies and keeps track of them while you make changes.


"Also, it gives you the capability from a marketing standpoint to call up information about someone with whom you are talking on the phone. You can plug in information they give you, and see what the rate is going to be. You can go through various underwriting screens which will tell you whether or not it's an acceptable risk as you feed in the information. And then the ability to store that information gives you the opportunity to follow-up with people who don't buy right away."


PUSHING CONVENIENCE: One other challenge Crough sees is the perception that only people with high incomes or substantial assets will opt for perpetual insurance.


In fact, he points out that nearly 40 percent of his firm's perpetual policyholders have homes with replacement costs under $100,000. Another 42 percent have homes with replacement costs between $100,000 and $300,000.


To make the perpetual insurance product even more palatable to consumers who may shy away from the large down payment requirement, Crough instituted the home equity option. This lets the policyholder pick a term from five to 30 years to build up his or her deposit.


"When you stretch out the payment to 30 years, you get down to the point where the annual payment for the 30 years is just about the same as what you pay for a conventional policy," Crough explains. "So in essence you can build up the asset (which is fully refundable) through the loan mechanism without putting out any more cash dollars each year."


BACK TO BASICS: Still, none of these strategies are likely to be of much value if the basic problem of education can't be solved. But according to Crough, there's a good historical base for optimism. He points to the situation that existed in the U.S. only a few years ago, when inflation was running in double digits, and many consumers still had their money deposited in savings accounts that often carried interest rates of less than six percent.


"The combination of television shows, talk shows, newspaper and magazine reports, helped educate a lot of people," Crough says. "They realized --if they were earning 5.25 percent on their savings accounts, and inflation was 13 percent -- they were actually losing almost seven percent of their money every year."


"Many people who were not necessarily well educated soon "got up to speed" on the comparative value in certificates of deposit and other long-term investment vehicles, he says.


"Essentially, that's the challenge we face here," says Crough. "This perpetual insurance product is really a financial planning tool, and we need to get that message across and educate people."



Horses as Investments

By Thomas Derr




Pg. 20



Yardley, PA, US -- IN a scene set outside a ticket window in the Marx Brothers' A Day at the Races, the hustling Chico convinces Groucho that the only way he can be sure to place a successful bet is to investigate the backgrounds of the prospective racehorses.


Groucho then tries to accomplish this by purchasing a series of at least a dozen or so complicated volumes of background material which Chico is only too happy to sell to him.


Entertainment value aside, the scene does reflect an important truth in the racehorse business -- you have to know your horse. For those who do their homework, and who take the time to carefully select a horse, and work with a good trainer, stable people, and experienced personnel to run the operation, horseracing can be both fun and profitable -- or one can go broke trying.


LOSE YOUR SHIRT: "It's a very tough business. You can do everything right and lose your money," explains Buck Hallowell, account executive for Dean Witter Reynolds, Inc. and a retired horse owner with approximately 20 years of experience in the business. "It's a very difficult business."


According to Hallowell, only about three percent of yearlings that are dropped (born) each year ever make it to the races. And only about three percent of that three percent make a profit.


Tom Doren, an attorney with the center city law firm of Deckert, Price and Rhoads, shares a similar viewpoint.


"If you look at the percentage of thoroughbreds in North America that earn more than what it costs to maintain them -- forget the cost of acquisition, this is just the cost of keeping them -- it's a pretty dismal percentage," he says.


Doren has put together a number of thoroughbred syndications over the past years and has worked with people on both the winning and losing sides. Several years ago, Doren says, an investor he knew purchased a stallion for $125,000. Within the past few weeks, Doren noted that the stallion share was trading for $4,000.


"I had another client who purchased an interest in a yearling and hoped to race it," Doren says. "I think the total price about six years ago was two hundred and forty thousand dollars. It got sold six years later for seven thousand dollars. That's not unusual."


MORE THAN "HORSE SENSE": More unusual is the kind of experience which Jules and Sandra Newman, two center city professionals, who have focused their interests on harness racers (standardbreds) rather than thoroughbreds.


Probably the best example of the Newman's success was Nihilator, which cost the couple an investment of about $100,000. Nihilator turned out to be the top racehorse in its class, winning 32 of 35 races started and earning about $3.2 million in prize money. Nihilator eventually was syndicated for $19.2 million.


And as Sandra Newman is quick to point out, their success is not due to their own "horse sense" but more a result of their close association with Louis P. Guida, who is probably the top syndicator in harness racing in the nation today.


According to Guida, the Newman's have invested along with him for the past ten years, and have literally made millions of dollars on rather modest investments as a result. But behind that success is much more than simple luck. Guida's special knowledge and insight is based on years of experience.


"Just to give you an example, I have had four Horse of the Year winners in the standardbreds; my one investment in thoroughbreds was Spend A Buck, and he was Horse of the Year; and I've had about 11 different divisional titles over the past seven to eight years," he says. "The key is -- we know what we're doing. We're good at what we're doing. And we work at it."


NOT A FAIR COMPARISON: As Doren notes, it might not be entirely fair to compare thoroughbred investments with standardbreds.


Generally standardbreds are much less expensive than thoroughbreds, often costing about one-third as much. At the same time, however, it is not unusual to find that standardbreds account for four or five of the top ten money winners in the United States each year.


"One of the reasons why they cost so much less is because the stud fees are so much less," Doren explains. "The highest stud fee for a single breeding for a standardbred that I know of is forty or fifty thousand dollars. The highest for a thoroughbred purchased now is one million dollars."


Standardbreds are bred by artificial insemination, which means one can be bred to 150 or more mares a season. A thoroughbred, meanwhile, will seldom be bred to more than 40 mares.


"Standardbreds also are a hardier breed -- you can race them 50 times a year instead of 20 times a year or less," Doren notes. "And they tend to be more resistant to injury -- they have a higher threshold of pain, I think. Sometimes you look at them and they can hardly walk, and somehow they get around the track. Thoroughbreds are built differently. Their legs are a lot frailer."


SYNDICATION: Generally the thoroughbred business is about 30 to 50 percent more expensive than the harness business, agrees Hallowell. But the nature of the syndication activity is similar. Generally speaking, if it is a private syndication, there is a limited number of shares that can be sold -- usually 40. Therefore, if a horse is syndicated for one million dollars, and there are 40 shares, each shareholder will invest $50,000. According to Hallowell, a typical private placement will cost an investor in the neighborhood of $25,000 to $50,000 per share. But that's just where the fun begins.


"Each one of those shares may entitle you to the following: one free breeding stallion, or one season," explains Hallowell. "Sometimes they guarantee you a live foal, sometimes they guarantee you only a mate. Whether or not the mare becomes pregnant, you still have to put up the money."


MARKET FOR STUDS: According to Hallowell, there is a very active aftermarket for stud seasons, and in fact horse owners often trade seasons as they would stocks.


"For example, if you own a piece of Secretariat, and you want to sell this season, you might call me up and say: 'Buck, I know you have that good mare. If you want to breed her with Secretariat, I will sell you the season for half a million dollars.' So I might buy that from you," Hallowell says.


At the same time, if a horse owner wants to breed a mare to a certain horse, and can't find an open season, he or she might go to a particular auction and bid on that season, just as one would bid on a particular horse. The difference is that the owner is then bidding on one mating -- which can be a risky business.


"A season is a one-shot deal, especially in the thoroughbred business," explains Hallowell. "Now in the harness business, they generally guarantee you a live foal, standing -- which means it can stand up and suckle the mare. In the thoroughbred business, in most of the newer syndications, they don't do that. So you're really taking an extreme chance, because all you get is a mating, and the mare may or may not get in foal, and she may even have a stillborn. After all, it's an animal, and it's not something that is particularly consistent."


Hallowell, though now retired from the horseracing business, says he has made a profit from his investments, but the effort that was needed to do so probably wouldn't be worth it for the typical investor, he adds.


"First of all, you have to have a horse that will stay healthy," says Hallowell. "Then you have to have a trainer that is capable of training the horse and getting him to the track and make some money. Then you need to manage your stable, because even if you are a good trainer -- if you're putting these things in the wrong place -- you're never going to make any money."


TEAM WORK: Stable people are also important, he says. Each horse has its own personality, and if it becomes discouraged, it will not race well. Therefore, good stable people and a good groom is also important if one wants to keep a horse cheerful and happy, so that he'll race well.


"You don't just buy the horse, take him to the track, put him behind the gate and let him go," Hallowell says. "You also need a trainer or an overseer who can train him, put him in the right class to race him, know what they are worth, get the best out of them, keep good help around, and keep control of the help."


It's a very expensive proposition, Hallowell says, which is why most of the syndications with which he is familiar rarely turn a profit. What generally happens is that the syndicate will buy 10 horses, one of which makes it to the races and "makes a hell of a lot of money." Most of the horses are destined for anonymity.


"That's generally the way it works," Hallowell says. "I might buy a piece of a single horse syndication, but I would not get involved in one with a group of mares, just because most of those that are put together tend to have one or two big names, and 12 basket cases that never make anything. Generally, they are just a chance for people to sell off their junk."


BETTERING THE ODDS: At least one syndicator, however, is hoping to change that kind of attitude toward horseracing investments. Mel Bergman, president of American Thoroughbreds Limited, in Yardley, has developed a means by which smaller investors can enjoy the thrill and pageantry involved in owning a racehorse while limiting many of the financial risks.


According to Bergman, American Thoroughbreds enables new investors to get involved in the horseracing business, often for as little as a one-time $3,000 investment. At the same time, there are no ongoing monthly bills for maintaining the horse -- which Bergman notes is probably the expense which causes most would-be investors to shy away from the investment.


"How we are able to do it is very simple," Bergman says. "We use a limited partnership vehicle and pool the monies of approximately 25 people, ranging from $3,000 to $5,000. We then set aside a specific amount as a working capital reserve, and with the rest we purchase the horses."


For most of his clients Bergman strongly advocates multiple (at least three) horse partnerships, because of the fact that if one is hurt or resting, the two others will still be able to race and pick up expenses. On the average, a winning horse will earn, statistically, about $7,000 a year. However, it also costs about $12,000 a year to keep a horse. Thus, most horses end up actually losing money from a statistical sampling, he says.


PICKING HORSES: Obviously no one can guarantee success on the thoroughbred track -- legally, anyway -- but there are ways of bettering the odds. One way, as noted, is by having someone who knows horses pick them for investors.


Bergman says that he and his trainer, Salvatore Campo, make their selections from a range of two year-olds to six year-olds that already have proven themselves on the track. Campo, in fact, earned nearly $900,000 in purses for American Thoroughbreds in 1984 and sent one horse to the 1984 Kentucky Derby. His brother is well-known New York trainer John P. Campo.


"It's a known fact that probably 40 percent of the horses foaled (born) each year never make it to the races," Bergman says. "So when I say proven on the race track, it means that we know they are race horses, and are capable of winning, and have won races in the past -- as opposed to buying a young, untried horse that may never make it to the races."


At the same time, the absence of monthly fees does help to hold down expenses. Still, Bergman does emphasize that horseracing is a risky business. At the worst, an investor can lose everything he or she invests -- but that's all. But according to Bergman, that might be enough to entice many investors who would never get involved on an individual basis.


"If an individual owner happened to buy a horse who got hurt, he or she is basically stuck with it. You know nobody wants to buy a hurt and broken down race horse," Bergman says. "At the same time, those expenses will still continue. You can't just turn a horse out to the streets and say I don't want you anymore."


CLAIMING HORSES: American Thoroughbreds offers a number of other economic advantages to would-be investors, as well. For example, because the organization deals frequently with claiming horses, it offers its investors automatic claiming insurance.


Probably 90 percent of the races in the U.S. consist of what are called "claiming races," Bergman says. That means any horse in a specific claiming race is actually for sale for a predetermined, published amount. For example, in a $10,000 claiming race, every horse in that race can be purchased by a licensed owner prior to the start of the race for $10,000. Claiming races start at about $3,500, but can go much higher, sometimes as high as $300,000.


The way it works is that up until 10 minutes before the race, a would-be buyer can look at the horse (physical examinations are not allowed) and decide whether or not to fill out a claim slip with the name of the horse and the name of the would-be buyer on it. Meantime, the buyer will have deposited the required amount of money, plus sales tax, in an account with the track's bookie, says

Bergman. The slip is then dropped in a locked box.


“As soon as those gates open on the race, that horse is yours -- dead or alive, that horse is yours," Bergman says. "Anyway, we have insurance where as soon as that gate opens, if we drop a claim and that horse dies, the insurance company covers us."


"There is no way to protect your investment in horses, other than mortality insurance, and all American Thoroughbreds horses are insured."


PERFORMANCE COUNTS: As with most other horseracing investments, the organization's ultimate intent is to develop a horse that will be much more valuable in a breeding syndicate. As Bergman readily notes, the appreciation or value of a horse goes up dramatically with the performance on the race track.


"That's our goal -- it's not often reached, because there are not that many horses that attain stakes-winning status," he says. "But there is real money to be made if you are lucky enough to develop a horse like that. You then convert it into stallion syndicate, or sell the horse for a substantial profit. And then the partners reap the benefits."


Bergman's classic success story involves a horse his organization invested in through a $3,500 claiming race. The horse, named "First Tent," earned $73,000 for the partnership. Thus, from a nondescript background, and at the bottom of the ladder of claiming races, First Tent wound up with 11 wins, four seconds, and five thirds out of 23 total races. In fact, Bergman notes that First Tent was the third leading horse in North America in races won -- quite an accomplishment, considering that about 80,000 horses are raced each year in North America.


PERKS OFFERED: Of course, not all partnerships end up with that kind of success, Bergman adds. But at the same time, there are few, if any, other investments that can offer the same kind of prestige, tradition, thrills and other intangible benefits associated with horseracing.


All of American Thoroughbred's investors become licensed owners, and thus are entitled to winners' circle privileges, paddock privileges (where they can go in and meet the jockeys and the trainer), and should the horse win, having their photographs taken with the horse in the winners' circle.


"The owners have a lot of the prestigious benefits that go along with horse ownership, for a minimal amount of money and the financial risks that are associated with horse ownership," Bergman says.


"I use a phrase that not all investments are made of paper and live in the safe. Some eat hay and race for millions," he continues. "There are a lot of intangible benefits, and it is not a straight line investment. It is very, very risky. And I clearly state in any literature I put out -- if you're looking for a safe, steady source of income or cash flow, forget it. Don't go to race-horses. Go somewhere else. But if you're looking for a little fun, excitement and something different, try it."



Investment Banking: The More Things Change, the More They Stay the Same

By Thomas Derr




Pg. 19



Philadelphia, PA, US -- WITH the recently enacted changes in the tax law, many business people probably are wondering what kind of impact the new regulations will have on investment activity.


The general feeling among most area investment bankers seems to be fairly clear -- little or none. For the most part, the trends which the investment bankers have seen in the recent past are expected to continue -- and this is true for a variety of different types of investments.


Peter C. Colella, Jr., managing director of Colmen Management Co., sees a strong trend continuing in the area of consolidation and merger activity, especially in smaller sized companies.


"There is still a tremendous amount of activity taking place in the two to one hundred million dollar range, and that really doesn't get the focus of publications like the Wall Street Journal," notes Colella.


Nevertheless, he says that type of activity is likely to continue, although prices may start becoming somewhat more realistic. Some of the prices and multiples that acquiring companies pay today are "unheard of," he adds -- and in the smaller transactions, those multiples often do not hold true.


SUPERMARKET SYNDROME: According to Gabriel F. Nagy, vice president of Investment Banking at Howard, Lawson & Co., buying and selling of companies has reached the point where "it is practically like walking into a supermarket and saying: 'I'll take that off the shelf.'"


Companies are being bought and sold with tremendous frequency, Nagy adds, and these transactions come in a wide variety of shades.


Major players such as acquisition czar Irwin Jacobs, for example, will buy into large corporations for very large blocks, with the hope of making money on the ultimate purchase and resale of the whole company, Nagy says.


"That's the most extreme form of buying and selling, where you have large companies such as when General Motors bought Electronic Data Systems," he adds.


LEVERAGED BUYOUTS: More typical for the Philadelphia area market are leveraged buyout transactions. These generally consist of management buyouts -- wherein the managers of a company who do not already possess an equity interest in the business that they are running make an offer to buy the company from the company's current shareholders.


"Typically you have the founder of a company, sometimes a family business, who sort of runs out of steam or runs out of heirs interested in the business," Nagy explains. "So the guys who are running this company for him, at the next level down, put together their money, find an investment banker to find them some more money, and make an offer to buy the company."


Currently there seems to be a great deal of that kind of activity taking place not only in the Philadelphia area, but throughout the rest of the country as well.


THEN GOING PUBLIC: According to Nagy, there is an identifiable cycle that generally is involved in the buying and selling game: The people who buy these companies usually operate them for several years, and then go to the public markets so that they can become liquid. In other words, the cycle eventually repeats itself.


"Generally the cycle that tends to operate is the founder founds the company, he sells it to his managers," Nagy explains. "The managers operate it for a couple of years, make it grow even faster than the founder did, and then they take it public -- thereby becoming liquid themselves. The company then becomes permanent and is acquired by an even bigger company."


As an interesting sidelight, this cycle also offers a clue to venture capitalists who are trying to make up their mind as to when young early state companies will provide a payback, he adds. At the same time, Nagy expects the recent flurry of activity in company buying and selling to continue unabated by the new tax law.


"Nobody much seems to be talking tax consequences as either a negative or a positive," says Nagy. "It doesn't seem to be an issue until you get close to looking at how you structure it. The bottom line is whether the deal gets done doesn't really seem to be affected by the tax law."


Although there was a tremendous deal flow toward the end of 1986, as companies tried to get in under the wire and thereby retain favorable capital gains treatment, there still seems to be a strong flow of activity through the first part of 1987.


NOSTALGIA: As Colmen Management's Colella notes, some of the more highly publicized activity still revolves around larger corporations that are either gobbling up smaller companies or spinning off companies to get back to core businesses. As a matter of fact, Colella thinks the next few years will see something of an increase in the number and size of conglomerates. And for some business people, this surge of acquisition may set off a wave of historic nostalgia.


"The height of the mergers and acquisitions activity in this country in relative terms actually occurred during the late 1800s and early 1900s," Colella says. "AT&T is a classic example. They gobbled up hundreds of local independent telephone companies. U.S. Steel was formed by putting together a large number of separate businesses. General Motors acquired 75 or so companies in a single year back then."


Current antitrust laws, in fact, were enacted mainly because of the rampant acquisition activity that occurred from the 1890s through the 1920s. Whether or not future antitrust legislation will become necessary currently is unforeseeable, but it's unlikely that the acquisition activity will be slowed by tax laws, anyway.


ASSET DEALS OR STOCK DEALS: "The principal thing the new tax law has done in the area of corporate acquisitions is to make it less attractive to do asset deals, or stock deals," Nagy says. "But it really hasn't affected the likelihood of seals of companies going on. That hasn't happened much."


One investment banker who apparently is more optimistic about stocks is Harry Kuch, president of H.G. Kuch & Co., Inc.


"It's been the most prosperous year in our history. We're making so much money we can't believe it," Kuch says. According to Kuch, continued growth in the stock market is likely because of simple supply and demand -- the big companies are buying up much of their own stock, thereby leaving fewer and fewer shares behind for the mutual funds and pension funds. A smaller supply available means higher prices can be demanded.


PROGRAMMED TRADING: But another investment banker who happens to share Nagy's caution in current stock-related activity is Michael J. Walsh, Jr., head of the Research and Syndication Department for Boening & Scattergood, Inc.


Walsh's reasons for caution largely involve what he terms "programmed trading" by investors who are playing with huge sums of money to make a comparatively small profit on the transaction. In fact, his company has urged clients to sit back for a time and let some of these more ambitious strategists play out their hands.


"It's not that we see the end of the market or anything like that," says Walsh. "We feel that the market has been traded like a commodity rather than an investment arena."


For example, during one recent Friday of trading, there were basically five large stocks that kept the Dow Jones common stock levels from dropping precipitously, he explains. Although the final tally showed the Dow being down by only 0.42, the Dow Jones during the course of the day traded about 100 points, total ups and downs, regains and rebounds, Walsh says.


Each stock has a certain weight, Walsh explains. IBM is a heavyweight on the Dow. So are General Motors, USEX, and Exxon. The adventuresome traders concentrate on these heavyweights, and then use options and futures as hedges.


LOT OF DOLLARS: "There are all kinds of strategies involved," Walsh says. "They are going to the stocks, if they go up, they go to the heavyweights, and when they are trying to cover on the shortside, they may sell off the heavyweights. They do various hedges, and they are playing with a lot of dollars to make a small profit."


According to Walsh, it can take as much as five million dollars to make $50,000 on these trading hedges, and with a multitude of different transactions. Frequently these programmed trades will start hitting late in the afternoon, which sometimes leads to situations such as one recent day, when the market went from minus ten to minus 50 in an hour and a half, which is a pretty wide swing in just a short time, Walsh says.


"It really has gotten out of the hands of the men and been put into the hands of the boys, with these computers," he adds. "That aspect leaves as a little bit alarmed. It's not a good climate. It's not an investment driven market, it's a cash driven market when you have these guys with big baskets of cash to buy baskets of stock."


UNPREDICTABLE MARKETPLACE: It's difficult for the ordinary investor to know when to buy or sell stock in such an unpredictable marketplace, agrees Madeline Magee, Securities Analyst for Hopper Soliday & Co., Inc.


Magee notes that generally there are two basic types of stock pickers -- bottom-up, and top-down. Top-down pickers look at the overall economic scenario, the multitude of factors and trends that exist in the general economy and gradually narrow their focus down to the best industries and then pick the best positioned companies in those industries. Bottom-up pickers work the other way around, putting less emphasis on overall economic scenarios and more on the strength or weakness of individual companies.


Although she notes that there is a fairly well documented correlation between interest rates and the stock market (when interest rates are down, the stock market usually rebounds favorably) she adds that trying to predict how the market will do vis-à-vis anticipated interest rates, bond prices, or other stock prices is not a course of action which her company recommends either.


"We're not market timers," Magee says. "A market timer is someone who decides to get into the stock market when they think it looks cheap, and get out when they think it's overprices. Basically our method and philosophy is to try to find good, sound companies that we feel the price is undervalued, in both good markets and bad."


OPPORTUNITIES: In additional to the traditional stock-related activity, there are also several "new-fangled" types of opportunities available to investors, notes Michael J. Mufson, vice president and managing director of Corporate Finance for Butcher & Singer, Inc. One of the most exciting is something called the master limited partnership.


The master limited partnership is, for all practical purposes a partnership formed that behaves like common stock, Mufson explains. The difference is, the individual's ownership is not a share in a corporation. Instead, it would be a unit of a limited partnership within what is called the master limited partnership.


According to Mufson, the reason for their proliferation at this time is because most MLP formats sit well with businesses that tend to be mature, that tend to have significant, consistent cash flows from their operations, and where the marketplace under normal price earnings or price to book multiples is not rewarding the value that the corporation which owns the asset thinks its worth.


BOSTON CELTICS: Although MLPs traditionally have been used in the oil and gas business, the concept is now taking hold in fields such as cable television, real estate, publishing, agriculture, and professional sports -- the Boston Celtics recently were sold in a master limited partnership.


According to Mufson, MLP investors usually are higher net worth individuals than the average.


"It tends to be someone who is looking for higher yielding instruments, but is willing to take the risk with it and wants to shelter some of the income that comes off of it," he explains.


Because of the very complex tax nature of the master limited partnership, much of the income is sheltered, or tax deferred. Typical partnerships, using generally accepted accounting principles, show losses, while their cash flow is quite positive.


"That's what you focus on -- the cash flow -- not reported earnings," Mufson says. "And the kind of investor that invests in these is someone who: one, understands it; and two, is in a high enough income bracket that the sheltered income becomes important to them."


MLPs also are an effective means for corporations to raise money, he adds. Part of the reason for that is some new legislation that makes it more onerous to want to issue other corporate securities.


"Over the years, partnerships have been a fairly commonplace way of financing capital formation for oil and gas and real estate," Mufson says. "For most buildings that were built, partnerships were formed. For most oil wells that have been drilled have been done with a partnership format."


ROLLING INTO ONE: "What MLPs allow you to do is take all these little individual partnerships and roll them all into one big mass."


As a result, instead of a thousand partnerships being administered individually, there is one huge partnership that comprises a thousand smaller partnerships -- and economies of scale start coming into play involving the way they finance and administer their operations.


"At the same time, the benefits to the investor are obviously there," Mufson says. "That was the genesis of these master limited partnerships. But now they really are being used all over. Any time you have a high cash flowing vehicle that the marketplace doesn't value based on historical evaluation parameters, it makes sense to look at the MLP."


In other words, one old adage may yet hold true -- there's safety in numbers.



Accounting Firms Are Not Just Number Crunchers Anymore

By Thomas Derr




Pg. 16



Philadelphia, PA, US -- IN the good old days, all accountants looked alike -- they wore green eye shades and huddled over their books with a feather quill in hand and a dim light guiding their way. Today if you walked into an accounting firm, you would find individuals you could swear are doctors, lawyers, computer specialists, engineers, and so on. And you'd be right.


"We don't want to overplay the importance of consulting, but I think it is important to say that accounting and auditing is still the bread and butter of the practice -- I think it will remain that way for at least the foreseeable future," explains Kenneth Daly, a partner in the accounting firm of Peat, Marwick, Mitchell & Co.


At the same time, however, Daly admits that consulting has come on very strong over the last several years. And one of the reasons why is that business itself is becoming increasingly competitive, and increasingly complex.

"What that has led to is the fact that there really is no easy decision anymore," says Daly. "There was a time when you had one of three alternatives, and which alternative to choose was relatively straightforward. Today there are probably 15 alternatives, and there are various shades of gray, so we can't be sure of those black and white decisions anymore."


REVIEWS: As a result, Peat, Marwick & Mitchell has become involved in a number of hybrid and unusual areas. One such area is internal control reviews.


"People want us to come in, and review what their internal control, environment, structure and procedures are," Daly says. "That is what you read in the newspapers -- this fraud, that embezzlement, this problem, that problem. And director and officer liability is a big part of that -- the insurance companies like to know that internal control consciousness is high, that people just don't give it lip service, and consequently we're being asked to come in and do full scale studies, reviews and in certain cases, write opinions on whether or not we think the internal controls are adequate."


A second major area is known as Information Systems Services or ISS, and can involve everything from long range systems planning to reviewing how systems are built, to assisting clients in determining what kind of hardware and software they want to bring in-house.


"We've had a lot of calls for what we call untangling spaghetti code," Daly notes. "This is the old COBOL programs which have become so large and unwieldy that it is difficult to amend and correct them, and we have developed software to assist the client in amending and correcting these long COBOL programs."


Other key areas of interest for Peat, Marwick's consulting services include incentive compensation, employee benefits, and real estate consulting.


ENGINEERING WORKBENCH: "One of the new things that is exciting in our consulting process is a project we have been involved in for at least three years, working with a former professor out of MIT," says David C. Carney, managing partner for Arthur Young & Co. "It involves the development of software package we call the Arthur Young Engineering Workbench. Essentially this will create software to allow computers to program themselves."


According to Carney, the Engineering Workbench would be used by major firms across the country to upgrade their ability to develop software for a variety of purposes.


"It's really geared toward the senior level directors of management information systems -- the EDP people," Carney explains. "It's a tool that allows programmers to program automatically and is on the cutting edge of technology."


Another software tool being marketed is the called Arthur Young ASQ (Audit Smarter Quicker) which Carney says is a complete computerization of the audit process.


LOOKING FOR APPLE: But what may be Arthur Young's showcase area is known as the Entrepreneurial Services Group. This is a freestanding, profit center within the organization that concentrates on small business development, Carney explains.


"Basically, they work not only with smaller businesses, but with start up companies as well, helping entrepreneurs get launched," says Carney. "We use the old war story here that our firm started with Apple Computer when they were still in the garage behind the house. So clearly what we are doing here is trying to find another Apple Computer -- small, emerging, entrepreneurial companies that look as though they have a good chance to succeed. We work with them by providing consulting, and helping them prepare business plans, to finding them financing, to setting up their accounting records, computerizing their internal systems, helping them locate a place to set up their organization -- whatever they might need at that stage of the game we're here to help them."


The typical client in this area would involve an engineering type or someone in the high-tech end of the profession, Carney says. Very often, these are people who are very knowledgeable of their product or the service they are trying to provide, but who have never started a business before and need all the guidance they can get. But there are others, as well.


"One of the companies that comes to mind is a start-up mutual fund management company, which we started with three years ago and has now grown into a rather significant client in this office," Carney says. "Now they have about 12 different funds worth more than $2 billion."


VISION: Speaking of high-tech, Arthur Andersen & Co. has been involved in the computer field since the late 1940s, when an Arthur Andersen partner was on the team that built the world's first major computer at the University of Pennsylvania.


"Based on that guy's vision at that time, we believed we saw a major opportunity for our clients to computerize their major transaction systems, such as your payroll and billing systems -- the traditional types of things that up until then had been done either manually or on very antiquated accounting machines," explains Joseph G. Reichner, managing partner/Philadelphia for Arthur Andersen & Co. "So we were really one of the first to get involved in that process."


One of the company's first practical applications of the new technology came in the 1950s, when Arthur Andersen was engaged to do a major study for a Ford plant in Detroit that was installing a major payroll system.


"From that point on we started to make some substantial investments all during the late 1950s and early 1960s, in developing new methodologies and beginning to hire people who had an interest in computer science -- to the point where that has now become probably half of our practice worldwide," Reichner says. "Today we have more than 9,000 professionals dedicated to information systems, computer design and installation of systems, selection of hardware and software for companies, and actually maintaining the systems and running their facilities. In fact, our major competitors today in that area, instead of being other accounting firms, are principally IBM and EDS. So it gives you some sense that things really have changed quite a bit for us in that area."


This inclination toward high technology is especially strong for Arthur Andersen & Co., and makes the company somewhat unique among accounting firms, Carney adds.


"The fact is, we do much more complex type of engagements," he explains. "For example, we just finished working on the Commonwealth of Pennsylvania's new vehicle registration system. That took about 75 people full-time for several years to do that engagement, and that's the type of engagement we can handle very comfortably because of the size of our firm. We have engagements, for example, for the New York Port Authority, where we have a tremendous number of people dedicated for five years and we can go to places all over the world for the purpose of fielding teams -- the Tennessee Valley Authority, major manufacturing companies such as General Motors or Dupont Corp., and field significant teams."


Evidently, the focus on technology has paid off well for Arthur Andersen. Reichner predicts that by 1990 information consulting will comprise about half of his firm's business. At that time, the more traditional auditing practice should make up about 35 to 40 percent of the practice, with the tax practice making up the difference, he says.


CLIENT DRIVEN: "One thing you have to keep in mind is that most of our people are audit partners. We don't have very fine lines all the time between practice areas," Reicher says. "Our principle interest is in the needs of the client as opposed to the product, so if you have a client who has been solely a tax client, if that client is talking with the tax partner about a major problem they have uncovered in one of their plants, we can still be of assistance. Let's say their manufacturing quality has slipped dramatically, or this manufacturing system which they were using which they thought was state of the art is giving them a great deal of problem -- that tax partner will likely ask that client if he would be interested in chatting with one of our manufacturing experts. Then that manufacturing expert would then come in and provide service."


Reichner emphasizes the fact that his firm's focus is principally client driven, as opposed to pushing a particular product.


"We are not as much selling products as we are selling expertise," he says. "And I think that is the way we have been philosophically since the beginning. Our client's needs are changing over time because of this information age that we're in, and we're just kind of going after that changing market. And hopefully we'll be a step ahead of it."


AFRAID OF PIGEONHOLING: But just being able to provide the service is only half the job. According to Dick Rossi, partner-in-charge of the Manufacturing Special Practice Unit for the Mid-Atlantic Region of Price Waterhouse, there is still a market perception among some companies that often has to be overcome which tends to pigeonhole accounting firms into the more traditional types of services.


"Sometimes a client will wonder 'Why should I engage an accounting firm to look over my production line? I don't need an auditor, I need a manufacturing expert,'" says Rossi.


A few years ago, an accounting firm may have been able to offer a "reconditioned" accountant -- one who was given some additional training in a particular area of business or industry. But with the growing complexity of the workplace, that is no longer possible today, Rossi says. Today, accounting firms must be able to offer the services of engineers, insurance specialists, operations experts, lawyers, and other staff to mirror the multitude of business interests which the accounting firms' clients have.


Rossi says that Price Waterhouse has a half dozen or so specialized groups across the firm that are set up to deal with interests such as computer integrated manufacturing, information systems, and traditional manufacturing services.


In fact, Price Waterhouse recently completed two surveys of manufacturing clients in the Mid-Atlantic region. The first survey dealt with financial officers, and asked them if they were satisfied with the information and control capabilities they had at their facilities. The second survey dealt with people in the more technical manufacturing end of the business, and asked them to judge their company’s' use of computer integrated manufacturing to obtain a competitive advantage.


"Once the data was collected, we invited our clients to a one-day seminar that surveyed the costs, benefits and applications of advanced technology in their particular businesses and marketplaces," Rossi notes.


At the same time, an effort was made to emphasize the point that it's not just accountants at Price Waterhouse, he adds. That point is especially important, because more and more firms are offering specialized services in order to attract and to hold onto business clients.


PROFIT CENTERS: At Laventhol & Horwath, the only major firm with headquarters in Philadelphia, that emphasis on specialization has reached epic proportions. According to Richard J. Ferst, managing partner at Laventhol & Horwath, in excess of 50 percent of the firm's gross revenue comes from nonaccounting and auditing services -- and is equal to about three or four times what most of Laventhol & Horwath's major competitors have in the way of consulting services revenue, he adds.


That's why Ferst tends to bridle a bit when someone uses the term "alternative service" to describe the nonaccounting and nonauditing work which his firm does.


"The fact is, these are major contributing profit centers for Laventhol & Horwath, and in many cases they involve higher profit margins than the historical accounting and auditing profit margins," Ferst says. "But they are not ancillary. They are primary."


As a matter of fact, these nonaccounting and nonauditing services have begun to feed the traditional accounting and auditing base of the company. In years past, the opposite situation was true -- the accounting and auditing would feed the outside consulting, Ferst explains.


"For example, we dominate the real estate market in Philadelphia -- we do a phenomenal amount of consulting work in all kinds of real estate endeavors. Now people are saying: 'Since I use them as my consultants, I may as well use them as my accountants,'" Ferst says. "So the reverse is now happening, which is a phenomena that we didn't focus on, but is a very nice one to have happen to us."


MIDDLE MARKET: Irv Chasen, partner-in-charge of Grant Thornton's Management Consulting Division, says, "We compete vigorously against the Big Eight in their market. The Big Eight views their marketplace as the immediate world. So not only do they do the Fortune 500 and the Fortune 1000, they will also compete with us in where we think we are predominant, which is the middle market," says Chasen. "In order to compete with them, you not only have to offer quality standard services, which are audits, compilations and reviews on the accounting side; and tax services, which are corporate and individual tax returns and tax planning and tax projection work -- you also have to offer management consulting services."


The services Grant Thornton offers include systems work, which often involves updating or replacing a client's data processing operation. "We go in and do operations reviews, a diagnostic of the DP operation, and wind up recommending an improvement program," Chasen says. "Many times the improvement program ends up pointing in the direction of a new computer system. Then there is a hierarchy of tasks that relate to that type of consulting project which begin with requirement studies perhaps request for proposals or vendor surveys, hardware/software recommendations, and implementation assistance."


In addition, Grant Thornton also gets involved in areas such as financial consulting and litigation support.


LITIGATION SUPPORT: "In litigation support we service a client base of attorneys that are involved in litigation matters, and we become expert witnesses in helping them prepare their briefs, going into the courtroom and testifying," Chasen explains. "Some of the cases we get involved in are cases such as wrongful death. We had a case last year where somebody had coronary bypass surgery and did very well, except 18 months later he started to have some chest pains. The examination showed he had a sponge left inside him. The surgeon went back inside to get the sponge and the guy died on the table. The estate sued, and we were retained. From litigation support, we had to project his income in terms of supporting the value of the suit brought forward."


According to Chasen, the same people that do litigation support also help in bankruptcy analysis -- evaluation of companies, and the use of microcomputers and financial acumen and expertise to come up with projected and historical values.


"We also do executive search recruiting of key employees for our clients, and we are very busy with telecommunications consulting" he says. Telecommunications consulting involves helping a client to pick a telephone switch, reduce his phone bills, pick a long distant carrier, integrate voice and data communications, achieve networking with his microcomputers, says Chasen. He notes that this field became especially important with the divestiture of the telephone company, and has since become a relatively lucrative area of the firm's consulting practice.


BUSINESS ADVISOR: "What is behind this trend toward specialization is that accounting company fees have become very competitive, and accounting clients will change accountants based on whether is $40 an hour or $42 an hour," says Chasen. "The only way to bond the client to the company is to be his business advisor, and the way to do that is to provide specialty services."


And there are benefits on both sides, he adds. First, the consulting services are often more profitable for the accounting firm; and second, the client is better served by the comprehensive, convenient nature of the services. But at the same time, there are certain responsibilities that go along with the new relationship.


"You have to be more accountable to the client if you are there doing his tax work and his financial reporting," Chasen says. "He has to have a high level of confidence in you, so that you are not just someone who says: give me ten grand, I'll tell you what I think and leave."


"And the bottom line is that if you provide the services effectively, you get the nonrecurring work because you are doing the recurring work. The recurring work is the quality control factor he looks to in order to get value from the specialized work," he says.


"We do some pretty sophisticated things today. It's not just a matter of having what you would call the green eye shade accounts anymore."



How Middle Market Companies View Their Commercial Banks

By Thomas Derr




Pg. 118



Philadelphia, PA, US -- In years past, changing banks very often carried with it the same stigma as divorce -- even though everyone knew it was done, nobody wanted to talk about it.


Today, of course, everyone talks about divorce. But still only a few are willing to discuss why companies change banks. One of those few is Paul D. Neuwirth, managing partner at Grant Thornton, a Philadelphia-based accounting and management consulting firm which recently released a study titled: "How Middle Market Companies in the Delaware Valley View Their Commercial Banks."


MAJOR SHIFT: According to Neuwirth, one of the major findings is that since the last time Grant Thornton conducted this sort of study, in 1982, there has been a shift in emphasis in the minds of banking customers from those things that bankers could not control to factors which bankers can control.


"Four years ago, 60 percent of the reasons customers gave for being with their primary bank involved Philadelphia oriented things like 'tradition,' 'loyalty,' 'convenience,' and 'location,'" says Neuwirth. "When we looked at it again this time, we found that number had dropped by half."


Neuwirth says that only 16 percent of respondents identified convenience and location as primary reasons for being with their primary banks, while another 16 percent used the terms loyalty and trust. In the meantime, "service" has become the key factor for 30 percent of banking customers -- up from 15 percent four years ago.


"That means the emphasis in the minds of customers on service and away from the tradition-bound Philadelphia approach," Neuwirth explains. "I think that is a tribute to the banks in what they have done during the last several years. I also think it indicates increased sophistication on the part of the middle market decision makers, who are now looking at the products and services being offered instead of saying: 'Well, I've always done business with this bank.'"


ELITE GROUP: The study is based on interviews with executives of 224 companies who were selected at random from a data base supplied by the Wharton School of the University of Pennsylvania. All the companies fall within the eight-county Philadelphia standard metropolitan statistical area, and all have revenues of between $5 million and $125 million.


According to Neuwirth, the individuals interviewed also represent a "very executive" group. One-third of the respondents were chief executive officers, presidents or vice presidents, another third were controllers, and another third were treasurers or other corporate officers.


"The willingness of these high level people to spend their time talking to us tells us that the level of commercial banking services available is a very important consideration for them," notes Neuwirth.


At the same time, that desire for more and better commercial banking service may account for what might be described as increased levels of both commercial bank philandering and outright polygamy on the part of these middle market customers.


"It's of great interest to us to note that there has been a great deal of bank switching in this middle market," Neuwirth says. "One out of six companies in this survey did switch. But they switched from Fidelity, and they switched to Fidelity; they switched from Mellon, and they switched to Mellon. There are some exceptions in here where one bank did perhaps better on the gains side than on the losses side, but by and large there has been a lot of trading of customers among the banks."


Still other customers, as many as 60 percent, actually use more than one bank. And according to Neuwirth, even those banks which appear to enjoy an exclusive banking relationship with their commercials may not have all the facts before them.


NONBANKS: "According to our survey, only 40 percent of Continental Bank's customers use a second bank. On the other hand, many of Continental's customers also told us that they did use a nonbank to make deposits, so they are doing banking in nonbanking institutions and putting their money in money markets, mutual funds, and the like."


Neuwirth says that one out of every four companies in the middle market in the survey deposited funds in nonbank institutions -- a figure he called "significant." In addition, one out of every six companies admits to borrowing money from a nonbank source -- either private investors, an insurance company, or some other source.


"There is a double message here," Neuwirth explains. "The news is that to have an exclusive commercial banking relationship does not always mean there is an exclusive banking relationship, because some of the banking transactions may be done in non-commercial banks."


The continued customer trading by banks and the bank diversification by customers has created something of a state of flux for the middle marketplace.


Neuwirth says that fact may be a sign to some bank managers that more attention ought to be given to holding on to existing customers as opposed to continually trying to attract new customers to the bank.


"When customers who did switch to another bank were asked why they made the move, the primary word that kept coming up was 'service,'" Neuwirth says. "That's a broad word, but it is certainly today's watchword. And it's not anything other than what the customer perceives as what he is after. He is defining the term in his own way."


For that reason, the nature of the commercial banks' marketing effort should also be looked at closely, he adds. One of the points which banks do not seem to have focused on, until now, is that the middle market may be viewed as two groups -- one that does not switch, and one that does switch and may be getting ready to do so. Until now, most banks have taken an undifferentiated, "shotgun" approach in their marketing effort, Neuwirth explains.


QUALIFYING POTENTIAL CUSTOMERS: "We wonder whether the banks would be better off qualifying the potential customer first as to whether the customer is, in fact, one that would benefit from a switch, and is capable or susceptible of switching at this time," he says. "Finding out what the specific needs of the prospect are, and then trying to match what the bank can offer to meet that customer's needs would seem to be a more rational approach in today's market than simply offering a generalized package of services."


For some banks, aiming at the specific needs of a certain type of customer may not be enough, says Richard Meyers, executive vice president of Meridian Bank. Meyers notes that Meridian's total market covers 12 counties in Pennsylvania.


"Naturally there will be a lot of shared issues among our commercial customers," Meyers notes. "But because of the diversity of this bank, we can't totally suggest that issues that are important to a customer based at Broad and Walnut in Philadelphia will be equivalent to a customer located at 5th and Hamilton in Allentown."


NICHE: According to William J. Friel, Senior Vice President at Provident National Bank, a more customer-specific marketing strategy is probably a good idea. Friel says that, for the most part, each bank already has its own target market that it seeks to satisfy.


"Each commercial bank in the Philadelphia seems to have its own little niche," explains Friel. "Continental is known as handling the smaller, middle market customer, maybe even real estate oriented people. Fidelity, in the past, I think, has shied away from that middle market, although it does pick up on the higher end of the middle market."


Even Provident has its own little niche, Friel adds, although it is probably less clear cut. He describes Provident as being something of "a small PNB" in that many of the approaches and ultimate deals are similar. But at the same time, there is also a certain degree of overlap among the various banks, he adds.


SELECTION PROCESS: According to Neuwirth, one of the important factors that bankers tend to overlook is the process by which a customer selects his or her own commercial bank.


"I think bankers have to acknowledge that target marketing is a comprehensive process, especially in the middle market," Neuwirth says. "Middle market executives have a history of relying, and properly so, on their outside advisors. That is something which bankers cannot ignore when they are talking to a prospect."


Only one-third of the study's respondents said they personally selected their bank, Neuwirth notes. What that means is that many executives in the two-thirds who did not select their own bank actually inherited the bank from a preceding CEO.


"But the one-third who did select the bank also said that they were introduced to their bank either through a business associate, or through a banker, or they researched the options by themselves," Neuwirth says. "So it seems the implication is clear that from the bankers' perspective, if they are going to do target marketing of a company, they ought to surround that company and get to know their lawyer, their CPA, and any others who may influence the decision making process for that middle market executive."


OVERALL IMAGE: Provident's Friel says that a commercial bank's overall image can be a significant factor in how this network of advisors influences the corporate decision maker -- especially if a bank seems to be experiencing any serious problems.


"In prior years, some banks experienced declining earnings and heavy loan losses. Personnel turnover in lending side can also be a problem, also mergers. All of that triggers a negative feeling in the commercial marketplace -- both from the customer and from the bank's point of view. And also from an accountant's and a lawyer's point of view," notes Friel. "A lawyer or accountant wants his customer to deal with a good, strong bank. And if you have personnel upheaval, or if you have declining earnings or problem loans, then people tend to take their customers elsewhere, Fortunately for Provident, we have not had that. We've had very little turnover in our people, and our merger has run very smoothly."


Mellon wasn't so lucky in its approach to the merger with Girard bank, but the end result has been little or no change in the amount of business it has, Neuwirth notes.


"It has been our perception that by design or ineptitude, business was pushed out of the bank (Mellon)," observes Neuwirth. "At that point, they came to the very quick realization that if they don't stem the tide, they will have a very big problem. They said: 'Oh, my god, we've got an exodus here,' and they got their finger in the dike. And when you look at the figures, you'll see that although 20 percent of our respondents switched from Mellon, another 14 percent switched to it, so they were able to regenerate whatever they may have lost in the shuffle and bring back customers. Their face was scratched, but they came out just fine, and they still hold onto the number two position in this marketplace."


EFFECT OF MERGERS: All in all, Neuwirth calls the issue of commercial bank mergers "today's non-event' in the eyes of the bank customer."


"What we found in our survey is that almost half our sample said their primary bank had been involved in a merger. And astoundingly, two-thirds of those who said their bank was involved in a merger felt the merger had no effect. The other third was split in half -- some said it had a positive effect, some said it was a negative," he explains. "So although some banks have customers whose views are a little skewed to one end or the other, by and large, for the banking community as a whole whatever problems that were associated with mergers seem to have been taken care of and it is not a significant factor to the customers."


On the other hand, the issue of mergers could prove important as it relates to the potential threat posed by New York banks who are rumored to be poised and ready to strike at the Philadelphia marketplace.


"We've been hearing about the threat of the New York banks for years," says Friel. "But you never see them. You see them on large, multinational credits, or large national type loans, but it just has not happened for the middle market credit in the Philadelphia area."


Friel says the middle market commercial customers still prefer to deal with the Philadelphia banks, and because of the number of mergers that have taken place involving area banks, there is no need to deal with a large New York bank.


"For the most part we all have strong international departments," Friel explains. "And the ones who don't -- the IVBs, the Continentals, the small banks who do not have strong international departments -- have since merged and now can offer that type of service, cash management services and other things that they really didn't push before."


BOTTOM LINE: Thus the bottom line is still "service," Neuwirth says. "The moral is that banks that pay more attention to strategic planning for the attraction and retention of customers in the middle market will fare better in the coming years."


Neuwirth likens the regional banking marketplace to the situation involving the American auto industry in the 1970s.


"At that time, Japanese auto makers understood better than the American companies what attracted the customer, and they held those customers," Neuwirth says. "They didn't just sell a car. They sold the small, quality car and serviced the hell out of it. The Philadelphia area commercial banks understand this, and they are going into service in a stronger, more disciplined fashion."


Mortgage Banking Companies Are Hot – Who’s Selling, Who’s Buying and Why?

By Thomas Derr




Pg. 104



Philadelphia, PA, US --

During the past year or two one of the hottest financial products has been mortgage banking companies. A number of area banks have put their mortgage company subsidiaries on the market, and other financial institutions have been quick to gobble them up.


The start of this "keeping up with the Jones's" scenario can be traced to May, 1985, when Corestates Financial Corporation, sold its subsidiary Colonial Mortgage to GMAC. Soon afterward, a number of banks followed Corestates' lead, including Manufacturer's Hanover, PNC Financial, and Fidelity Bank.


GAIN FOR BOTH: To some observers, it would seem as if the divesting banks were putting their cash cow out to slaughter for someone else's gain. But as Gary Brooten, vice president and director of corporate communications for Corestates Financial Corp. explains, the transactions were actually extremely beneficial to both parties.


"In reality, the company was worth an awful lot more to GMAC than the value that was carried forward on Corestates' books," says Brooten. "It was a store value for us in the way of strengthening our financial position at a time when strong financial position was pretty important for banks."


According to Brooten, it wasn't a matter of Corestates actually going out to sell Colonial Mortgage. Instead, GMAC simply presented a very attractive opportunity, so Corestates followed through. Although there was no real pressing need to have more cash on hand, there was still an obvious desire to improve its current capital balance, given the unexpected opportunity to cash in a very valuable asset.


"GMAC is not subject to certain regulatory requirements that inhibit what Corestates can do with a mortgage banking company, for the simple fact that we are a banking company," explains Brooten. "That was our thinking at that point in time, and the market has shown that a nonbanking company can probably place a higher value on a mortgage bank operation than a regulated bank can."


AFTER-TAX GAIN: Just how significantly those values can change can be somewhat shocking. According to Brooten, the book value of Colonial Mortgage Company was about $36 million. Corestates sold the company for approximately $190 million, which left Corestates with an after-tax gain of $95.8 million.


"It was a very valuable property, and we were carrying it at a very low value on our books." explains Brooten. "That was the attraction of the deal. It wasn't that we were looking to get rid of our mortgage banking group."


Instead, Corestates had a number of forthcoming opportunities to deploy capital profitably in the banking business -- and selling Colonial Mortgage was a practical way of putting Corestates in a position to make those investments, Brooten adds.


PREMIER PRICE: Similar modes of thinking formed the basis of Fidelity's Bank's decision earlier this year to sell its Fidelity Bond and Mortgage Co. to suburban real estate developer E.F. "Bud" Hansen, of Hansen Properties. Fidelity Bond and Mortgage is now part of the Hansen Financial Corp., which is the financial services arm of the Hansen Group, which in turn is the umbrella organization for Bud Hansen's growing program of diversification and expansion.


However, the influx of vast amounts of additional capital was by no means the only reason Fidelity Bank decided to sell. According to John DelaGrange, president of Fidelity Bond and Mortgage Co., the reason Fidelity Bank sought to sell the company did involve the attraction of the premium prices that were being generated by mortgage banking companies elsewhere.


"Our company is worth considerably more upon sale than it is on a balance sheet basis, and our services portfolio is the main reason for that -- there is a very large value placed on that, and about the only way the bank can realize this value would be to sell the company," explains DelaGrange.

"It's an off balance sheet item. What that means is -- we are a full service mortgage banking company and we not only originate the loans, but we have developed a very large services portfolio which is basically a future income stream."


VALUE OF THE PORTFOLIO: Another reason why the company was so attractive to buyers is that it also represents a very large consumer base from which cross selling techniques can be applied, he says. The problem with that from the bank's standpoint is that the value of that portfolio is not really recognized on the balance sheet. Although Fidelity Bond and Mortgage generates three or four million dollars a year in servicing income, the value of that continuing stream does not show up anywhere on its balance sheet, or the bank's balance sheet. Thus, the only way they have of realizing that is to liquidate the investment.


"In addition, the sale represented something of a change in strategic direction for Fidelity Bank," says DelaGrange. "Maybe not necessarily a change, but they never really were in our business to begin with."


According to Jere A. Young, chairman and chief executive officer of the Hansen Financial Corp., many commercial banks are also going through the process of more clearly defining what their plans are. For example, the officers at Fidelity Bank defined their strategy as being much more wholesale/commercial oriented. Therefore, a mortgage company that deals primarily in residential single family loans did not fit into their long-term thinking plan, he explains.


Or, as Fidelity Bank's director of communications, John McKelvie, puts it: "A mortgage company, to be competitive in today's market, requires an investment. And it was an investment we preferred not to make because of our desire to concentrate more on basic banking services."


So there are strategic reasons as well as financial reasons for many commercial banks to divest themselves of mortgage companies.


WHY PURCHASE: Not surprisingly, there are also a number of reasons why a financial institution or private investor might want to purchase a mortgage company.


According to Charles Newcomer, a spokesman for GMAC Mortgage Corp. in Detroit, the acquisition of Colonial Mortgage, combined with its acquisition of the servicing portfolio and servicing facilities from Norwest Bank in Minneapolis, gave his company the opportunity to create GMAC Mortgage Corp., which is now the largest mortgage servicer in the world.


"What we found attractive about Colonial was that it had a proven, strong management team that would provide us with immediate expertise in the mortgage banking field," says Newcomer. "Obviously that type of business is very synergistic, that is, it fits well with our business. We were not mortgage bankers, and it was important that we have knowledgeable, strong management in place when we got into the business. Colonial and the Norwest group both offered that opportunity."


Those acquisitions combined to create GMAC Mortgage Corp. at the end of the second quarter of 1985, with an existing servicing portfolio of about $18 billion. Today, that portfolio is approaching $22 billion, Newcomer says. The bulk of the business is residential, although there is also a good deal of commercial mortgage loan business going on. Many of the new offices in Philadelphia are GMAC Mortgage financed, and GMAC recently announced financing agreements for several major shopping on the east coast, Newcomer adds.


CROSS-SELLING: But just as Fidelity Bond and Mortgage's DelaGrange noted, there is also an opportunity for cross selling that particularly looms significant for GMAC Mortgage Corp.


"I guess the area that we are most enthused about is the opportunity of combining the expertise and knowledge of mortgage banking we have through our acquisitions with GMAC's 70-year history of consumer financing and service," says Newcomer. "And we think that is a perfect marriage to bring efficiency and better quality service to customers when they are involved in taking out a mortgage. So one major area that we are engaged in is making our services available to GM employees, and current GM customers, making sure that they are aware of our mortgage operations and can take advantage of them as needed."


Synergy is also an important word to remember in explaining why the Hansen Group has gotten involved in its recent financial acquisitions, says Jere Young. In addition to Fidelity Bond and Mortgage, Hansen also purchased outstanding stock from the Raritan Valley Financial Corp., East Brunswick, NJ, which includes Raritan Valley Savings and Loan Association and Raritan Valley Mortgage Inc.


"Raritan Valley is very much into multifamily homes -- apartment buildings, garden apartments, that type of thing, whereas Fidelity Bond and Mortgage is overwhelmingly residential," explains Young. "From our standpoint, we feel this makes them very compatible. In addition, we are buying Fidelity Bond and Mortgage as a subsidiary of Raritan Valley. A residential mortgage company makes a lot of sense as a mate company to a savings and loan. Savings and loans, after all, are by their charter geared primarily to residential loans. And if we can do it through a subsidiary mortgage company, that makes a lot of sense for us."


NEW SYNERGIES: In addition, there are a number of new synergies that the Hansen Financial Corp. should be able to realize from its affiliation, notes DelaGrange.


"For example, one of the missing components of our originations to this point in time has been the lack of an adjustable rate mortgage product, and these are times when that has been a very popular item," he says. "Fidelity Bank itself was never a portfolio lender, and this put us at somewhat of a competitive disadvantage when certain types of products were selling on the street."


With our new affiliation with Raritan Valley, and other savings and loans which the Hansen Group may acquire, Fidelity Bank and Mortgage will finally have the ability to do the kinds of things that our competitors are currently doing," DelaGrange adds.


What the Jones's will do next is anybody's guess.



Philip Kendall Pushes Packard Press to Become a National Leader in the Competitive Financial Printing Industry

By Thomas Derr




Pg. 24



Philadelphia, PA, US -- IF on a Sunday morning, this summer, Philip J. Kendall, chairman and CEO of Packard Press, is not found casting his diminutive shadow on the tennis courts in Margate, N.J., chances are he can be found, cigar in hand, casting a much longer shadow at another Packard office, somewhere in a major U.S. market, "continuing the game plan on a national basis, discovering other islands or pockets of opportunities," as he puts it softly.


Associates who have watched Kendall on the tennis court are quick to point out that he doesn't run Packard Press like he plays tennis. If he did, competition would have no difficulty winning a love game by just lobbing the ball over his head, catching him flat footed. Although this super salesman may not have mastered the nuances of the sport of tennis, at least not yet, he is more than likely to go after that lob, only to prove a point. Not to the rest of the world though, but to himself that he can take whatever competition dishes out.


When it comes to the printing trade, however, Kendall has the court covered. His strategy is not so much to fight the competition, but to look at market niches. He knows the market; and as the subsidiary of a major parent company, Packard has the financial muscle to expand. With a pretax return of 14 percent on sales last year of $50 million, Packard's growth defies industry averages.


SHORT BALL: He is always looking for that short ball, and when it comes sailing over the net, he pounces on it. Kendall's short ball came in 1971 in the form of the Legal Intelligencer, a company that published the oldest legal newspaper in the country. Only a year before Packard had embarked on serving the needs of the financial community.


"We knew there was a market for this business," explains Kendall. "The people who owned the Intelligencer weren't printing people. They did get some business because of the Legal Intelligencer. But once we acquired the company, we went out and sold our new capabilities. That was really the emergence of our growth."


MAJOR PLAYER: Since then Packard Press has emerged as a major financial printer for banks, corporations, stock brokers, law firms and insurance companies, ranking in the top five in the country. The workforce at Packard has doubled since 1977 when the firm was acquired by New York-based Basix Corp.


Since then the number of employees has jumped from 150 to 600. During that period, sales at Packard increased from $8 million in 1978 to more than $50 million in 1985.

(Packard recently billed $8 million in December alone, according to Michael Lamond, Packard's vice president of marketing. When Kendall joined Packard in 1953, its revenues totaled $300,000.)


Much of Packard's success can be traced to two basic factors: Management's willingness to invest in the latest technology, and the ability of Packard personnel to use that technology (and other innovations that may arise) to satisfy the needs of different market niches.


And according to Kendall, that idea has been largely responsible for his company's growth in the financial end of the commercial business ever since the financial division's establishment in 1970.


FOUR LOCATIONS: "We had a conference room facility at 1700 Walnut Street," says Kendall. "We were doing the preliminaries, the filing packages, at 6th and Walnut, which was where the old Curtis plant's duplicating operation was located. Our typesetting was being done outside at Central Typesetting, which was at 17th and Vine, and we were printing the prospectuses at 57th and

Lancaster (the site of Packard Press before it moved to its current location at 10th and Spring Garden).”


Kendall says that his chief competition in the Philadelphia financial printing market, Allen Lane and Scott, had had a virtual monopoly up until Packard's entry into the market. ALS hinted that an efficient financial printing operation could not be run that way -- from four different locations.


"I said but we are doing it, and we will do it, and we enjoyed success because we just dedicated ourselves to providing high quality service and aggressively pursuing the financial printing business in the city," says Kendall. "And also, we tried to keep that business in the city which up to that time was going outside the city, to New York with the New York investment bankers."


CONSOLIDATION: By purchasing the Legal Intelligencer, Kendall was able to enhance Packard's own financial printing capabilities, while at the same time bring several printing operations together under one roof.


"They (the Legal Intelligencer) were primarily doing appellate printing and some small commercial work while also publishing the nation's oldest daily law journal," says Kendall. "So they had a Web press that was running an hour and a half or two hours a day, and they had some typesetting equipment, too, which we didn't have. Also, they had some Linotype which they weren't running -- so after we bought the company, we buttressed that operation by buying a bunch of Linotype machines, because at that time computer typesetting had not yet developed into a reliable system."


Moreover, most of the other financial printers still used hot type in their print production processes. It wasn't until two years later that Pandick Press, a competitor, led the way into computer typesetting and experienced a number of problems with its early systems, according to Mike Lamont.


Other major financial printers, including Packard, followed suit shortly thereafter. But it took Bowne & Co., for many years the nation's leading financial printer (Bowne is currently number two, behind Pandick), until 1983 to update its financial printing operations from hot type to computer typesetting. But in 1971, the Web press and linotype machines at the Legal Intelligencer operation seemed to offer a fast, reliable means of enhancing Packard's own financial printing capabilities, Kendall says.


"Once we bought the company, we were then able to do many more things. We immediately had a pocket in the market with the financial printers. We had the appellate printing, annual reports, stock offerings, proxy statements, legal briefs, often requiring 24-hour turnaround time. And we had the fast turnaround commercial work that fit so well on the Web press," he explains.


VERTICAL INTEGRATION: That service factor was also enhanced by Kendall's ability to make Packard Press as vertically integrated as possible. Many services that are often contracted out by other print houses are performed internally at Packard Press. Thus, from the planning stage, through typesetting, printing, binding, inserting, and mailing, Packard can maintain direct control over the completion of each document or other printed piece.


"This capability also gives us the opportunity to utilize more internal people." Kendall says. "Still, it's very difficult to be all things to all people. In the area of turnaround -- that's really responsiveness. And that has been the key to almost everything that we're doing -- every market niche that we're working on."


CROSSROADS: These smaller acquisitions and centralized operations served to enhance Packard's capabilities and helped the company gain a reputation as a dependable, albeit smaller, financial partner. By 1977, after years of steady growth, the company had reached a crossroads. Although Packard had reached an all-time sales record of $8 million during that year, Kendall realized that to become a truly competitive entity in the national financial printing industry, Packard would need more capital.


This infusion of capital came from Basix Corp., an international company, which acquired Packard in 1977 for $4 million. Basix includes subsidiaries that operate in two major groups: Operating Systems and Energy. These subsidiaries are engaged in a diverse range of businesses, including revenue, traffic and access control systems, information processing systems, computer systems, power transmission line systems, engineering design and consulting, and energy exploration and production. Shares of the company are traded on the New York Stock Exchange (ticker symbol: "BAS") and the Stock Exchange, London.


With Basix's financial muscle, Packard invested in capital equipment and other technology, keeping it competitive in the financial printing industry. Also, Packard has expanded its realm of service facilities as well since 1977. Packard's corporate offices remain in Philadelphia, but in 1979 it established a national sales office in New York City, in the heart of the world's major

financial district. Other Packard offices are located in Pittsburgh; Miami; Washington, D.C.; San Francisco and, most recently, Boston. Packard also maintains a joint venture operation called the Overseas Printing Alliance (OPAL) in London, England, with Financial Print and Communications, Ltd., of London.


HEAD-TO-HEAD: As a result of this expansion program, made possible by Basix, Packard is now in a position to go head to head with the traditional leaders in the financial printing industry, Kendall says, including Pandick, Inc.; Bowne & Co.; R. R. Donnelley & Sons Co.; and Charles P. Young, Inc. One of the main areas in which Packard is now taking on these major competitors

is in the printing of annual reports for insurance companies, Kendall notes.


And to increase its responsiveness in the insurance industry, Packard has made on of its most recent investments in new technology, he says. This new technology is an innovative computer software program called the "Freedom Package," which was developed in cooperation with TLS Co., an Iowa-based firm specializing in information processing. The software automates the preparation of a company's financial documents and annual statements.


According to Kendall, Packard uses the Freedom Package to help insurance companies by enabling them to more efficiently file their annual statements with the various state insurance commissions through the use of tailored computer software packages that are subsequently integrated with Packard's printing process. The software standardizes many of the documents that must be produced by the insurance companies and also minimizes the amount of "keyboarding" and retyping that must be done by word processors or secretaries.


Like many of his company's innovations, Kendall says, the Freedom Package was the result of an idea that was developed by a Packard employee who recognized a specific problem and looked for an appropriate solution.


FOSTERING CREATIVITY: "In this case, the problem was workload," explains Kendall. "Now, our guy who is responsible for the production of annual insurance statements saw the problem from the customers' perspective. It was taking three weeks for them to prepare their statements and take the input from their computers and put it on the master forms we furnished. We update the master forms in compliance with the requirements of the NAIC and the various state laws. Now that three-week lag time has been cut down to about three days."


Kendall indicates that the working atmosphere at Packard Press has been designed to foster creativity.


"The company is replete with stories of guys who started in very junior positions who have been given responsibility and comparable authority and have enabled it to grow," says Kendall. "We allow our people to grow from within the organization. So as ideas are forthcoming, we give the

people a chance to run with those ideas. We give them a great deal of latitude. And not only in their own personal situations, but with the people they handle. That also engenders new ideas."


Similarly, one of Packard's newest publications, the Delaware Corporate Law Reporter, was developed in response to a need that was recognized by the editor of the Pennsylvania Law Journal Reporter (also a Packard publication) during a visit to the state of Delaware.


"He was at a cocktail party with a number of corporate attorneys and officials, and he realized that this must be an area that has an application far beyond what we were then addressing," says Kendall. "The point is, these individuals in both the legal and insurance divisions saw an opportunity. They brought it to me and I said: 'OK, let's explore it.' I try to maintain an open mind."


LISTENING & LEARNING: "I look at everything with a spirit of discovery and exploration," Kendall says. "I'm always listening and I'm always learning. And I don't know the answers to everything, but when somebody has an idea and they focus on it, I'm able to recognize the application and from that point organize the forces to take advantage of the situation."


And that management philosophy seems to be further reflected in Kendall's overall business philosophy.


"I like people to have psychic income -- to be happy with what they are doing, because when that happens, you get performance at a point far beyond what the economic rewards are," says Kendall. "Furthermore, we recognize the contributions people make and we try to encourage them. And we don't cut them off if they move too far, too fast, and make a mistake. Because, you know, you can be an ostrich and keep your head in the sand and not make any mistakes. But you won't make any progress, either. Sure, our people make mistakes. But I would rather they make mistakes out of commission than of omission."


"From my standpoint, I think the fact that our people have open minds means that when they get ideas, they are thinking in a positive fashion," he explains. "So if they get information, then they are going to look for an application in their own situation -- and the ultimate beneficiary will be the customer."


And that point should be the underlying theme of any business transaction, he adds.


BOTH PARTIES BENEFIT: "A sale is not a sale unless both parties benefit from it," says Kendall, a point which was demonstrated at a recent printing trade show in New Orleans.


"When we went to New Orleans and unveiled our software program, our major competitor was there with last year's books. We already had the new books with the new laws, and we had them printed in two colors with changes indicated in red," says Kendall. "We also had a new software package with a four-color brochure explaining it, and we had a physical demonstration of the software program in application on the hardware. So people were lined up ten deep to get in our booth.


"We also endeared ourselves to the association (who sponsored the show) because we were providing a real service. We weren't there just to pull on their coattails and try to get business. I wanted to be able to go into a firm and into an industry, find out what their particular problems are, what their needs are, and then go back and translate that and figure out a way to solve the problem."


Thanks in large part to Basix, Packard is now in a much better position to make that idea a reality, Kendall adds. And it is that enhanced ability that has brought the company from a market share of next-to-nothing to being one of the national leaders in the financial printing industry.