The McGraw Group: An epilog

The Chapter 7 bankruptcy filing by The McGraw Group, Richmond, VA, as reported in MDM in May, was little more than a formality for a company that passed away last year. In reality, the 136-year-old company started into a freefall more than two years ago, and was ultimately a victim of the economy, consolidation and the merger and acquisition mania of the 1990s.

As reported in the last issue, The McGraw Group, Inc., Richmond, VA, filed for chapter 7 bankruptcy protection on May 7 in the U.S. Bankruptcy Court for the Eastern District of Virginia. In its filing, McGraw listed total assets of $664,217 and total liabilities of $13.2 million. Liabilities included secured creditors of $3.7 million and unsecured nonpriority claims of $9.4 million. The company reported year-to-date net sales of industrial products for 2002 of $250,000. Sales in 2001 were $46.6 million, while sales in 2000 were $82.3 million.

As one source close to the situation observed, many of the same factors that forced Integra into bankruptcy were at play with The McGraw Group ' an aggressive growth model based on acquisitions, difficulty integrating acquired companies, and investors from outside the industry who in some cases failed to understand the dynamics of connecting customers, distributors and suppliers to generate a revenue stream.

The build up

James McGraw, Inc., the name of the company until its 1997 merger with Industrial Transmission, started on an expansion program to build out as a regional distributor when it sold a majority interest in the company to Columbia Naples Capital, a New York/Florida private investment group, in 1996. Columbia Naples sought to use McGraw as the platform to assemble a $500-million roll-up through mergers and acquisitions. The strategy was to build out into a larger regional company, similar to what other distributors were doing in the Southeast, Mid-Atlantic and Midwest.

At the time of its bankruptcy filing, Columbia Naples Capital held more than 41% of the company. The next largest shareholder was George W. Sydnor, who was with the company for 37 years, and was its president until 1998. Sydnor brought Columbia into the company as the financial investor. He actively took on the role as dealmaker with knowledge of the industry and potential companies to acquire to pursue the strategy. Sydnor was active throughout his career with several industry associations.

McGraw purchased Industrial Transmission, Greensboro, NC, in October 1997, and changed its name to The McGraw Group. The next acquisition was S&K/Air Power Tool and Supply Corp., Mattoon, IL, a $33-million distributor of industrial and contractor supplies, and the largest Ingersoll-Rand distributor in the U.S., in February 1998. That pushed McGraw's annual sales to $105 million. It also purchased Advanced Technology Services, Peoria, IL, in 1998. By 1999, McGraw had 22 branches in the Southeast and Midwest.

Product mix broadened with its growth, with about 60% in general industrial supplies; 30% in power transmission, material handling and fluid power products; and the remainder in machine tool sales and specialty niche areas.

The fall down

Like many other distributors, sales by mid-1999 were starting to drop, according to sources, and were down 20% or more by the end of 2000. By that point, Columbia Naples Capital had changed out management and had set aggressive return goals. Too aggressive, according to Sydnor, who stepped down as an active company officer in 1998 but continued until recently on its board.

'It was a classic case of trying to apply generic investment principles to an industry that wouldn't fit in a bottle,' Sydnor told MDM. 'The model was based on growth, but it wasn't in line with industry rates of return. It simply wasn't realistic on a timeline basis upfront. The integration issues were difficult as well. The result was that they overleveraged initially to

meet their desired rate of return.'

The investment group tightened funding as projected returns weren't met, sources said. That took a toll on working capital and ultimately led to problems with suppliers, sales people, and eventually customers. Similar to what happened at Integra, McGraw put itself on restricted terms with several suppliers in 2001 ﾖ essentially a self-imposed Chapter 11 status.

A management team at S&K/Air Power Tool and Supply bought the company back in 2001. That move was in part an effort by CNC to sell the most productive assets to generate cash for other operations, sources told MDM.

McGraw then sold selected assets, including branches in Charlotte, Greensboro, Greenville and Lenoir, NC, to Precision Industries, Omaha, NE, in December 2001. The company was essentially dismantled by the end of 2001.

Post mortem

Like many other companies in and near its markets, McGraw fell victim to a tightening economy and customer base at precisely the time it was leveraging its balance sheet to an acquisition model.

'It was frustrating to see a company get destroyed when it didn't have to happen,' Sydnor reflected. 'It boiled down to unrealistic expectations for rates of return. They overleveraged initially and failed to make the necessary investment in working capital to get to the end goal, which was to build scale to the point where you could enjoy a good rate of return. You have to understand the industry to take the component parts and work carefully with suppliers to build marketing programs and create some synergy across the acquisitions. It has to be handled smoothly. That never had a chance to take place.'

List of McGraw Group creditors holding 20 largest unsecured claims

Unsecured creditor	Amount of claim (2/11/02)
3M Company	$683,595
Ingersoll-Rand	$627,004
Leclair Ryan (law firm)	$230,108
Milltronics Mfg.	$218,048
Segro/Colonial Abrasives Corp.	$187,261
Valenite Inc.	$176,246
Schrader Bellows	$170,269
Dana Corporation	$168,624
Norton Company	$141,260
Acu-Rite Inc.	119,055
U.S. Elec. Motors	$111,326
FMC Corp.	$100,025
American Saw & Mfg. Co.	$91,458
Siemens Energy	$90,898
Eurodrive, Inc.	$87,226
Morse Industrial Corp.	$81,251
Svedala Industries Inc	$78,258
Duff Norton	$75,346
Columbia Naples Capital, LLC	$74,168
Automatic Switch Co	$73,652

Source: Source: May 7, 2002 filing by The McGraw Group, Inc. with the U.S. Bankruptcy Court, Eastern District of Virginia.