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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