Mergers Fuel Growth at FleetPride

Mergers and acquisitions have proved to be a fast track for growth for the former Alco Equipment, now known as FleetPride Inc, a provider of fleet service and heavy-duty truck and trailer parts based in Agawam, Massachusetts.

The company, which started as Alco Equipment with one location in a suburb of Springfield, Massachusetts, now belongs to a network of 170 locations nationwide with the merger of Quality Distribution Service Partners (QDSP) and HDA Parts System Inc. The transaction was scheduled to become effective September 30.

In 1997, prior to the acquisition, Alco Equipment renamed itself FleetPride Inc, a corporate umbrella covering two separate operations-Alco Heavy Duty Parts and FleetPride Service Centers. With the merger of QDSP and HDA Parts System, the FleetPride name will be used throughout the resulting company.

Until recently, FleetPride grew in part by setting up its own branches. Over the years, the company opened locations in New Haven, Connecticut; Londonderry, New Hampshire; Albany, New York; Williston, Vermont; and Deerfield, Easton, and Norwood, Massachusetts.

The number of locations grew sharply, however, as FleetPride acquired a series of companies-New England Truck & Auto Service, and Clutch & Brake.

But twice in the past 18 months, FleetPride has been the company acquired. The first instance was July 1998 when President Dave Townsend sold the company to QDSP of Itasca, Illinois. This transaction resulted in a parts distribution network of about 70 to 80 locations. That number will jump to more than 170 with the merger of QDSP and HDA Parts System of Deerfield, Illinois.

Heavy-Duty Network QDSP and HDA Parts System announced their intent to merge June 11. The merger could produce what is considered to be the largest independent distributor network in the U S heavy-duty truck parts aftermarket.

The resulting company will have revenues exceeding $500 million. Each of the company's locations will carry a full line of nationally recognized brand name parts. In addition, FleetPride will offer an array of in-house remanufactured products such as brake shoes, transmissions, rear axles and driveline components. Some locations such as FleetPride's operations in New England will offer truck and trailer repair services.

"HDAPS and QDSP are an excellent strategic fit," says John Greisch, president and chief executive officer of HDAPS and president, chief executive officer and a director of FleetPride when the merger is completed. "With the merger of HDAPS and QDSP, we are able to accelerate the achievement of our mission to create the first nationally integrated distributor in the heavy-duty aftermarket."

Acquiring Distributors Over the past year HDAPS and QDSP have acquired a number of local and regional distributors, some of which have been in the business for more than 50 years.

"The combination of HDAPS and QDSP will result in the creation of one of the leading independent distributors in the heavy-duty aftermarket," Greisch says.

HDAPS and QDSP were both formed in 1998 by two Los Angeles based private equity firms, Brentwood Associates and Aurora Capital Group, respectively. Brentwood and Aurora, together with certain of their affiliated funds, will be equal shareholders in FleetPride.

The combination will be structured as a stock merger with the shareholders of QDSP receiving HDAPS stock with a value of approximately $68 million. In addition, at the time of the merger, HDAPS is expected to receive proceeds in the amount of approximately $40 million in cash from the issuance of new equity to certain existing shareholders of HDAPS and QDSP.

Reasons to Sell When Townsend sold his company to QDSP last year, he did so for several reasons.

"The parts business is ripe for consolidation," he says. "Growth has been flat. The ownership of businesses in our industry is fragmented. And a lot of companies in the parts business are family businesses that do not have heirs."

Capital requirements were another factor. We needed access to capital if we really wanted to grow," Townsend adds. "And as part of a larger company, we could be more profitable. We will continue to generate sales, but we will be able to do so with less cost. For example, we have cut our insurance costs. Our capital requirements for computers and other expenditures are less. To sum up why we sold the company, it was for all of the traditional reasons."

The aftermarket parts business is not the only area in which merger mania is affecting the market. Townsend cites a recent study conducted by Arthur Anderson that investigated a wide range of the distribution industry. The report concluded that 42 of 52 segments of distribution business had undergone major consolidation.

Economies of Scale

FleetPride is benefiting from the economies of scale that come from being part of a larger operation.

"We now have a single, nationwide 401 (k) program, health, and benefits package," Townsend says. "We also have centralized payroll and purchasing operations."

One of the primary advantages of an organization the size of HDAPS is the ability to purchase parts in volume. Even so, the company continues to achieve higher volumes by channeling purchases through fewer sources.

"All of our vendor selection is done in Chicago now," Townsend says. "We are in the process of putting together a vendor reduction plan. The idea is to provide greater sales support for fewer vendors."

He cites air bags as an example of a product that the vendor reduction plan could address. The purchasing office may decide to buy air bags from Firestone, Euclid, or another manufacturer.

"We would prefer to buy from one vendor," Townsend says. "There are a lot of advantages in reducing the number of vendors we represent. But which specific companies those might be will be determined by the Chicago office."

Electronic Ordering One of the new programs FleetPride has implemented is an electronic parts ordering system for use by Alco Heavy Duty Parts customers.

Part of the company's Karmak computer system, the technology enables Alco customers to inquire about a part and to place orders electronically. The system also enables Alco to track the inquiries-including those that did not result in a sale. With it, Alco can print out a list of such inquiries which parts sales personnel can use to make follow-up calls. With such knowledge, Alco can better learn customer needs and identify reasons for lost sales.

To use the system, customers need a personal computer and a modem. They also need to know the part number for the product they wish to order.

For 25 to 30 Alco customers, the company has made using the system very simple. Parts sales personnel have organized the parts bins for these customers, labeling each bin with the appropriate Alco part number.

"We have received a lot of positive feedback from our customers," Townsend says. "It's also a good system for us. It saves us and our customers labor and time on the telephone. The only real limitation we have seen is that the customer must have a computer and must know the part number to be able to order."

Selling Service While parts sales are what Alco Heavy-Duty Parts is all about, the shops have been increasingly busy over at Alco's companion company, FleetPride Service Centers.

"Fleets have been outsourcing a lot of their service work," Townsend says. "It is expensive for them to operate their own service shops. Plus, the incredible shortage of technicians is helping drive customers to shops like ours."

The company's shop in Londonderry is now operating 21 hours a day, six days a week. The remaining service outlets are open 12 hours a day, six days a week.

FleetPride also reaches out to its customers with a fleet of mobile service trucks. Twelve-foot van bodies are mounted on Mitsubishi chassis. The trucks are equipped with gasoline-powered generators and air compressors, gas and arc welding equipment, and a full set of tools.

The trucks are used primarily to perform preventive maintenance on a contract basis. Typically the terms of the contract call for the FleetPride technician to inspect each truck in a fleet quarterly, performing such work such as brake service, suspension work, alignments, and air system maintenance. The trucks also offer emergency road service. Technological Outlook

Townsend expects technological changes such as the electronic ordering system to continue. For example, the Internet will play an increasingly large role in the aftermarket parts business.

FleetPride is at work on its own web site and will have an intranet for handling internal communications.

"Our web site eventually will provide customers with a link to our parts catalog," Townsend says. "So far electronic catalogs really have not gone anywhere. After all, how many technicians today have a computer with Internet access? We expect that to change dramatically in the next few years, though, as the Internet becomes more popular."

He believes technology will be the biggest driver of change in the aftermarket parts business.

"Other than that, we expect it to be business as usual," he says. "Guys will continue to come in, drop a greasy part on our counter, and expect us to sell them a new one."

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