The Independents

Sep 01, 2008 9:30 PM  By

Walter Karl…Edith Roman…Mokrynski…Millard…Direct Media…Will there be a single independent list firm standing by the time Vin Gupta is done?

Good question. Gupta has said several times that the list business needs to be consolidated, and his firm, InfoGroup (formerly InfoUSA) has swallowed up several outfits.

But a number of strong players remain, and they feel they bear little resemblance to some of the acquired companies. They’re solvent, they have succession plans, and they value their independence.

And they don’t see themselves as list companies, thank you very much.

Take ALC. Founded 30 years ago by Donn Rappaport, ALC has picked up quite a few companies, including Novus Data Marketing and the MKTG Services management arm; established the partnership that created Belardi/Ostroy; and repositioned itself as an all-purpose marketing services company.

Many sources agree that ALC is in the top one or two in the field in terms of size — it has 240 employees, 56 of whom have equity or options in the company, and offices in multiple locations.

Why this emphasis on diversified services? Because direct mail volume is shrinking, and companies can no longer thrive solely by peddling lists, Rappaport says. “Our focus is not on lists, but on acquisition, retention and lifetime value,” he continues. “We have all the capabilities, and if we don’t own it, we can subcontract it.”

That’s especially important for clients, given the distress many are in these days, he adds.

Has ALC been approached by potential buyers? Sure.

“I’m not interested because we have a vision that we’re following,” CEO Rappaport says. “We’re embarking on a strategy to redefine our footprint.”

Would he ever consider selling?

“Companies sell for a variety of reasons, one being that the owners want to cash out,” Rappaport says. “I don’t qualify on that score. The second reason is that they’re struggling and need money for growth. We’ve been able to grow using debt.”

What about succession, one of the factors that might have influenced some owners to sell?

“We have a terrific management team,” Rappaport points out. “Have I decided who’s going to be my successor? There are a bunch of people who could be, but I haven’t designated one over the other.”

But he has tested their ability to think on their own. At a recent management retreat, staffers were asked to conduct this exercise: What ideas would they pursue if the upper management — Rappaport, his wife Susan Rice Rappaport, Fran Green and the other partners — disappeared?

The company is now considering one of the notions that emerged: To break down the lines between brokerage and management and have account relationship teams that would oversee everything. “The old-time list companies are not set up that way,” he observes.

Rappaport says he might accept an equity investor if he couldn’t fund a major project through debt. But for now, he enjoys the freedom to take risks: “You call the shots, and if you make a mistake you’ve got to pay for it.”

SPECIALISTS MARKETING SERVICES

Another strong solo act is Specialists Marketing Services. It was started in 1987 by Lonnie Mandel in partnership with publicly traded LCS Industries.

“It was a great relationship,” Mandel says. “The industry was vibrant and doing well, and we were basically left alone to run the business and do our thing.”

But LCS sold to ClientLogic, a large private corporation, in 1999. Mandel repurchased his own equity in 2005 and opened as Specialists Marketing Services Inc. And then he started making his own acquisitions.

What’s the benefit of being in a public company?

“You’re in a larger organization that in some cases has a tremendous amount of financial backing or cash reserves,” Mandel says. “That gives you some breathing room.”

But there are drawbacks. “You always hear about shareholder value, and you can’t always do the things you want,” he adds. “You can’t run the business as an entrepreneurial enterprise, as I can now. I’m the sole owner, and I’m not worried about shareholder value.”

So what’s Mandel done now that he’s free?

For one thing, Specialists has purchased several firms — NRL, Transcontinental Direct and 21st Century Marketing — to expand its client base and service offerings. Like ALC, it considers itself a full-service marketing company — it helps clients with everything from multicultural marketing to interactive, and also serves as a consultant.

Unlike InfoGroup, Mandel integrates acquisitions under a single corporate brand. “Our goal is to march with a common vision as Specialists,” he says.

And succession? Mandel laughs. “I love what I do, and my plan is to be around for a long time,” he says. “But I have an outside board of directors, and we’re working on what a [succession] plan would look like. There are many options — we could consider selling the business — but to the right company, or to the employees.”

MERITDIRECT

Yet another independent is MeritDirect, which focuses on assisting business-to-business marketers. But it had a difficult birth.

It started when Acxiom decided to sell Direct Media, which it had acquired in 1996, back to founder Dave Florence. Left out in the cold were Ralph Drybrough and Mark Joyce, who’d signed a letter of intent with Acxiom to acquire Direct Media’s B-to-B unit, the one they had built up. (The letter of intent was torn up, according to Drybrough.)

The world soon had a new company, with Drybrough and Joyce as managing partners.

“We started doing orders in January 2000, and by the end of the year had taken over 80% of our old business, paying nothing for what we previously were willing to pay $12 million for,” Drybrough says.

Why did Direct Media clients follow the team?

“A personal services business is successful to the degree your account people are able to develop trusted relationships,” says Drybrough, the firm’s CEO. “That’s more important than any corporate consideration.”

Today MeritDirect has 115 employees, including 11 partners. The company recently initiated a share-redemption agreement in which the seven younger partners will buy the shares of the four senior ones over 10 years.

This will provide MeritDirect with an orderly succession. “The beauty of the plan is that our business is viewed by the seven younger people as a good investment because they have confidence in the future,” Drybrough says.

Confidence is a big differentiator for Drybrough. He believes some firms “didn’t have the confidence going forward that they could steer an independent course and ended up finding solace by selling to InfoGroup.”

Drybrough also feels that his firm’s brokers are objective — as part of an independent, they can make the best choices for their clients regardless of the source. And he likes having the leeway to make financial decisions.

MeritDirect is a partner with Experian in a membership co-op, called b2bBase, that contains the names of up to 6 million to 7 million b-to-b multibuyers. The firm also helps clients with both acquisition and retention, and offers circulation planning services. And online? MeritDirect is making almost 15% of its net commission revenue on e-mail brokerage and management, according to Drybrough.

Like Mandel and Rappaport, Drybrough prefers to throw the dice himself.

“One great thing about being independent is that we’re not sitting there catching holy hell from the CEO of a public company because our costs are up 3% from what we budgeted and sales are down 5%,” he says. “Our investments of time and financial resources are aligned with what we see as the opportunity.”

THE OTHER SIDE

At this point, it’s only fair to hear from the other side in this debate.

We’re the company that’s made the investment,” says Ed Mallin, president of InfoUSA Services Group, a division of InfoGroup.

“We’ve invested in these companies, we’ve added services when our clients have wanted them. We spend millions and millions every year on building platforms and capabilities.”

Is there a chance InfoGroup is getting a little too big?

“We’re still very entrepreneurial,” Mallin says. “And we are as customer-centric as anybody out there.”

He adds: “I have never said anything negative about independently owned [firms] or boutiques or small shops that specialize in a certain vertical. They have their niche and always will. Our value proposition is clear — clients want a broad level of capabilities.”

Okay. But the independents mentioned above hardly exhaust the list. And all offer many services.

ParadyszMatera was founded in 1990 by Chris Paradysz and Angelo Matera.

Employing 200 people, it helps clients with digital marketing, modeling, data processing, analytics and print media, among other things. Total revenue has been reported as over $35 million.

The company has several components, including a large list brokerage arm staffed with people from the client side. And it has a unit called PM Digital, a full-service agency that competes with players like Performix and Avenue A.

Almost two-thirds of its clients don’t overlap with other parts of the business, Paradysz says.

But there’s one thing missing from the portfolio: ParadyszMatera doesn’t manage lists. And that’s by choice.

“We don’t sell names and data — we solve marketing problems,” Paradysz says. “Our core business is acquiring customers. Where and how we do that is kind of irrelevant.”

With its data know-how, “we can create investments based on what consumers and businesses want.”

All the more reason it should not be part of a public corporation.

“In a private company, you have the choice of who your shareholders are,” Paradysz says. “And you can have a management team selected and developed through many years instead of being chosen by a board of directors that’s financially oriented and not long-term focused.”

He adds that short-term financial goals — the kind set by public companies — would prevent an organization like his from investing at the pace it wants.

“We don’t dabble,” he says. “We either do it or we don’t.”

Not that he has anything bad to say about companies that have sold.

“On some level, InfoUSA could be a good thing for them because it’ll bring financial rigor. Rigor’s a good thing.”

Yes. All would agree it’s important to have financial controls that result in profitability.

Another privately owned firm is Worldata, founded 30 years ago by Roy and Helene Schwedelson in their garage.

“Our succession plan is very simple — I’m the succession plan,” says Jay Schwedelson, son of the founding couple.

Located in Boca Raton, FL, the company has about 150 employees, a service bureau, e-mail transmission capability, and various online and offline services.

What’s the value proposition?

“Our clients like working with an organization without tremendous layers,” Jay Schwedelson says. “I’m involved on a day-to-day basis with every account.”

So…could two or more of the firms mentioned here merge with each other?

Nobody seems to rule it out. For example, Drybrough might pursue it, “provided we were satisfied there was a significant expansion of the capability to serve our clients in new ways.” Others say similar things.

But don’t expect it to happen soon. Despite the market pressures, all these guys are having too much fun.
Additional reporting by Jim Emerson and Tim Parry

The Freedom Train
Some other independent list firms

Don’t think the independents mentioned in our lead story are the only ones out there. There are many others, and some are significant.

Take Statlistics. Headed by John Papalia, it manages many types of lists, but has a particular specialty in controlled-circulation B-to-B publication files.

Then there’s Lake Group Media Inc., the venerable company founded in 1960 and now owned by Ryan and Karen Lake. It has 65 employees and offers management, brokerage and interactive services. It also operates DonorBase, a cooperative database for nonprofits.

The succession plan? It’s in place. Ryan Lake took over as CEO in 2000 when his parents, Walter and Joyce Lake, retired. And he isn’t shy about his firm’s virtues.

“An independent company offers objectivity when selecting lists and building mail plans,” he says. “It’s not beholden to stockholders, and therefore is not required to cut staff or impose hiring freezes to satisfy Wall Street even if certain divisions are doing well.”

Still another is RMI, founded in 1988. Its mission back then? In part, to fill the void for companies that were cutting marketing staffs, says CEO Martin Stein.

The company, which has 45 employees, considers lists its core business. Recently, it acquired D-J Associates.

RMI is owned by senior management — Stein is the majority stockholder.

Has it been approached by potential buyers? Yes, but there’s no sale. “We’ve always shied away from it,” Stein says. “My senior staff likes to make decisions to benefit clients, which ultimately will benefit us. They don’t have to think about what headquarters will say.”
Ray Schultz, with reporting by Jim Emerson and Tim Parry