Right here,” says Will Lansing, president of Fingerhut Cos., “we have the look and feel of the new Fingerhut.” He’s holding up a 1999 Spring Big Book. It has no brown-paper cover wrap. No bargains hawked in 30-point type. Inside, there are no veneer nightstands at 12 payments of $6.99. Even the old hokey Fingerhut typeface is gone. This thick and glossy catalog, featuring models cavorting in blue-sky landscapes, “is an Architectural Digest look by design,” Lansing says.

Two years ago, comparing Fingerhut to Architectural Digest would have been tantamount to comparing Burger King to The Four Seasons. But then, nobody knew that Fingerhut would become one of the catalog industry’s top consolidators and Internet marketers. Or that it would eventually attract a wealthy suitor like Federated Department Stores, owner of Bloomingdale’s and Macy’s, which in February paid $1.7 billion for the firm. That price was $25 per share-more than triple Fingerhut’s share price nine months earlier.

So what happened in this Pygmalian saga? Faced with stagnant sales and an outmoded installment-plan credit policy, Fingerhut Cos. rebuilt itself from the assets up. Armed with a huge household database (31 million names) and about 500,000 sq. ft. of unused fulfillment space, Fingerhut took aim at the world of e-commerce and acquisitions. Since mid-1998, it’s invested in five Internet companies, launched three more of its own, spun off six specialty books, and purchased three major apparel catalogers: Arizona Mail Order, Bedford Fair, and Popular Club. Meanwhile, Fingerhut’s core catalog-which accounts for about $1 billion of the firm’s nearly $2 billion in annual revenue-has upgraded its merchandise and features revolving credit instead of installment plans. The result? After two years of stagnant sales, net sales from existing customers were up 2% in the 1998 fourth quarter.

Coming from Fingerhut, one of the industry’s quiet giants, the changes surprised some. Until two years ago, “I don’t think Fingerhut had much of a strategy,” notes Craig Battle, managing director of Princeton, NJ-based investment banker Tucker Alexander. “But what it had, which is powerful, was 31 million customers and a very efficient fulfillment infrastructure.”

Evidently, those assets were attractive enough to kick-start direct marketing at $15.8 billion Federated. Within weeks of the deal, Macy’s by Mail began reporting to Fingerhut executive vice president Michael Sherman; was put under Fingerhut’s e-commerce president, Andy Johnson. (Bloomingdale’s by Mail remains under Federated’s command.)

The merger appears to empower both parties. Federated gets to hook onto what looks like a rising direct marketing star, and Fingerhut gains more acquisition muscle-while retaining much of its autonomy. And both firms may gain customers. Fingerhut won’t specify numbers, but Lansing notes, “Federated could pass on its credit rejects to us, and our customers could graduate to Federated.”

The deal has its skeptics, though. “$1.7 billion is a rich price to pay,” says Jeff Stein, managing director of McDonald Investments in Cleveland. “If Federated wanted [Fingerhut’s infrastructure], it could have replicated it for a lot less than $1.7 billion.” Moreover, Fingerhut’s typical buyer-a 40-year-old woman with $15,000-$35,000 average income-is younger, less educated, and less affluent than Federated’s. “I just don’t think there are very many synergies,” Stein says.

But others say it’s too soon to judge this deal. “It’s a work in progress,” says David Leibowitz, managing director of Burnham Securities in New York. “It will likely take two or three years to determine if this is a wise acquisition.”

Betting on the Web By then, though, Fingerhut Cos. will probably have shape-shifted yet again. Lansing says Fingerhut will eventually become a leading “infomediary,” an Internet-dominant “one-to-one marketer” designed to “broker transactions between suppliers and consumers.”

Under Lansing, the company has moved decisively into Web territory. Last July, it bought a chunk of flowers-and-gifts Web marketer PC Flowers, now undergoing an IPO. Five months later, Fingerhut bought stakes in two Web ventures: climbing and skiing site MountainZone; and FreeShop, a site of samples and magazine-subscription trials. Earlier this year, Fingerhut invested in Internet equipment marketer Roxy Systems, and in computers marketer Hand Technology.

Fingerhut is also concentrating on its proprietary Websites. The biggest is Andy’s Garage, originally set up in ’95 as a giant “garage sale” for overstock electronics, gas grills, and other household merchandise. (“Andy” refers to e-commerce president Andy Johnson.) Though he won’t reveal sales or hits, Lansing claims that demand has fast outstripped supply, and the site draws a younger, more male demographic., Fingerhut’s Gen-X Website, is also attracting a new (and younger) audience. The purveyor of lava lamps and subwoofers now gets 2,000 hits per day and is supported by catalog, mailed to 800,000 (mostly rental) prospects. Sales are about 50/50 catalog/Web.

But e-commerce is still in its infancy. This year, Fingerhut’s Websites will bring in only about $100 million in sales-about 5% of Fingerhut’s expected gross revenue.

A ‘natural consolidator’ With this in mind, Fingerhut has been growing much more aggressively via acquisitions. This past September, looking to step up its share of the apparel market, it bought Arizona Mail Order-its first catalog acquisition in nearly eight years.

“We wanted to grow bigger and get more synergies,” says Arizona Mail Order president Steven Lightman. For instance, Fingerhut can now share its credit clout with the apparel mailer, which previously denied credit to 60% of shoppers acquired from Fingerhut rental lists.

Besides, the price was right. Fingerhut paid a reasonable six multiple on Arizona’s $19 million earnings. A few months later, it got even better bargains at Bedford Fair, which was in Chapter 11 (paying $39 million for the $100 million firm in December), and Popular Club ($42 million to J. Crew for the $180 million company in November). Bedford Fair skews to a professional, older audience; Popular Club skews to a lower-income urban household. Both gave Fingerhut new customers, while Fingerhut gave back buying clout and operational efficiencies. Popular Club is profitable; Bedford Fair is on track for profits in the third quarter.

By the time Federated came knocking early this spring, Fingerhut had boosted net sales 6%, to $1.6 billion, and net earnings on continuing operations were up 22%, to $46 million. Given Federated’s sluggish 1.1% top-line growth, the Fingerhut buy “was a growth strategy for us,” says Federated spokeswoman Carol Sanger. And she insists that Federated will take a hands-off approach to Fingerhut’s aggressive expansion strategy.

If that’s the case, Fingerhut will no doubt keep poring through prospectuses. “We’re the natural consolidators in this industry,” Lansing says. “We have the database science, we have the huge infrastructure, and we’re interested in catalog companies that few others want to buy.”