How Schein shines in Europe - and beyond (Corporate Dealmaker)

How Schein shines in Europe - and beyond

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If you're traveling in Albania or Bangladesh and have the misfortune to lose a filling, take heart: These days, the dentist you'll be visiting may be getting his supplies from the same folks who supply your dentist back home. That would be Henry Schein Inc., a big - and still rapidly growing - distributor of dental, medical and veterinary products to office-based practitioners. How has Melville, N.Y.-based Schein extended its reach so far and wide? Therein lies a case study in cross-border expansion achieved through a vigorous program of acquiring mainly private companies, in a realm where reputation and service count for nearly everything.

Key to Schein's expansion have been the bases it has set up through the 23 European acquisitions it has completed since 1991. By mastering cultural nuances and developing an integration process that maximizes the effectiveness of its distribution infrastructure, the company continues to grow at an impressive rate. Schein is expected to report annual sales of $3.9 billion for 2004, a 20% increase over last year. Analysts think sales could reach $4.5 billion this year. "We're the only company that sees global needs that are similar," says executive vice president of business development and chief dealmaker Mark Mlotek. "The reason we went to Europe is we see it as one world - the demographics that affect our customers are true throughout the world."

Just last year, Schein closed, for €255 million ($336 million), its long-sought purchase of three dental distributors - Demedis Dental Depot GmbH, Muller & Weygandt, and Krugg SpA - providing it with leading positions in Germany, Austria, the Benelux countries and Italy. Demedis is a leading full-service distributor of dental consumables and equipment in Germany, Austria and the Benelux countries. Part of the Demedis acquisition was Euro Dental Holding GmbH, which consists of two crucial direct marketing companies. Demedis also complements Henry Schein's successful 2004 acquisition of Hager Dental GmbH, a regional, full-service distributor in Germany.

Muller & Weygandt is one of Europe's leading direct-marketing distributors of dental products. Krugg is Italy's leading dental products distributor. The combined sales for the three companies exceeded €400 million for the fiscal year ended Sept. 30, 2003.

The group buy (from a consortium of investors led by private equity firm Permira) enabled Schein to further its pan-European strategy of being a full-service provider of products and services to European dentists - which means that in addition to providing its customers with cotton swabs and cavity fillers, it can also provide them with computer software and uniforms. The deal, too, allowed Henry Schein to gain entrée into Italy, Europe's second-largest dental market, and to double its European dental sales.

Today Schein's customers include 170,000 European practices, the majority of which are in Western Europe, where the company had 12% of the estimated $3.4 billion dental market and 5% of the estimated $2.3 billion medical and veterinary market in 2003. With help mainly from its European base, it distributes supplies to 125 countries. "The European buy was a strategic move, and one that will certainly differentiate us from our peers in the long run," says Mlotek, who worked on the deals for close to three years.

Schein's origins go back to the 1930s, when a man named Henry Schein ran a pharmacy in Woodside, Queens, N.Y. Schein was one of the first to start delivering a gamut of medical supplies to doctors at lower prices. Eventually, the company developed its own generic drugs. In the 1950s, Henry Schein distributed drugs made by Schein Pharmaceuticals, and in the 1970s it expanded into dentistry, putting catalogs together for dental practices. The big shift in strategy began in 1989 when Stanley Bergman, the company's former accountant, became CEO. He replaced the senior managers - members of the Schein family - with his own team, built out the company's information technology and distribution systems and started putting together a plan to go public.

In 1992, Bergman spun off Schein's successful generic drug business and handed the barely profitable dental distribution company its current philosophy: A happy, profitable customer is a returning customer. When Bergman said that he wanted Henry Schein to be a global, full-service medical distributor, he meant that if a dentist in Germany needed office supplies and uniforms, Henry Schein would turn itself into its sole supplier.

Industry fragmentation was the key to implementing the strategy. At the time, Henry Schein participated in a $7 billion market, where the company was the biggest player with just a 7% share. In August 1994, Henry Schein had just 250,000 customers worldwide. Its customer database now contains the names of more than 650,000 healthcare professionals. "When I joined the company in 1994, Bergman had a vision," says Mlotek.

Bergman's vision was to consolidate the medical, dental and veterinary industries and put them through the same centralized infrastructure. "Like most large distributors competing in these markets, one way Schein is attempting to increase its own profitability is by driving more products through its existing distribution infrastructure, which has 25%-30% of unused capacity," said Morningstar Inc. analyst Marcia Markowitz in a January research report. "To that end, the company is using its broad product offering to exploit every possible cross-selling opportunity to further penetrate existing customers and add new ones."

Henry Schein went public on Nasdaq in 1995 at $16 a share and was soon trading in the mid-$30s. It was a banner year. The company acquired 14 companies with a combined $100 million in sales and reported revenue of $616 million. It also already had significant success in the U.K, where catalog shopping was late to begin but quickly caught on. Between 1994 and 1996 alone, Henry Schein made 34 buys in North America and Europe.

"We went public to get capital in terms of cash and in terms of liquid stock, and the Street bought our story," Mlotek says. Because of its fast growth, in its first few years of public treatment, Henry Schein had between a 30 and 40 times trading multiple. The years before Sarbanes-Oxley made stock deals tougher were good to Henry Schein. The company paid for dozens of acquisitions with its shares and used the deals to gain critical mass.

Between 1997 and 1999, the company made five of its biggest U.S. acquisitions, buying dental supplier Sullivan Dental Products Inc.; medical suppliers Caligor Scientific Supply Co., MicroBioMedics Inc. and Arcona Inc.; and dental software supplier Dentrix Dental Systems Inc. Those large deals enabled Henry Schein to get to a size where it could consolidate its back-end operations and start dealing with manufacturers as their biggest customer. It allowed the company to generate even more cash flow to do even more deals.

In the past five years, the deals have been less about scaling up and more about strategic benefits. "Today we won't do an acquisition unless we see a synergy where one and one will equal more than two - whether it's because of a new product line where with our company we can grow sales or whether it's because it's in an area of the country where we're not strong," Mlotek says. Ten years ago, the company had an operating margin of 2%. Today that margin is 7%. "We've not only had a strategy, but we've executed," Mlotek says.

Part of the key to the European conquest is that Schein views and treats European markets in much the same way it treats those in the U.S. Dental floss in Kansas is still dental floss in Europe - everything goes through the same infrastructure. Henry Schein's advantage today is that it sees itself as the only company in Europe - and the U.S. - that defines the market the way it does. Henry Schein operates globally, with all three supply channels working under the mantle of "office-based practitioners."

Henry Schein's competition is made up of companies that are generally regional, specializing solely in dental, medical or veterinary supplies. York, Pa.-based Dentsply International Inc., for example, specializes in dental supplies, and St. Paul, Minn.-based Patterson Cos. distributes primarily dental and veterinary supplies to the North American market. Henry Schein also competes in medical supply distribution against PSS/World Medical Inc., Cardinal Health Inc. and McKesson Corp.

Henry Schein goes into potential acquisitions with an eye toward understanding cultural differences well enough to respect them - yet still find a way to integrate its purchases. Explains Mlotek, "Every market we went into we worked with the local company and local management until we felt the culture was competent on its own - that's the one key to our success in Europe, that we don't go in and say, 'This is the only way to do things.' "

Henry Schein immediately follows up on its acquisitions by delivering, to each employee's home, information packages that describe the company, financially and culturally. "Communication is high on the priority list," Mlotek says.

The company hasn't always executed perfectly. In 1998, after the 1997 acquisition of Sullivan Dental, Henry Schein quickly followed up with the acquisition of the next-biggest player behind Sullivan in the market, Meer Dental Supply Co., which had $180 million in annual sales. The problem with Meer was that because it wasn't a public company, the competition had the ability before the deal closed to make a run on its employees. "We were a little behind in our communication plan," Mlotek says. Henry Schein lost between 5% and 10% of the company's sales reps. Subsequently, though, Schein has hired many of those reps back. "Sometimes acquisitions can't be judged on a six-month time frame; they have to be judged slightly longer to see a strategic mission get accomplished," Mlotek says.

Headed by Mlotek, the dealmaking team nevertheless takes its direction from Bergman. "It begins and ends with Bergman because all business begins and ends with strategy," Mlotek said. Mlotek himself began his affiliation with Henry Schein after joining Proskauer Rose LLP, where he was part of the company's team of outside counsel. Mlotek reports directly to Bergman. "But it's clearly teamwork; I can't do anything without other people," he says.

The company puts together an informal approval committee to go over each buy. The committee includes Bergman, Mlotek and CFO Steven Paladino, as well as the relevant divisional president: medical division head Michael Racioppi; the U.S. dental division's James Breslawski; or, if the deal is international, the senior vice president of the international group, Michael Zack.

During Mlotek's tenure, the company has closed more than 100 acquisitions, with the number of potential buys far exceeding the number completed. Each of Henry Schein's markets has hundreds of potential candidates, which means that thousands of companies are eligible. The company looks at anywhere from two to 20 companies at a time, looking for strategic, financial and cultural fits.

Henry Schein assesses the management of potential targets by looking at its attention to detail. "You ask someone what reports they review on a daily basis," Mlotek says. "People in our business look at daily sales, sales by territory ... There are so many metrics and so much various analysis you can do to understand problems before they get bad, and then implement solutions - a good manager knows how to do that."

Thanks to Henry Schein's reputation and sensitivity, Mlotek says, retention of both employees and customers has been good. "We try to maintain everything that the customer likes about the other place. We are flexible," he says. Henry Schein is also flexible when it comes to the decision over whether to keep an acquired company's name - the decision is made on an acquisition-by-acquisition basis, depending on how crucial it is to the acquired company's customers.

Both acquisitions and integration are hands-on activities, requiring lots of executive time and travel. Bergman visits every company site every two years, and each senior executive travels to meet the employees of a target company during the acquisition process. It is no small feat, considering the company has grown from a few hundred to 2,000 employees at 250 sites.

"We assist the business groups with cultural integration, and this, too, involves education and communication about our philosophy of accountability and Team Schein values," Mlotek says. "The goal is to communicate and then overcommunicate." Bergman is said to receive anywhere from 300 to 500 e-mails a day and to handle them the same day - whether by forwarding them to other executives or responding personally.

Mlotek, whose international travel has increased the most in recent years, spends 60% of his time outside the office. "We are constantly in search of the right strategic partners," he says. In 2004 alone he made 20 trips to Europe.

As for regulators, Henry Schein hasn't encountered too many difficulties even as it builds up a formidable position in Europe. It has only run up against two antitrust (or in European parlance, competition) problems in its time there. One problem came with the acquisition of Hager Dental last year and was resolved with the divestment of a small business. Mlotek declines to discuss the other, but he says the company is working to resolve it.

The fact is that the medical supply industry is still so fragmented, and the European landscape for acquisitions is still so vast, that Henry Schein hasn't yet met either tough competition or serious regulatory barriers. Sounds like a dealmaker's delight. - Tara Croft

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