When Kent Dauten (HBS MBA '79) bought Record Masters, a medical records storage and retrieval company, in 1995, he not only invested $12.5 million of capital in the enterprise, but he also put 15 years of experience in the private equity/buy-out business to the test. Two and a half years later, when he sold a much improved version of the same businessrenamed Health Information Management Services Corporation (HIMSCORP)for $90 million, it was clear he had passed with flying colors.
Into the Driver's Seat
Formerly a general partner at Madison Dearborn Partners, Inc.
(MDP), a Chicago-based private equity firm, Dauten was accustomed
to watching others manage the businesses in which he invested.
When he left MDP to find and acquire his own company, he intended
to put himself in the driver's seat. "I didn't want to buy a
business where I was betting strictly on other managers, like I
had my whole career in venture capital," Dauten says.
Instead, he wanted to utilize his own skills, honed during years
of interactions with CEOs and CFOs from successful companies.
Sitting on boards with executives from the healthcare,
restaurant, tool, industrial equipment, and textile industries,
among others, he had a bird's-eye view of management techniques
that had workedand those that hadn't.
The Attraction of Private Equity
The opportunity to work with talented executives was one
reason Dauten was attracted to private equity in the first place.
But when he arrived at HBS in the fall of 1977, courses on
entrepreneurial finance were nonexistent. "Back then,
venture capital was a cottage industry with only 3040
firms," he says. "And it wasn't very well understood.
We were encouraged to follow a corporate track that would take us
to the corner office in a big company." Looking beyond such
conventional wisdomand a relatively low starting salaryDauten
saw opportunities not yet apparent to many others and accepted a
job with First Chicago Venture Capital. "It was a career
path that I felt would offer tremendous diversity in terms of the
industries and types of businesses I would look at as well as the
people I'd work with. And while it was the lowest salary offer I
had, I could see that there would be attractive economics over
time," he recalls.
Dauten later became a founding partner and the second-in-command at MDP, a spin-off of First Chicago. In 1994, ready for both a career and a lifestyle change, he decided to leave MDP and make the switch from observeralbeit an active oneto player.
Finding the Right Opportunity
After looking at approximately 50 different businesses, Dauten
learned that four of the thirteen Record Masters' franchises (in
Philadelphia, Pittsburgh, New Orleans, and Detroit) were
collectively up for sale. Record Masters was an eight-year-old
company offering storage, management, and retrieval of medical
records for healthcare providers.
Dauten had become intrigued with the records storage field several years earlier, targeting it as a prime industry for consolidation. "It had several of the characteristics that my experience at MDP had taught me were crucial to a successful buyout, including a recurring revenue stream, a definable and protected niche, and competitive entry barriers," he explains. In addition, because the four businesses for sale were all independently owned and operated, this particular deal fulfilled one other important criterion. "There was no corporate leadership, and so the opportunity to step in as the chief executive officer and president of the overall company was there," he notes.
As head of this new enterprise, Dauten's first task was to learn about its day-to-day activities. He kept detailed notes in a thick, red spiral notebook, writing down information accumulated during phone conversations and on-site visits. "That notebook became my bible. It helped me track the operations, marketing, finances, and customer base of each location," he says. Whenever Dauten added a new component to the business, the notebook gained another tab.
Drawing on the lessons learned during his venture capital days, Dauten began to combine the four disparate entities into one unified company. Communication, he says, was key. For example, to keep each location informed of the others' activities, he would send out a monthly report documenting each office's operating statistics such as revenues, EBITDA (earnings before interest, taxes, depreciation, and amortization), sales growth, expenses, annualized productivity, and cash flow. "Inevitably, managers would compare their results with their peers' similar operations, and that would spur them on to better performance," he says. The data sheet also provided an opening for managers to call each other and compare notes about employee productivity or winning new accounts. The monthly mailing sometimes included more gimmicky items such as bumper stickers asking, "Have you checked your EBITDA today?"
Dauten also encouraged his key people to exchange information at a yearly meeting that included formal presentations and round-table discussions. Held near a different HIMSCORP location each year, the meeting would include a tour allowing managers to see how another operation functioned. "You could almost see the lightbulbs going off in their heads as they compared best practices and revealed their secrets," he says. And such information sharing, he notes, is one of the benefits of consolidation. "These were independently run, mom-and-pop businesses. By putting them together, we were able to professionalize management, get rid of some of the purely entrepreneurial practices, and put in more standard operating procedures using shared best practices."
Exceeding the Sum of Its Parts
But merging the different locations into one entity was only
part of the task. If HIMSCORP was to become a company in which
the whole exceeded the sum of its parts, then Dauten needed to
find additional ways to create value. To that end, he encouraged
his managers to think more broadly about ways to serve customers.
Their expertise helped the company extend its offerings into
other areas. For example, when Dauten acquired the company, the
Pittsburgh location provided copy service to the hospitals whose
records it stored. After taking a hard look at Pittsburgh's
financials, he expanded that option to the other locations,
eventually acquiring for HIMSCORP a company dedicated solely to
copying.
A suggestion from the field led HIMSCORP to begin placing Medicare reimbursement codes on hospital records to expedite billing. Dauten launched a temporary staffing service in Houston that supplies expert coders to fill in whenever a hospital had an open spot. "We did industry research to determine whether that was a good market to get into as well as some financial modeling and new incentives to get the business going," he explains.
Dauten also added an imaging service in New Orleans that converts paper files to CD-ROM or optical disk. And he established a facilities management service, bringing HIMSCORP workers on-site to organize medical groups' file rooms. "We provided that service for a large physician group practice in suburban Philadelphia that was terribly inefficient. Using our own expertise, we were able to save them money through this contract-management situation," he says.
Thirty months after the initial deal, Dauten had acquired a total of 12 businesses for $32 million, buying the last Record Masters franchise in June 1997. But the industry was rapidly changing, and many large healthcare organizations were consolidating and rebidding their outsourcing agreements to national providers. Dauten wasn't sure if HIMSCORP could continue to compete in such an environment. "Our performance was strong," he notes, "and interest rates were low, the capital gains tax had been cut, and the document industry was hot. All the stars were in alignmentit was time to sell." In August 1997, he accepted an offer from Iron Mountain, a publicly traded Boston-based company headed by another HBS alumnus, C. Richard Reese (MBA '74).
Now considering his next acquisition, Dauten reflects on HIMSCORP's successful run: "I've been asked, 'Where's the magic?' The answer lies in effective leadership. We identified, negotiated, and bought good businesses at reasonable prices. We implemented incentives that would motivate talented people, and then we coached them to achieve our goals and build a business. We had credibility. They believed we could create something bigger, and we did."
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