Although undeniably tough, the healthcare business isn't rocket science. Thank goodness, says Robert Walter, founder, chairman and chief executive officer at Cardinal Health.
In his first job after graduating from Ohio State University in 1967, Walter, a mechanical engineer, worked for a giant defense contractor that made guided missiles.
He hated every minute of it.
The rocket-maker was overstaffed, billed the government through cost-plus contracts and enforced an oppressive seniority system. That taught Walter a lot about how not to manage. "Nobody was in a hurry to get anything done," he says. "I just couldn't stand the whole bureaucracy of a large company, so I quit and went to Harvard Business School."
With MBA in hand, Walter vowed he would never again be trapped inside a monster corporation and decided to scout around for a company to buy and run. His mission: Find a mismanaged firm in a simple business that he could put on the right track.
The beginnings. So in 1970, he returned to Columbus, Ohio, where he grew up and where he figured he would have an easier time finding investors. Walter settled on a struggling division of Consolidated Food Corp., a unit that distributed food to independent supermarkets. Walter, then 26, and a group of investors bought the company for $135,000 in cash and $1.35 million in assumed debt and christened it Cardinal Foods.
Over the next decade, Walter took the company from an also-ran to a regional power in food wholesaling.
Sales increased tenfold to $200 million. By the late 1970s, however, Walter realized that the once-fragmented food distribution business had largely consolidated into the hands of a few mega-players, blocking the logical route for Cardinal's growth beyond the Midwest. Cardinal had tried to diversify in the food business by starting a chain of supermarkets, but the experiment failed because the stores were too difficult to manage.
Nevertheless, Walter wasn't swayed from his conclusion that to grow, Cardinal needed to branch out.
"I could understand distribution, and we could translate (our experience with) food into drugs," Walter said during an interview at the company's headquarters in Dublin, Ohio, a suburb of Columbus.
In 1979, Cardinal paid $4.4 million for Bailey Drug in Zanesville, Ohio, about an hour's drive east of Columbus, which distributed drugs to pharmacies. Thus was born the company that has become healthcare powerhouse Cardinal Health, the second-largest company providing drugs, medical supplies and specialized services to hospitals, with yearly revenues of $21 billion. Now Cardinal, a mere 20-year-old in the healthcare business, trails only San Francisco-based McKesson HBOC, whose roots date back to 1833.
Healthcare only. The path to pre-eminence was unmarked. But Walter, who bought out his original investors in 1979 and took Cardinal public in 1983, always seemed to find his way. By 1988 Walter had transformed Cardinal into a dedicated healthcare player by divesting the food wholesaling division to focus on drug distribution.
Walter then began snapping up regional drug distributors, increasing sales and lowering operating costs in the process. He ultimately fulfilled the dream of building a national company through the 1994 acquisition of Folsom, Calif.-based Whitmire Distribution Corp.
"Up till that time we thought the West Coast was the Ohio-Indiana border," joked John Kane, Cardinal's president and chief operating officer since March 1993. Kane, previously president of Ross Laboratories, a division of Abbott Laboratories, plays Mr. Inside to Walter's Mr. Outside at Cardinal. While Walter takes the lead on big-picture strategy, deals and relations with Wall Street, Kane makes sure each part of the growing Cardinal machine keeps humming.
The $585 million deal for Whitmire, the golden spike in Cardinal's transcontinental distribution system, proved a turning point of a different sort for Walter. Shortly after buying Whitmire, Walter shifted his attention to diversification.
Though Walter's commitment to healthcare didn't waver, he started looking beyond distribution for companies that offered other services to Cardinal's current customers or suppliers. One reason: the profit margins in drug distribution were dropping fast. Margins stood at 9% in 1979, Walter says, but had fallen to 6% in 1994 and close to 2% today. An emphasis on specialty services, including consulting and niche manufacturing, promised to fatten Cardinal's bottom line.
By late 1995, Walter had picked his spots for acquisitions. Since then, Cardinal has been buying companies far afield from distribution-from Medicine Shoppe International, a franchiser of independent retail pharmacies, for $353 million, to R.P. Scherer, a maker of soft-gel capsules and related products for drug companies, for $2.5 billion.
In 1996, Walter's deals for companies catering to hospitals really got rolling. That year Cardinal bought Pyxis Corp., the leading maker of systems for automated management of drug and supply inventory at hospitals, for $1 billion, followed in 1997 by the purchases of Owen Healthcare, an outsourcer of hospital pharmacies, for $515 million, and MediQual, a clinical information and benchmarking firm, for $53 million.
All told, Walter has completed 22 acquisitions, most of them using Cardinal stock, since the company went public.
Cardinal's balance sheet is strong, with a long-term-debt-to-equity ratio of 0.29, compared with 0.67 for the companies that constitute the Standard & Poor's 500.
"I don't think my expertise ever has been to start businesses up," says Walter, a soft-spoken and intense 53-year-old. "I think other people are good at doing that. What I want to focus on is finding good base businesses that I think I can improve."
Diversification and Walter's touch for enriching what he buys have yielded bountiful fruits. Morgan Stanley Dean Witter, a New York investment bank, estimates that Cardinal's profit margin for pharmaceutical services, apart from distribution, top 16%. Overall, such services will account for a third of Cardinal's estimated operating profits of $1 billion in fiscal 1999, even though they represent only one-tenth of company sales. The company's estimated total profit margin for 1999 is 4.7%, according to Morgan Stanley Dean Witter.
His biggest deal yet. As if to make certain no hospital could overlook Cardinal, this February Walter scored his biggest acquisition to date: the $5.4 billion purchase of Allegiance Corp., a medical and surgical supplymaker and distributor based in McGaw Park, Ill. The blockbuster deal made Cardinal a single source for the most commonly purchased supplies and services used by hospitals across the country.
At the same time, though, Walter faces one of his biggest challenges in integrating Allegiance, whose core business of manufacturing and distributing medical and surgical supplies is quite different from Cardinal's expertise in drugs.
Investors in Cardinal appear a bit unsettled about the Allegiance merger. Since the deal closed, Cardinal shares have dropped 12% to $70.94 as of April 13, though a choppy market could also explain some of the slide.
But Walter's track record bodes well.
Pulling off a successful consolidation strategy first in drug distribution and so far in the artful assembly of a diversified healthcare service business is no small feat.
"Many deals fall apart on the soft issues, who's going to do what and what title will they have," says Regina Herzlinger, healthcare business guru, Harvard business school professor, and a director on Cardinal's board since 1995. But not for Walter, whom Herzlinger called a "superlative dealmaker, among the best . . . I've ever encountered."
A clear strategic vision, absence of ego and brilliant business sense help Walter succeed where others fail, Herzlinger says.
"Acquisitions are risky business," agrees Lester Knight, who had been chairman and CEO of Allegiance and is now vice chairman at Cardinal, overseeing mergers and acquisitions, finance and administration. But unlike some other less able consolidators, "Cardinal has done them extremely well," Knight said.
Wall Street concurs.
"The critical factor that explains why Cardinal Health is so successful can be attributed to Bob Walter," says David Risinger, a vice president at Morgan Stanley Dean Witter, who likened Walter to Jack Welch, the savvy chairman and CEO of General Electric Co., and called Cardinal the GE of healthcare.
"Bob and his team stand out as stellar in my book," added Lawrence Marsh, senior vice president at Lehman Brothers, New York. One reason Walter and Cardinal have been so successful is that they take "calculated, prudent bets. They're never interested in doing something where the odds of failure could be that high," Marsh adds.
Walter says he makes sure that Cardinal tirelessly cultivates relationships with customers. How? First and foremost, Walter preaches that Cardinal must "move quicker and work harder" than its competition.
And to keep Cardinal nimble, the executives of acquired companies have a great deal of autonomy to achieve the lofty goal of 20% annual earnings growth, which Walter requires for each line of business.
"We don't want this company to feel like a large company," Walter says, practically bristling with the memory of his false start in defense work. "We try and manage it in small segments, give a lot of authority to people, a lot of responsibility, and ask them to act quickly and to act like owners."
Many of them are, it turns out.
Fully 10% of Cardinal is owned by employees through a combination of stock and vested options, and more than 2% by Walter himself, according to recent figures compiled by Cardinal.
And just to make sure everyone knows the score, the cafeteria at the company headquarters features a red LED stock ticker flashing the latest price for Cardinal stock above the microwave ovens used to warm snacks.
Unfinished business. One reason that Cardinal seems to stay aggressive is that Walter never forgets the early days he spent building the company, which struggled to be noticed in the shadow of established players.
"The best title in the world is founder; there aren't too many of those around," says Robert Zollars, another Allegiance veteran, who joined Cardinal in 1997. As a group president, Zollars oversees the pharmacy automation and outsourcing businesses. He predicts that Walter, the company-builder, is far from finished.
Where Cardinal will strike next, Walter won't say. But if the past is any guide, he won't rest for long. Last July, the U.S. District Court in Washington nixed Cardinal's proposed $2.5 billion acquisition of rival drug distributor Bergen Brunswig Corp. on antitrust grounds. Walter barely caught his breath before he was on to new deals.
In September 1998, he started talking with Knight about buying Allegiance, and a definitive agreement was completed one month later.
It's a good bet that Walter's next acquisition will fit the strict criteria that so far have meant considering 50 candidates for every deal that gets done. Besides being a smart strategic fit, any company to be acquired must have the No 1. or No. 2 market position plus savvy management to keep it that way, Walter says.
Despite Walter's obvious success, a touch of paranoia seems to keep him from resting on his laurels.
"Don't ignore any competitor, or someone will sneak up on you," Walter says. "We snuck up on people, but we refuse to let other people sneak up on us."
Robert D. Walter
Chairman and chief executive officer, Cardinal Health
Born: 1945, Mansfield, Ohio.
Education: Bachelor's degree, 1967, Ohio State University; MBA, 1970, Harvard University.
Family: Walter's older sister introduced him to his future wife at a basketball game in the eighth grade. Married in 1967. Three sons.
Best acquisition: The food company he bought in 1967, because it was the toughest deal to pull off.
How to land in Cardinal's shopping cart: Market leadership, strong management, strategic fit.
Number of companies considered for each one acquired: 50
Biggest challenge: Keeping Cardinal entrepreneurial.
Most humbling experience: An unsuccessful attempt to start a chain of food supermarkets.