Suzy Bibko is editor of Families in Business.
Starting with virtually nothing in the 1940s, the Jacobson family built an industrial distribution empire now worth over $3 billion. Suzy Bibko discusses the challenges of the business and the creation of its family investment firms
MSC Industrial Supply Company (MSC) knows what it wants and doesn't mince words: its mission is to be the best industrial distributor in the world as measured by its associates, customers, owners and suppliers. Easier said than done? Apparently not, if MSC's phenomenal growth in the past 60 years count for anything.
Founded in 1940 by Sid Jacobson and his brother, MSC (then Sid Tools; the name later changed to Manhattan Supply Company and subsequently MSC) was a hands-on family company, with Sid pounding the pavement for orders and his brother sourcing and shipping the products Sid sold. When the second world war came in 1941, both brothers were drafted. Instead of shutting the doors on a fledgling business, Sid's sister pitched in and ran it for the brothers. Luckily, both brothers returned safely from the war and took advantage of a government programme for veterans. America had stocked up on a tremendous amount of war supplies because they didn't know when the war would end; the result was a surplus of tools to build airplanes and other machines. After the war ended, the government auctioned off the surplus to the public, and veterans were encourged to participate in a programme that allowed them to buy a percentage of any lot bought by anyone else. Sid and his brother gathered their cash, went to the auctions, bought percentages of lots, sold them at a profit, came back to the auction with a bigger bankroll and bought some more. Mitchell Jacobson (pictured), Chairman of MSC and Sid's son, says that this was an early milestone for the company: "One of the things the auctions taught my dad and his brother was that if you buy a product correctly, you can sell it. They learned a lot about the concept of buying things without necessarily having a customer for them, but because they were a good price."
The second major milestone for MSC came in the 1960s when Sid went to California on holiday – a big trip for a New Yorker back then. Always intellectually curious, Sid had seen an industrial catalogue prior to his holiday. Catalogues were just evolving and this one was for a company in California. So, combining business with pleasure, Sid visited the company that published the catalogue. The California owner gave Sid lots of information on how the catalogue business worked. When Sid returned to New York, he decided the time was ripe for a catalogue of his own and published the first MSC catalogue in 1964. Now known as The Big Book (MSC currently sells over 500,000 products), this was a major turning point for the company in its strategy for sales and market growth.
While the catalogue enabled MSC to reach more customers in more areas, there was still a big roadblock to growth due to the restrictions major brands put on the distribution of their products. Back then, major brands were sold purely by territory. Thus, if MSC had the distributorship for a branded product for Long Island, NY, it couldn't sell the product in Connecticut or even New York City. This restriction obviously limited sales for MSC, as well as product. To get around that hurdle, MSC learned how to adopt secondary brands, private brands and international imports. The catalogue showed the big brands that selling across territories was the wave of the future. Finally, one of the brands "broke" and allowed MSC to sell their products; others soon followed. However, the fact that MSC reached so many small customers with small orders meant that many invoices had to be processed. Sid, acting again on instinct and intellectual curiosity, decided that a computer would help his business. So, in 1969, he paid $125,000 for a computer (that was less powerful than today's PC) and became one of the first distributors with computerised inventory management and order processing – something that most every business takes for granted today.
By 1976 MSC was a flourishing $6 million company with 60 employees. Sid and his brother were still the only family members involved and that didn't look like it would change. Sid's son Mitchell had gone to law school and wasn't really interested in the "family hardware store". There was never any pressure for him to join the company, a tenet that still prevails today in regards to family members working in the company. But, Mitchell decided to give the family business a chance when his dad said he needed some help: "I agreed that since the company and my dad had paid for my education and childhood, I at least ought to go in and give him whatever help I could. We shook hands man-to-man on a six month deal – I would go in for six months, do my best to help him resolve some of the issues and then we'd shake hands and I'd go on and live my life. And any guilt I had about not going into the family business would be absolved."
Well, that plan went out the window soon after Mitchell walked through the doors. Perhaps Sid instinctively knew that his son was made for the tool business, or maybe it was just luck, but Mitchell soon realised that he had walked into an amazing opportunity – and something much larger than the hardware store he thought his dad owned. After the six month stint, Mitchell approached his dad and said, "This is going to be a huge company. It's going to be a $100 million business. Do you want to go for it?" And Sid, to his credit, said, "Absolutely."
Mitchell's first tasks were to publish the catalogue on a more regular basis, and put together a consistent marketing approach, have enough people to take telephone orders and ensure there was enough inventory to ship and people to ship it. "Execution was enormously difficult in those days," recalls Mitchell. "In order to grow the business we faced numerous hurdles. The first area of focus was smooth supply of product. In the 1980s, brand name manufacturers would not sell their products via catalogue as they had assigned franchised territories to local distributors. In order to secure supplies we established in-house quality controls and built relationships with manufacturers throughout the world. The next challenge was processing very small dollar orders and managing receivables. We were early adopters of computers as a result. We also had to develop a simple enough catalogue and computer system to enable us to take orders for somewhat technical products using non-technical inside sales associates. Finally, we had to develop demand forecasting tools in order to manage inventory at 30% and 40% revenue growth levels with 9–12-month lead times from suppliers. Once we accomplished these objectives we grew very quickly and were able to take enough share on targeted product lines that brand name manufacturers were forced to take the catalogue channel seriously."
Throughout the 1980s, Mitchell and MSC really focused on bringing more brands on board. When they finally did, they were able to hit the mainstream of the industry. Rapid growth resulted and by 1990 MSC was a $100 million business. However, the growth was financed by a lot of debt, heavily levering the company. When the bank crisis hit in the early 1990s, MSC had lines of credit with four different banks with about $80 million in debt, which had been used to invest in the business. Mitchell says it was an extremely stressful time for him and the company: "The banks hit a wall. They realised how levered we were and it was a major strain. However, we managed to fight through it. It affected me deeply enough that I worried about the family being heavily involved in the business. So, in 1990 we slowed things down. The company was still very profitable and we generated an enormous amount of cash, paid down debt, sold off a leasing company and refocused on the core business."
Mitchell, having reached his goal of becoming a $100 million company, now envisioned something bigger and developed a strategy for MSC to be a multi-billion dollar company. MSC was still just an east coast operation with one shipping centre, distributing primarily metal working products. "The opportunity we saw, based on this model we built for east coast metal working, was to be national, which was a big vision," says Mitchell. "It required a lot of capital, but we didn't want to be so heavily levered again." So, how do you grow if you don't want to take on debt and don't have the cash? The only answer was to go public.
In 1995, the same year Mitchell became chairman of the board and CEO of MSC, the Jacobson family decided to carry out an IPO. Mitchell admits the family didn't really want to go public, for all the reasons most families don't want to do it: they're a very private family, they didn't want the notoriety, they didn't want their names in the papers, they didn't want public scrutiny. However, it was really the only choice they had and they didn't agonise over it – a lesson Mitchell says his father taught him. "No decision is perfect, but you take a look at everything and make that decision."
The IPO brought in $125 million and gave MSC the funds it needed to develop a national footprint. Between 1995 and 2000, the company set up four distribution centres across the US, built 100 branches and expanded its product line from about 80,000 items to more than 500,000.
The company has also recently acquired another industrial distributor and taken together (on a proforma basis) the two companies would have annualised revenues of $1.5 billion – not bad for a so-called family hardware store. Erik Gershwind, Sid's grandson and senior vice-president for marketing, product management and strategy at MSC explains that this was a big decision for the company for several reasons: "For the past 10 years our growth has been achieved organically, investing in our existing business model to expand it. The growth has been terrific but we see ourselves in the early innings of a much bigger story. The market for the products we sell is $140 billion in the US alone. Globally it is several hundred billion dollars." MSC also wants to take advantage of an extremely fragmented market, still maintained mostly by small, local businesses: "In the US, out of that $140 billion, the top 50 distributors only have about 20% of the market. It's really unusual that a market this large has so little concentration of market share," says Erik. MSC believes that industry consolidation is inevitable and they've positioned themselves to grow substantially from this trend, with this acquisition being step one in the process. However, sticking to solid family business values, they aren't blind to the fact that this growth may take many years. "We've always said we would take a methodical approach – there is a lot of pressure to manage for the short-term, and I think the family influence has helped to keep us grounded in our mission and in taking a long perspective and time horizon," explains Erik.
But the Jacobson's story doesn't stop there. As a result of the IPO, the family was left with a large amount of cash. Mitchell says that because he never had any money to invest prior to the IPO, he wasn't sure what to do with his share. A friend who was a successful investment manager told him not to do anything with the money initially, as he was afraid that if Mitchell tried to invest it himself, he'd lose everything the family had worked for over the years. Mitchell's friend suggested he talk to different people, ranging from private banks and consultants to fund-of-funds and to families with family office structures, in the hopes of finding a suitable match for the Jacobson family. Mitchell was subsequently introduced to Stuart J Rabin, an investment manager and former lawyer. The introduction came through Richard Rainwater, the US-based financier who many years earlier had been the architect of the well-known Bass Brothers investment effort in Texas. Richard put Stuart in touch with the Jacobson family in November 1996. At the time, Stuart was interested in building a new family investment company and was seeking the right family with whom to partner and with whom he could work closely.
By both Mitchell's and Stuart's accounts, they hit it off immediately and both had the same vision for the family and their money. The rapport was, and continues to be, based on a desire for superior long-term investment returns, an entrepreneurial spirit, and especially on shared values and an ethical and honest approach to life and business. Stuart put together a business plan and Jacobson Family Investments (JFI) was born in early 1997.
By building JFI, Mitchell and Stuart wanted to achieve several things they both felt were lacking in a traditional sell-side firm or multi-client family office: a true alignment of interests among all the stakeholders of the firm, as well as between the family and each of its outside investment partners; the achievement of 'world class' investment returns; the ability to flexibly seek out and pursue new and interesting opportunities; the occasion to build a customised family investment platform; and a core focus on family and on treating people properly -- always with an ethical and honest approach to life and business. Stuart explains: "We try to only do business with good people. You can never do a good deal with a bad person. No matter how good an investment is, if it's with a bad person it is possible that they are going to figure out a way to take advantage of the partnership. We operate from a value-driven perspective, and those that work with us, both inside and out, understand that".
Stuart is also quick to point out that while JFI manages family assets, it is not a traditional family office but an investment company that by design manages only family capital. He says it was clear from the start that JFI would be investment focused and steer clear of the softer-side of things (the so-called 'concierge services') that many family offices traditionally offer. "We set out to build an investment firm," recounts Stuart. "It just so happens that it was backed by family capital, and we had no other clients. To me, this is the ultimate niche within the investment world – a single family, a very large capital base, a long-term time horizon and incredible flexibility."
But was the family ever nervous that they were being asked to start a new company, by someone else, with their own money? Here was an outsider saying "trust me" and if it didn't work out, Stuart had nothing to lose while the Jacobson's could lose everything. Mitchell says that to counter any fears, they spent a lot of time planning and developing a strategy before investing. They made sure the family and Stuart were aligned in their interests and were comfortable with each other. Mitchell also stresses that throughout the planning process, they made sure they shared the same vision. "I think we spent so much time together that there was an alignment and trust," explains Mitchell. "Also, I always run nervous – I'm always recalculating the odds. It keeps you alert."
Stuart says, that for him, building JFI was something much broader than just working for somebody – it was working with somebody. "I always saw this as building my own family investment firm," explains Stuart. "So, it was really more of a co-founder and partner arrangement, even though initially the vast majority of the captial was the Jacobson's." Today, Stuart invests his own capital through JFI, bringing the partnership full circle.
JFI's investment strategy is based on two primary goals: wealth preservation and asset growth. The reason for such basic objectives is, says Stuart, "because we never want to lose the fortune that took decades to build. We want to consistently and effectively compound the family's wealth for the benefit of present and future generations." To do this, JFI invests through six investment categories: outside public market money managers (primarily hedge funds) through customised portfolios the firm designs and builds itself; its own internal trading effort, or hedge fund; private equity (both funds and direct investments); real estate; 'seeding' new money managers; and a non-traditional cash management effort, using arbitrage managers. Each asset holder – family members, entities, trusts, foundations – has its own customised portfolio and assets are not co-mingled. Stuart says this is one of the hallmarks of the firm. "We took years to plan and effectively implement the structure where any individual or portfolio can opt in or out of a specific investment or manager."
This strategy has been so successful that a few years ago the Jacobson's and Stuart launched Nine Thirty Capital, an investment firm for other families. It's a natural extension of JFI, but it took a lot of thought and planning to take the business to outsiders. For several years, the family and Stuart had been asked by others for help with investing. They finally decided to build Nine Thirty Capital, for three reasons. First, to formally enhance their network of partners with new and interesting families that can each add something special to the investment firm (such as industry expertise, new deals, or perhaps a geographic focus or set of contacts that broadens the overall platform). Second, to provide greater scale to the investment business providing added opportunities for all to invest in additional 'world class' hedge funds, or into certain types of private investments (such as money manager 'seed' deals or into large private equity investments where there is added leverage from having partners with specific industry expertise). Third, to allow them to continue to attract and retain great people. "We believe that the better the organisation becomes, the better we will be able to compound our capital and generate superior long-term returns both for ourselves and for our Nine Thirty Capital families," says Stuart.
As was the case with JFI, the Jacobson's and Stuart share a significant and aligned vision for Nine Thirty Capital. In addition to continuing to effectively manage all of the Jacobson family's substantial asset base, they see the now expanded platform managing multi-billions for a select group of outside families as well, thereby creating an ever expanding network of family 'partners' – with each Nine Thirty Capital family adding value to the group as a whole.
An ambitious approach for sure but certainly not out of reach, especially if history is any guide. After all, the Jacobson family was successful in building MSC based on a very large vision. The Jacobson's and Stuart then extended this track record into the investment world and created and built JFI into a flexible, opportunity seeking, and very ambitious family investment platform. Now, with Nine Thirty Capital, the partners have extended and expanded the JFI business and its vision to include outside families and are using the same professional and entrepreneurial approach that has been so successful for managing their own asset base. They even seem to have combined some of the best things about a family (such as a long-term orientation and an ability to focus on managing wealth over multi-generations) with the best attributes of a buy-side investment firm (private, opportunistic in nature, and entirely focused on growing and compounding partner capital). As Stuart notes: "From the very beginning, we set out to build a real investment firm. We learned from the experience of others and we set out to build an investment company, as opposed to merely another family office." He continues: "We wanted to have a business that would always seek to achieve world-class returns and would allow us to work with exceptional investors and other partners. At the end of the day, we felt this was the only way to truly achieve our goals – wealth preservation and asset growth."
As with the Jacobson family's success on the MSC side, now after almost 10 years together the Jacobson's and Stuart certainly seem to have achieved what they set out to build – for both the Jacobson's and now also for their Nine Thirty Capital families. But the most unique thing about what has been built within Nine Thirty Capital is the alignment of interests provided to each outside family joining the platform. Since all Nine Thirty Capital money is managed substantially side-by-side with the Jacobson fortune, Stuart notes that "the families have access generally to the same group of investment managers, the same guiding philosophy and approach, the same portfolio construction methodology, the same investment tracking and reporting system, and the personal attention of the same group of principals who are managing all of the Jacobson money." Stuart explains: "Nine Thirty Capital is a very unusual offering for a family with substantial assets looking for the best way in which to invest their fortune. After all, where can a family with substantial liquid wealth receive a customised portfolio solution, knowing their money is invested generally side-by-side with the founding family, through the same platform, with the same group of money managers and by the same internal, professional, team?" He concludes. "In our opinion, this all makes Nine Thirty Capital a very special business for all of its stakeholders."
While it's often difficult to find other people who share your values and goals, the Jacobson's have beaten the odds and found an extended family through Stuart. Their trust in him has been another tool in the family's continued success. So much so there was no question on Stuart's choice of name for the new business. Nine Thirty Capital is named for Stuart's wife and daughter who both share the same birthday of September 30. Stuart says it was a natural choice for this family business: "It all comes back to values. There's nothing more important to us than our family and children. It seemed ideal as a name and makes us remember that it's all about managing wealth for the benefit of future generations." I think the Jacobson's would agree he hit the nail on the head.