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Letter to the Editor

M2 Comes Up MT (Empty)

What caused the collapse of another consolidator - and what does it mean for the industry?

Stuart Burns said there was occasional discussion around the M2 water cooler about how the company was doing, but it wasn't until April 1 of this year that he really put much stock in it.

"Some of the folks who'd talked to the paint and parts guys said they'd heard we were behind in paying the bills, but I didn't think it was to a point where I needed to worry about it," said Burns, a former technician (who didn't want his real name used) with the California M2 chain of shops in California. "I mean, I looked at the stream of work we had coming through this place, and I had a hard time believing they could be losing money."

Burns's view of the situation changed dramatically in April when, a day after hearing M2 would be bought out by another consolidator, he found out his paycheck had bounced.

What happened next most people in the industry - and thousands of California motorists - have already read about: The purported sale fell through, the doors at the 27 M2 shops were locked with as many as 2,000 in-process vehicles inside, and hundreds of employees found themselves with bounced paychecks for two or even three weeks of work. Estimates on the amount that suppliers and vendors were out end in the word, "millions."

What were the causes of this colossal collapse? Were there warning signs that were ignored? And what will it all mean for the industry moving forward?

There's plenty of finger-pointing when it comes to placing blame for M2's demise. What seems clear is this: Caliber Collision Centers in late March announced that it intended to acquire the M2 chain of shops. As those negotiations broke down in mid-April (Caliber's Den Pettigrew said it just didn't have enough time to complete its due diligence), M2's major creditor, GE Capital, froze the company's accounts and locked the shop doors in an effort to secure its investment (reportedly close to $5 million).

How the situation got to that point is, not surprisingly, up for debate. Some believe that M2 took on too much debt in acquiring shops, or overestimated - certainly to creditors - the likely return. Some say M2 tried to offer insurers too much for too little. Other criticize the expense or leadership of the company's executives, including CEO Hunt Ramsbottom; why, they ask for example, didn't the company enter into talks to sell off some or all of the company's assets prior to things becoming so dire? Others say investors just have unrealistic expectations and demands.

Likewise, how good or bad a thing the M2 collapse is depends on who you talk to. At a sealed bid auction of M2 assets in late April, some of the former owners were able to get back in the collision repair business for a fraction of what they sold their businesses for to M2 just a few years ago. (Twenty of the M2 locations sold at auction, no more than five to any one buyer.) Given that M2 wasn't the first consolidator to implode (see below), it serves as a good reminder to shop owners to get as much cash, and retain as many real assets (i.e., real estate), when selling a business as one can. Accepting stock in the future success of the larger company as full or partial payment seems particularly risky in this industry.

On the flipside, if there was any question that the valuations of shops acquired in the late 1990s and first years of this century were over-inflated, this should lay them to rest. Chances are, shop owners’ businesses today would not sell for what they would have sold for then - and may be worth significantly less than what many owners think they are.

Certainly M2's demise does nothing for the industry's public image, at least in California where shops are already appearing regularly on TV newscasts in the Bureau of Automotive Repair's fraud busts.

Some independent shops see M2 as the latest sign that consolidation won't be the panacea insurers are looking for. "I'm telling these insurers, 'I may not have dozens of locations or offer all the bells and whistles M2 was promising, but I'm also not going to go bankrupt and lock up a bunch of your insureds' vehicles,'" one of the purchasers of two former M2 locations said he's going to tell insurers as he begins life as a 4-shop "replicator."

As second in line after GE Capital, DuPont is likely to be among the biggest losers in terms of dollars. While other vendors won't have as large an outstanding IOU from M2 as DuPont, many of them don't have as deep of pockets either. Certainly shops in California, if not elsewhere, can expect to see some tightening of credit terms by vendors as a result of M2's collapse. Vendor investment in shops could also take a hit.

The ending has, in some ways, been a little bit happier for Burns, the M2 technician who believed right up until April 1 that the company would succeed. The former owner of the M2 location where Burns worked has bought it back, and Burns is back at work inside.

"He even made good on our paychecks that bounced," Burns said of the former owner who is now back in charge.

But just as the M2 collapse didn't do anything to improve the industry's image in the eyes of the consumer, Burns said he and other former M2 employees also have become more jaded.

"It just feels like some of the management is going to walk away from this like it's no big deal, but there's people that got hurt by this," Burns said. " I used to like coming to work and feeling like we were a team. Now it seems like that was mostly corporate bullsh--. We got used. I don't think a lot of us are ever going to look at this as anything more than just a job again."

Earlier Consolidator Closings

While M2 may be the latest of the consolidators to collapse, it certainly wasn't the first or the largest to do so.

The "distinction" of being first is held by CARA Collision & Glass, a Minnesota-based company that, at its peak in the late 1990s, had 26 locations in five states and $40 million in annual revenues. As with M2, its final days were not pretty. In June of 2000, it locked the doors on its remaining 13 shops - leaving customers' cars inside and 150 employees without their final paychecks - and filed Chapter 7 bankruptcy.

CARA founder Randy McPherson (a founding partner of ABRA Auto Body & Glass prior to leaving that company in 1996) has blamed the collapse on CARA's rapid and far-flung growth. His goal, he readily admits, was to capitalize on the late-1990s Wall Street appetite for industry "roll-ups" or consolidators.

At eight stores (all in the Twin Cities area) in 1997, CARA was making money. But too many of the shops acquired in the rush for growth were poor performers that CARA never had the internal systems and structures to get turned around. With salaries for executives at its headquarters, and the cost of travel to get trainers to its added shops in Las Vegas, Denver, Wisconsin and Indiana, CARA soon was weighted down with overhead. Poor performing store managers were being replaced - but often with people from different regions who weren't familiar with the particular insurance procedures in that market.

The company began a sell-off of its stores, but still lost $2 million in 1999 and called it quits in mid-2000. Sherwin-Williams was the paint company that took the hit in CARA's collapse, struggling through the bankruptcy procedure to recover some portion of an estimated $1.5 million it was owed.

As with M2, several of the former shop owners who sold to CARA (including some who became CARA executives) bought back some or all of their former shops.

That was also what happened as Collision Team of America (CTA) gave up the consolidation game in 2002. Ford's decision to jettison the 33-shop CTA did not come as a big surprise to many, who had watched the struggling automaker sell off its other related businesses to refocus on its core competency. That the ultimate buyer turned out to be the very shop owners who created (or sold their businesses to) CTA was a bit more of a shocker; two other consolidators, ABRA and Caliber Collision Centers, had reportedly been within days of closing a deal that would give them control of the majority of CTA's shops.

But Dan Hall in Indiana, Paul Tatman in Illinois, Mark Fuller and Wayne Baker in Texas, and the other former owners of CTA shops had a lot to lose if CTA was dissolved and sold off piecemeal. So thanks to a deal that Hall managed to put together in just over two weeks, the former owners found themselves once again in the collision repair industry - an industry that had one fewer consolidator.   o

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