Lab Specialists Acquired By Kroll-O’Gara Company

Fast-growing toxicology laboratory decides to become part of a security services firm

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CEO SUMMARY: Laboratory Specialists of America has demonstrated a multi-year capability to increase revenues and boost earnings. The merger with Kroll-O’Gara provides it with ample capital to intensify its own acquisition program. One key to Laboratory Specialists’ success is its recognition that it is in a service industry, not a test results industry. Client service is a hallmark of this progressive laboratory company.

WHEN A MUTUAL FUND MANAGER bought stock in both Laboratory Specialists of America and Kroll-O’Gara Company, the last thing on his mind was a merger of the two firms.

Yet that is eventually what happened after he encouraged executives from the two companies to meet. On October 22, Kroll-O’Gara announced its purchase of Lab Specialists for $29 million in stock, with the deal set to close in December.

“We met Kroll-O’Gara through a mutual fund manager who invested in companies specializing in corporate security services,” said John Simonelli, Chief Executive Officer at Lab Specialists. “He recognized that both companies had complementary strengths. He encouraged us to meet with Kroll-O’Gara.”

Laboratory Specialists of America is a drugs of abuse testing laboratory which has tripled its annual revenues during the last three years, from $5 million to $15 million per year. (See TDR, December 4, 1995.)

Kroll-O’Gara Company is a $190 million firm offering corporate and private security services, including internal and external fraud prevention. Kroll- O’Gara finds drugs of abuse testing to be a perfect complement to its full menu of corporate security services.

“There are two primary reasons why we agreed to sell to Kroll-O’Gara,” stated Simonelli. “First, they provide us with ample funds to acquire more tox testing business. Even though our earnings were growing 50% per year, our stock price traded at a relatively low multiple, making it more difficult for us to finance acquisitions.”

Cross-Sell Clients

“Second, it improves our ability to boost sales by giving us access to Fortune 500 clients and allowing us to cross-sell existing clients of Kroll-O’Gara,” he continued. “Our shareholders benefit from this merger as well, because of the value which Kroll-O’Gara paid for our lab.”

According to Simonelli, Kroll-O’Gara intends to allow Lab Specialists to continue its growth strategy. “We will operate without any fundamental changes to our existing organization,” he explained. “They want us to continue with acquisitions. In fact, many laboratories now in discussions with us about selling their drugs of abuse testing operations are excited about the merger. They recognize the increased financial strength behind us. That is why we believe our acquisitions program will actually move faster.”

Laboratory Specialists of America is a successful business model that has much to teach the clinical laboratory industry. Both Simonelli and his partner, Larry Howell (President of Lab Specialists), come from a corporate management background, not healthcare. Their ability to generate sustained growth and increased profits during the 1995-1998 period demonstrates that professional management techniques have application in managing laboratories.

Key To Success

One key to their success is customer service. “We emphasize customer service,” stated Simonelli. “After buying a book of business, we work hard during the transition period. We spend a lot of time understanding our new clients. For us, lab testing is not about low cost, it is about anticipating and meeting the needs of our clients.

“If we do a good job with service, our clients reward us with loyalty. ‘Lowest price’ ceases to be the primary reason they chose our lab over competitors,” he continued. “That is why we provide the personal touch with every client. It sets us apart from the competition.

“Another element in our success is that we solve problems immediately and permanently,” added Simonelli. “This is a service industry, not a test results industry. We appreciate the difference. If our client has a problem, we want to fix it immediately. We also want to fix the system that created the problem so it won’t happen again.

“I would say that many laboratories will fix a customer’s problem, but do not solve the ongoing issues which generate similar problems over and over again. That frustrates clients. It is why we place a high priority on responding to the customer’s needs, then permanently fix our system to prevent it from triggering the same problem again in the future.”

Independent clinical laboratories can expect to see more of Laboratory Specialists in the future. “We continue to be interested in acquiring the drugs of abuse testing business from regional laboratories looking to exit that segment of the business. We are involved in those kinds of discussions every day.”

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