As Quanta continues to buy up electrical contractors across the country, how do distributors and smaller contractors survive in the new roll-up market? The second in a series.

If 1998 and 1999 were any indication of what's to come, it looks like contractor consolidator Quanta Services, Inc., Houston, Texas will only continue on its fast track. Currently the fourth largest electrical contractor in the country, Quanta went public in 1998 when Chief Executive Officer (CEO) John Colson created the company from four existing infrastructure companies, including PAR Electrical Contractors, Inc., North Kansas City, Mo. (where he'd worked since 1971); TRANS TECH Electric, Inc., South Bend, Ind.; Potelco, Inc., Sumner, Wash.; and Union Power Construction Co., Englewood, Colo.

Since that time, Quanta has experienced phenomenal growth due to its aggressive acquisition strategy. Check out these numbers: The company's number of employees grew from 3,325 in 1998 to 7,200 in 1999. Starting with an annual revenue base of $150 million when Colson merged the four companies, Quanta forecasts more than $1 billion in pro-forma revenues for 1999. It experienced a 162% increase in third quarter revenues from $103.7 million in 1998 to $271.8 million in 1999, and it currently has principal offices in 25 states, more than 300 customers, and 52 acquisitions under its belt.

"We are gratified by our strong operating performance, significant growth and improved financial strength we achieved during the third quarter of 1999," says Colson. "During the third quarter, we have continued to expand our portfolio of services by acquiring 15 companies, giving Quanta a revenue run-rate of over $1 billion. These quality specialty contracting companies enhance our service capabilities to meet the expanding needs of our customers in the rapidly growing electric utility, telecommunication and cable TV markets.

"Additionally, we were pleased to have closed the $186 million investment by UtiliCorp United Inc., at the end of the quarter, leaving us well positioned to continue to seize upon expansion opportunities in 2000 with numerous attractive platform acquisition candidates."

A focus on several niche markets. Competition among suppliers and vendors for Quanta's allegiance is fierce. But does the company's size and enormous purchasing power mean the little guys are out of the picture? According to Colson, the answer is no. In fact, he says the majority of Quanta's projects are still the smaller jobs handled at the local level.

As an electrical and telecommunications infrastructure contractor, Quanta provides specialized contracting services to electric utilities, telecommunication and cable televisions operators, and governmental entities. It also installs transportation control and lighting systems and provides specialty electric power and communication services for industrial and commercial customers. With such a wide range of services, Colson says it's important to allow the management team at each of Quanta's operating companies to make their own purchasing decisions.

"We operate on a fairly decentralized basis, giving our operating units as much autonomy as possible with oversight from the corporate level. We try to keep the existing management in place and let them continue to operate successfully," he says. "All of these companies were very successful to begin with or we wouldn't be buying them. We do not buy companies and turn them around. We buy the top companies in their market so there is not a lot of management training we need to instill in those people."

Purchasing by partnership. Fearing their business relationships with smaller contractors may change once a consolidator like Quanta purchases them, the question most distributors want to know is: How does Quanta purchase materials? According to Colson, Quanta purchases its products in two ways:

"At the local level, our individual operating units market to their existing customers-local and regional. Then, we market Quanta and our group of companies on a national level. So you can see us purchasing materials at both levels. We have a group that supervises the purchasing of materials and formation of alliances with our materials suppliers."

Basically, Quanta decides on a case-by-case basis whether to purchase centrally or decentrally. It all comes down to the best business option, he says. Due to its size and massive poolof resources, Quanta's competitive advantages include the ability to share expertise and labor resources, as well as significant discounts on equipment, credit and insurance through volume purchasing. And by capitalizing on best practices among its operating companies, Quanta promotes cross-marketing opportunities that effectively utilize skills from all of its sister companies.

As a result, Colson explains it makes sense for each operating unit to continue business as it has in the past on smaller projects. However, as Quanta moves into larger contracts, he says it's more feasible to have centralized purchasing of materials and alliances with materials suppliers. Despite some suppliers' skepticism about the roll-up trend, Colson says there's an underlying advantage for distributors in this highly competitive market: service.

"The good news is cost is not the major consideration in many cases," he says. "Particularly on some of these larger projects, it's service-it's the ability to perform and get the right piece of equipment in a timely manner more than cost. Of course, the cost needs to be competitive, but I think that's the good news for material distributors. They don't always have to have the lowest dollar cost all the time. If they have the right product with the right availability and the right timeframe, it's usually more important."

Colson says Quanta has grown so quickly because of fertile market conditions and three market drivers: deregulation of the utility and telecommunications industries, the aging of existing transmission and distribution infrastructure in the U.S., and the explosive growth of the Internet and increased telecommunications traffic.

"Deregulation is the key on the electric utility and telecommunications side," says Colson. "On the telecom and cable T.V. side, it's the demand for bandwidth. Those are drivers for our industry. We've seen strong growth in those industries for quite some time."

Life with Quanta. >From a Quanta perspective, its consolidation strategy offers opportunities >for contractors, distributors, and manufacturers. But what does someone >who's made the change from a smaller electrical contractor to one of >Quanta's operating companies have to say? According to Sam Bowen, >president of Dillard Smith Construction Co., Chattanooga, Tenn., life >after Quanta has been business as usual.

Bowen joined Dillard Smith in 1990, a company founded by its namesake in 1947, as the cooperatives were electrifying Tennessee. Dillard Smith passed the torch to his only son Turner, who continued the company's focus on overhead electrical distribution work. To keep Dillard Smith viable and growing, Turner made Bowen's dream of one day buying the company a reality in 1998--when he sold the family-owned business to Bowen and his two partners. But Bowen admits this transaction came with a somewhat unusual twist: He found himself a bit skeptical when Quanta, the fourth-largest contractor consolidator in the country, came knocking at his door.

Quanta had some preliminary discussions with the previous owners before Bowen became interested in purchasing Dillard Smith, but he didn't pursue the negotiation until several months after he closed the deal. "Just after closing, Turner handed me a phone memo from John Colson at Quanta, and said, `You need to call this man,' " says Bowen. "I didn't call John for about four or five months because owning my own company was everything I had always worked for."

After meeting with Quanta's CEO, Bowen says the decision to merge made perfect sense to him. When he and his partners began asking themselves questions like: Where is the market going? How are we going to fill our equipment needs? Where will the cash come from for equipment and other things as you experience growth? How do we grow our company?--all of the answers kept coming back to Quanta.

"The good thing was I already knew those companies (Quanta's four operating companies) from doing business over the past 20 years. I knew they were good upstanding companies and just felt real comfortable with it," explains Bowen. "The more we talked with the Quanta folks, it really made sense not only for us but also for our employees. To me, it offered more stability for Dillard Smith." With the acquisition by Quanta complete on Feb. 12, 1999, Bowen looks at the merger as a positive step for the succession and continuation of his company and its 700 employees. So far, he has no complaints.

"We're all really pleased. Our company is 52 years old, and we look at it as a step in the right direction," he says. "Employee attitude has been very pro-Quanta, despite going through changes two years in a row. I wanted this merger to be right for our employees, and I feel it has been."

Overall, not that much has changed. Dillard Smith continues to handle the same types of projects, including overhead distribution work, transmission work, some substation maintenance, substation construction, underground-residential distribution (URD) work, ductbank work, installing and pulling conduit, streetlight work, cell towers, and all types of pole-line type construction.

"The truth is they really do leave us alone," says Bowen. "The things we've experienced from a Quanta perspective are a better 401K program, better company insurance programs and cheaper rates-all things that are very positive."

Although he can't name any drawbacks, Bowen admits going from a privately held to publicly owned company introduced a new set of challenges-especially when it comes to financial reporting. For example, when Bowen had crews working 39 consecutive days on storm work this fall, some things got put on the back burner.

"In the past, we might have said, 'We'll set our financial reporting back here and get to it as soon as we have time,'" says Bowen. "We can't do that anymore because that's what grows the stock, and everyone understands that."

Business relationships that last. When asked how the acquisition has affected Dillard Smith's relationship with distributors and vendors, Bowen insists the company hasn't modified its business practices. "We're still doing business with a lot of the same folks-our friends and businesses that have been there for 52 years. While we're part of a larger organization, we're part of a team now," explains Bowen. "We've always been a very team-oriented company. Now we're just part of a larger team. We're there to support the other Quanta companies, but we certainly have not forgotten who helped get us where we are today."

As a result, Dillard Smith has changed very few accounts. Bowen notes most of the benefits of belonging to a conglomerate like Quanta fall on the banking and insurance fronts.

"We feel very fortunate. We've gone through a learning curve, picked out some very good suppliers, and had no directives to change that," says Bowen. "Even if we ever do, I feel like most of the vendors and suppliers we're dealing with already are preferred anyway. So I don't foresee a lot of change there."

Future projections. As the contractor consolidators continue to buy up more and more local contractors, Bowen believes the market holds challenges as well as opportunities. "I think as deregulation continues, no one is sure what's going to happen. There will not be one model for everyone. I feel like having good quality contractors offering a wide range of services who can fulfill many functions within an organization is a definite plus."

According to Bowen, when a customer can get one experienced company like Quanta to come in and handle all of the different phases of work, such as underground, overhead, and gas, it's very attractive. With regional offices in Little Rock, Ark., Memphis, Tenn., New Market, Tenn., Charlotte, N.C., Okahumpka, Fla., two offices in Atlanta, Ga., and a headquarters location in Chattanooga, Tenn., Bowen stresses Dillard Smith still relies heavily on smaller projects.

"We see everything from customers who just want to deal with the good old Dillard Smith and a handshake all the way up to those who ask if our sister companies can come in and provide additional services," says Bowen. "It just makes you much more versatile. It's almost like being in a library. You've got all these resources available to you and your customers so all you have to do is say, 'Is there something else that you need?'"

Needless to say, there is a lot of referred business going back and forth between the 25 principal offices at Quanta. That's probably why corporate executives rely so heavily on each unit's management team to identify potential acquisition candidates.

"If we see companies that we think are very valuable to our industry, we're referring that on to Quanta," says Bowen. "Why not ask these people to be part of our team? We're proud to be a part of such an exciting organization."

Although many in the industry initially feared the ramifications of this consolidation trend, it looks like it's here to stay. However, Bowen thinks contractors and distributors should view this ever-changing market as an opportunity rather than a threat.

"For people who look at this trend and think it sounds scary, it isn't," he says. "We're growing at a rapid pace and doing more business than we've ever done, especially from a profitability standpoint."

1999 sales forecast: Quanta's pro forma revenues were just over $1 billion. Third quarter revenues increased 162% to $271.8 million compared to $103.7 million in the third quarter of 1998.

Company background: Quanta went public in 1998 (trading on the New York Stock Exchange under the symbol "PWR"). In an effort to consolidate the industry, this company was created from four acquired infrastructure companies, including PAR Electrical Contractors, Inc., North Kansas City, Mo.; TRANS TECH Electric, Inc., South Bend, Ind.; Potelco, Inc., Sumner, Wash.; and Union Power Construction Company, Englewood, Colo.

Corporate headquarters: Houston, Texas

Locations: Principal offices in 25 states

Number of employees: Currently, Quanta has 7,200 employees. In 1998, the company employed 3,325.

Acquisitions: 52 to date

Industry focus: Quanta is a leading provider of specialized contracting services to electric utilities, telecommunication and cable television operators and governmental entities. The company also installs transportation control and lighting systems and provides specialty electric power and communication services for industrial and commercial customers.

Challenges: To continue integrating the individual operating units into Quanta once they're acquired and maintain the company's good margins. Goals: Quanta plans continued rapid growth, both internally and through acquisitions. Senior executives plan to continue broadening geographically, increase the company's customer base, and add specialty services that enhance its ability to be a full-service contractor.

Senior management: Vincent D. Foster, Chairman; John R. Colson, CEO; James H. Haddox, CFO; Derrick A. Jensen, VP, Chief Accounting Officer and controller; Brad Eastman, VP, Secretary and general counsel.

Web site: www.quantaservices.com (currently under construction)