Western Power was founded in December 1992 to acquire seven Case Corp.-owned equipment distributorships in Washington and Oregon. Since then, the company has expanded to California, Nevada and Alaska.

"The investors were primarily shareholders of a publicly held holding company, and they wanted to diversify their portfolio by getting into the equipment business. Case was selling off some of its company-owned stores, and we put together a package of seven original stores in Washington State and Oregon, and closed the transaction with Case Corp." That was the nucleus of Western Power & Equipment.

Today, WPE sells, rents and services construction equipment through 25 stores in five western states. The equipment is used by contractors, governments and other customers. Products sold and serviced include backhoe/loaders, excavators, wheel loaders, crawler dozers, skid steer loaders, forklifts, compactors, log loaders, trenchers, asphalt pavers, snow blowers, street sweepers, highway signs and other equipment.

HELP FROM A HOLDING COMPANY

That holding company-American United Global, Inc., of California-furnished the capital to get WPE started and remains the No. 1 shareholder. "When we went public they retained two million shares of WPE stock, and there are 3.5 million shares outstanding," McLain told CED. "They own just under 57% of Western Power today, down from 100% just before WPE went public. When we went public they released 43% of their ownership to the public to give us capital to expand and grow our business." The IPO brought in $7.8 million.

WPE still is closely held. "A majority of the stock is held by five shareholders," McLain says. "There is a small amount of 'traded' stock in many other shareholders' hands. Because we're so closely held, our share value is a tremendously good deal. We're trading under our book value, which is close to $7 and today we're trading at a little over $6. The reason is that there is not a lot of 'float', or shares to trade, out there in the stock market, because we are closely held."

WPE was traveling through uncharted territory when it underwent its initial public offering (IPO). "We were one of the first construction equipment dealerships to go public, and we had no road map," McLain says. "We had to take one step at a time. I won't say that we didn't make any mistakes because we did. I really believe that the revenue base needs to be $200 million-plus before you go public, because it helps you 'stand tall' and be recognized by enough people.

"All-in-all, we have done a very respectable job, have built a good company with a solid foundation through same-store market share growth and acquisition growth," McLain says. "We've built our rental businesses up and our parts and services is one of our fastest-growers. It's crucial to this industry that parts and services be a very solid business, and we've done that over the last five years."

WPE has enjoyed 49% cumulative annual growth since 1993, primarily by growing market share and through acquisitions. "Our first year [1993] we only did $30 million, and in 1994 $67 million," McLain says. "In 1995, when we went public, we did $86 million, $106 million in 1996, and our FY ending July 31, 1997, $148 million."

In the quarter ending Jan. 31, 1998, WPE reported record second-quarter revenues of $39.7 million, up 13% from $35 million the same period the previous year. FY 1998 year-to-date revenues were $76.6 million, up 16% from $66.2 million in the comparative fiscal 1997 period.

Year-to-date net income was up 33%, to $1.13 million, from $.8 million the prior year. Earnings per-share were up 33%, to 32 cents per share for the first six months of FY 1998, compared to 24 cents for the same period fiscal 1997.

DEMANDS OF PUBLIC OWNERSHIP

Despite its appeal, public ownership of a firm puts added demands on management, McLain has found. The chores of public outreach and accounting have taken him away from operations and made him more dependent on his worthy staff.

"It's very time consuming," he says. "If you compare the scenarios of being public and being private, the public company requires a whole lot more of your time. There's much more reporting and different types of accounting. A private company doesn't receive the same scrutiny as a public company, so everything that you do is exposed. It's a lot different."

Investor relations means less time for customer relations. "If you spend only 10% of your time on management of a publicly held company, that's 10% less time you have with your customer base, growing and developing your company," McLain says. "I rely on my vice presidents of sales & marketing and product support to make sure I'm in the loop when I need to be or when a critical customer situation is at hand. Before, I was more involved in the mid-level decision process than I am now."

A common criticism of publicly held firms is that they are slaves to quarterly earnings reports and that strategic future investment for the corporation is diverted to dividends to satisfy investors on a quarterly basis. But McLain hasn't yet had to deal with that problem.

"We have not paid dividends to this point," he says. "There are certain expenses that you have in being public: You travel and put on a lot of presentations. You have your annual reports and your proxies. You will have advertising and promotion expenses, and that affects your cash flow. But we're a very closely held public company, so there would be little benefit to payment of dividends. We don't have enough 'float' in the public market for dividends to make an impact."

Instead of emphasis on dividends and increasing the value of the stock, the management priority is growing the company. "We've grown the company considerably while the price of our stock has stayed very low, trading below book value almost since Day 1," McLain says. "We appear to be a very good deal, but the fact of the matter is that there isn't a lot of stock out there to buy." That could be remedied some day by another public offering. "One of these days we will do a secondary, putting more shares out there to float."

WPE's regional coverage is a tremendous competitive strength. "A customer can look at a competitor that only does business in western Washington or one that only does business in eastern Washington," McLain says. "Or he can look at Western Power & Equipment, so that no matter where he works in a five-state area-whether in Alaska, Washington, Oregon, most of California or northern Nevada-we've got locations there.

"If he buys a piece of equipment from us," McLain says, "he will get the same type of service no matter where he's working in those five states. And most of our bigger customers work in that geographic market. We provide greater value to what we're selling the customer than our competitors can."

GRAY MARKET INCURSION

Not all is perfect, however, for this burgeoning business. "We have our own opportunities here in the Northwest, but also our difficulties," McLain says. Among them is an incursion of "gray market" excavators fleeing the soft economies in Asia for the Pacific Coast.

By "gray market" McLain means foreign-sourced excavators that are not marketed through conventional U.S. distribution channels. "Equipment 'jockeys' go to Asia and buy equipment direct from a broker or the factory, put them on a boat, bring them over here and try to sell them to my customers," McLain says. This is especially common when the Asian equipment markets are doing as poorly as they are now, he adds.

It's a reprise of what happened over a decade ago, McLain says. "The majority of excavators is manufactured in Japan or Korea. With Asian excavators, the first place they hit is the Port of Seattle. Any time the Asian market goes down, we [in the Pacific Northwest] have to deal with their excess equipment," he says.

"They won't stop building them. They won't throw all those people out of work. Instead, they ship them over here and accept a lower margin. There are tremendous price differences between excavators sourced from a U.S.-brand name and those that come over in the gray market."

Despite the strong national economy-and the potentially enormous and positive repercussions of the House and Senate surface transportation bills that were working their way through Congress late this spring-McLain still plans for times when business conditions might not be so good.

"You always have to have a contingency plan for downturns," McLain says. "We review our business plan on a quarterly basis to see where we are, how we are doing and what we need to do to adjust our overhead for short- and long-term. It's very important for all businesses."

JUDGING GROWTH OPPORTUNITIES

If one of the company's growth strategies is to be through distributorship acquisitions or bolt-on product lines, then analysis of potential additions is a critical step.

"The first thing we look at is whether the business will mesh with ours over the long term," McLain says. "I've had several opportunities to take on some product lines with strong parts and service businesses, but the line is dying out. We will walk away from that situation because it's not in our or our customers' long-term best interests to take that on and then drop it 18 months later."

Instead, McLain looks for product lines that will still be in business 15 or 20 years from now. "Another thing I look at is what kind of people they have," he continues. "Do they fit the image that Western Power displays to its customer base? Thirdly, is the acquisition a viable business?" McLain considers how it would fit into WPE's divisions of

• Logging
• Contractors, primarily dirt
• Governmental sales
• Rental
• LED, including skid-steer loaders, miniexcavators and small compactors
• Asphalt paving and compaction

"Each of the six divisions has its own management, sales and specialized product support staffs," McLain says. "I consider how acquisitions would fit into the divisions."

Each division operates as a profit center, he says, but the divisions can blend together in actual practice. "We may have logging in three locations, but to utilize our overhead it might be blended into construction. In a remote distributor location -- for example, on the eastern side of the Washington mountains-one salesman might represent all lines, he says. "But in a metropolitan area like Seattle, we may have dedicated salesmen for each division, with separate responsibilities and groups of customers," McLain says.

There is overlap, however. If a government agency wanted to buy an asphalt paver, it would be handled by the governmental sales rep with assistance from an asphalt paving rep. But strictly paving contractors would be the paving salesman's exclusive responsibility. "They work together, and we also have sales managers in our locations who are well-versed in all product lines," McLain says.

SAHLBERG A STRATEGIC FIT

The recent purchase of Sahlberg Equipment, Inc., was a strategic acquisition that considerably enhanced Western Equipment's stature, while illustrating the trend of ongoing industry consolidation.

"The Sahlberg group was in Chapter 11," McLain says. "It required a lot of money to be brought up to par and we didn't go after it at first. But we did not have an asphalt paving line or a good, strong governmental division in the Northwest to complement our governmental sales in California and Nevada. As we looked at it, we realized that Sahlberg would give us those pieces that we desperately needed up here."

Though well known, the Sahlberg name has been retired and the dealerships now bear the Western Power & Equipment moniker.

McLain says acquisitions like Sahlberg help manufacturers as well as customers. "One of Sahlberg's lines was Champion motor graders," he says. "When we bought Sahlberg, Champion had a single-digit market share percentage. Within one year-because of our multiple locations and professional sales staffs-its market share rose fivefold here in the Northwest. We've been able to rapidly increase that manufacturer's business because of our corporate structure."

WPE doesn't shy away from overseas product lines and sometimes attends international shows. "I go every two or three years to see what foreign manufacturers are offering," McLain says. "One that we picked up was Indeco, an Italian-made hydraulic hammer. We first saw it at Intermat [1994 in Paris], and when they entered the U.S. market in the Northeast we brought it in." But corporate commitments precluded him from visiting Germany's Bauma '98 in March.

Western Power's long-standing relationship with Case is one that McLain is proud of. "Case is our primary product line so we make a very diligent effort to have the highest market share in that line that we can get," he says. "This year they constitute 75% of our revenue. They're a very good partner and we work very closely together."

WPE, like other Case dealers, had to grapple with satisfying major customers last year after extensive warranty work was indicated on Case Model 580L backhoe/loaders. "We had sold 2,882 backhoes that needed warranty modification," McLain says. But Case had limitations on how much it would do for retail customers for the modifications.

"It would have been a terrible inconvenience for our customers," McLain says. "We made a business decision that we would not put them through that. If we brought one of their machines in, we paid the freight. If it were kept more than a day, we provided a loaner. But when we did all that, we lost a lot of money." The financial downside was disclosed in WPE's annual report. Under the circumstances, Case later altered its remuneration plan to better satisfy the needs of its dealers.