Meanwhile, Cardinal also moved downstream. For example, it leveraged its relationship with hospitals to sell them medical and surgical products in addition to drugs. With the acquisition of Pyxis Corp., in 1996, it acquired machines that dispense pharmaceuticals in the hospital. Since the acquisition, Cardinal has broadened the Pyxis line to automate other functions within hospitals and pharmacies, enabling them to boost efficiency and improve patient care.
Cardinal’s long-term guidance for growth is midteens or better EPS growth, according to CFO Richard Miller. But “Cardinal has always looked at growth as a strategy more than an outcome,” he says. Miller, who joined the company in 1994 and became CFO in 1999, says any new market opportunity must pass four tests. One is the fit with the existing business. “We are not going to go for wild diversification outside health care or into ‘just anything health care,’” he says. “It has to be a complementary business that makes one or both of the businesses better to justify it.” Another test is whether it helps Cardinal establish a leadership position in the new market. A third relates to the quality of acquired companies, a key determinant in achieving a successful merger. Finally, Miller says, the financial model has to be sound, leading to the creation of shareholder value.
Acquisitions have been an important part of Cardinal’s strategy; the company has made 27 deals since 2000. “We purchase a company for scale or expertise, and then we build out breadth systematically,” says James Mazzola, a Cardinal spokesperson.
The willingness to take a broader view of itself has helped make Cardinal one of the fastest-growing large companies in the nation. Over the past decade, since it started to diversify, the company’s revenues have ballooned from $2 billion to more than $50 billion, and operating earnings have grown from $60 million to $2.5 billion.
Redefining the Core
Taking too broad a view of a company may result in growth initiatives that stray too far from the core business (see “Growing Pains,” at the end of this article). Sometimes it’s better instead to redefine the core and grow from there. That’s essentially what Reynolds & Reynolds did in 1998, when it sold off part of its printing business. The roots of that business reach all the way back to the 19th century, to Reynolds’s founding in 1866 as a business-forms company.
Over the years, Dayton-based Reynolds became the top supplier of business forms to auto dealerships. When computerization took hold, the company branched into back-office systems for dealerships. By the late 1990s, Reynolds had become an $800 million company, but neither of its main businesses was growing much. “We did a few acquisitions, but not a lot of organic growth at all,” says CFO Dale Medford, who has been at Reynolds since 1974.
So Reynolds decided to focus its growth efforts exclusively on its automotive-related customers. The company sold off the nonautomotive part of its printing business in 1998. Through acquisition and internal development, it assembled a host of CRM (customer relationship management) solutions that would seamlessly connect with Reynolds’s existing back-office applications. Medford says its CRM applications can increase the number of sales a dealer can close on the showroom floor by 2 or 3 percent. “That doesn’t seem like much, but in the auto business, that is a lot of money,” he says.