Just four years ago, Micro General was a sleepy little Santa Ana company with $2 million in annual sales of postage meters, postal scales and shipping systems.
That was before Bill Foley got hold of it.
Nowadays, Micro General’s revenue is close to $100 million annually and there are no postage meters in sight.
And that’s just for starters. Foley, a deal-maker famous for making big bets on title insurance and fast-food chains, is making Micro General his play on the Internet.
“We are clearly Bill Foley’s Internet strategy,” said John Snedegar, Micro General’s chief executive. “We have no other technology elsewhere.”
But Foley’s recent bets haven’t fared so well on Wall Street. With rising interest rates and a recently concluded merger, shares in his Irvine-based Fidelity National Financial Inc. were at 15 last week, flat for the year and down 28% from last July’s 22 level. Shares in Anaheim-based CKE Restaurants Inc., where Foley serves as chairman, have been in a prolonged downtrend since early last year and were at 3 last week. And Micro General itself has been hammered in the tech-stock downturn, going from 45 in March to 10 last week.
Micro General grew out of real-estate services company Fidelity National. Fidelity still owns more than two-thirds of the company’s shares through Micro General’s 1998 reverse merger with Fidelity ACS Systems Inc., a Santa Ana maker of real estate software that once served as Fidelity’s data processing unit. Fidelity also is a big Micro General customer.
But as part of a move away from stodgy postage meters, an industry dominated by Pitney Bowes Inc., Foley is recasting Micro General as an Internet services company.
Among recent events:
n Micro General is selling its long distance telecommunications unit, which provided two-thirds of its $95 million in revenue last year.
n The company’s beefing up its insider-dominated board of directors with former Microsoft Corp. executive Dwayne Walker, political insider California state GOP chair John McGraw and real estate columnist and Internet businessman Bradley Inman. (See related story, this page.)
n Micro General formed a new company, Santa Ana-based Escrow.com, along with Fidelity. Escrow.com recently hired Russell Stern as chief executive, who was in the running to be CEO at Irvine-based disk-drive maker Western Digital Corp.
n In April, Escrow.com, a Micro General unit, received $30 million in funding from, among others, Softbank Corp., Chase Manhattan Corp. and Hong Kong’s Pacific Century CyberWorks Ltd. The funding comes even after March’s fallout in technology stocks.
n The company recently announced plans for a spin-off. The division, which hasn’t yet been named, will offer online real estate settlement products and services designed to handle transactions over the Internet. CEO Snedegar expects Micro General to launch other spin-offs in the next couple of years.
n Micro General’s stock recently moved from the low-profile over-the-counter bulletin board to Nasdaq.
n The company’s employee count has jumped to 392, double the number it had six months ago.
When compared to Foley’s other businesses,Fidelity National, with $3.4 billion in 1999 revenue, and CKE Restaurants Inc. of Anaheim, with $2 billion in 1999 sales,Micro General seems like small potatoes.
But Foley has signaled a renewed interest in Micro General. He’s back in the role of Micro General co-chairman after stepping down from that spot a year ago to focus on his other companies. Patrick Stone, Fidelity’s president, is the other co-chairman.
“Bill’s a lot more interested in what we’re doing nowadays,” Snedegar said.
For the first quarter, Micro General’s revenue increased 6% to $20.5 million. Net losses continued, coming at $1.6 million, compared to the previous year’s loss of $1.4 million. Company officials attribute the loss to increased operating costs at its telecommunications unit.
Micro General’s shares have been on a wild ride. They were as low as 2 last summer and reached a zenith of 45 in March before getting whacked in the recent technology stock correction. They now trade at about 10.
“It’s really hard to go against the current trend,” Snedegar said.
Foley sold 65,000 shares for an estimated $2.4 million on March 9, the day before the stock hit its peak. He still owns 4.5% of the company. Snedegar has another 7.3%. Fidelity owns the lion’s share, at 69%. Only about 3.9% of the closely held company’s 12.9 million shares are floated.
Snedegar joined Micro General’s board in 1998 and took over as CEO a year ago. He replaced Bruce Crair, a former Cox Communications PCS executive who said he left Micro General in March 1999 because of what he called “a difference of philosophy over the direction of the company.”
Before joining Micro General, Snedegar ran four other companies now listed on the Nasdaq exchange. Perhaps the best-known local company is StarBase Corp. of Santa Ana, a provider of Internet products with a market cap of $214 million.
“I went in there, cleaned it up and took it public,” he said of StarBase.
In the past three years, Micro General’s revenue has grown a chart-busting 3,000%. A big part of that growth came after Foley came on board and moved Fidelity’s technology unit, ACS, to Micro General. Fidelity then contracted with Micro General for technology services.
“Fidelity, by creating Micro General to do its outsourcing, has taken what is an expense and will turn it into a profit,” Snedegar said. “That benefits their shareholders.”
There’s more to it, Snedegar said. Foley and others are looking to Micro General to nurture and spin off new businesses.
“Out of it, they create opportunities, such as escrow.com,” he said. “We might take what was an expense and turn it into a billion-dollar asset. It’s a brilliant strategy. Some of it we stumbled on and some of it we planned.”
Escrow.com has been up and running since November. Snedegar is its chairman and Foley is a member of the board. Other noted board members are Yoshitaka Kitao, the No. 2 executive at Softbank, where he is VP and CFO, and Ken Minihan, a retired general who was director of the National Security Agency. Investors value escrow.com at $148 million, Snedegar said.
“Micro General owns 60% of escrow.com. That is an $80 million value that we consider as an asset,” he said.
Further down the line, Micro General is looking to spin off another business that collects Internet sales taxes for government entities.
In the near term, Micro General faces a transition. The company plans to sell LD Exchange, a provider of long-distance phone services that it bought for $3 million in 1998. The unit provided two-thirds of Micro General’s revenue in the first quarter. And it’s been a big reason for the eye-popping growth that’s gotten Micro General onto several lists of fast-growing publicly traded companies.
So why the sale? Profits at LD Exchange aren’t as big as company officials expected. And as Micro General pursues Internet services, most of which are tied to real estate, a phone service company is the odd man out.
Even so, Micro General stands to make a profit from the sale of LD Exchange, according to Securities and Exchange Commission filings. It’s asking $9 million to $15 million for the business, though the potential buyer hasn’t yet been disclosed.
Snedegar is looking to an increase in business from Fidelity to offset the loss of revenue from an LD Exchange sale. He’s also looking to growth from escrow.com and other units.
Micro General also will get a boost from Fidelity’s March buy of Chicago Title Corp., which now becomes a Micro General client. The Chicago Title acquisition doubled Fidelity’s size, making it the industry’s largest title insurer. Moreover, some 150 employees who ran the technology side of Chicago Title are being transferred to Micro General. This group includes senior managers, technical staff, electronic-commerce developers and others.
