Fading Fortune.

A global flower distributor wilts.

WHEN U.S.A. FLORAL PRODUCTS SET OUT IN 1997 TO consolidate the global distribution of the nearly US$40 billion market for cut flowers, with a focus on Colombian blossoms, Wall Street loved the idea. But love can be fickle. Four years and more than $230 million later, the company has gone bust.

The story of how this so-called "poof" company--one that seemingly appears from nowhere--failed at its goal speaks volumes about global commodities trading, logistics, management and financial strategy. At its peak, the world's largest flower company had 4,300 workers worldwide and 122 distribution points in 21 countries on five continents.

But poor execution ultimately nipped the burgeoning empire in the bud, according to U.S. Securities and Exchange Commission documents, bankruptcy court records and interviews with creditors and industry experts. The quick-growing company couldn't integrate and streamline operations fast enough to realize savings. It also never managed to unite disparate systems for receiving, tracking, storing and distributing information for flowers, an industry where freshness is crucial.

"Because the industry is so fragmented, what's important is for everyone in the distribution channel to access information about the flowers. People want to know that they didn't sit in a warehouse for two weeks," says Andrew Manton-Zamora, CEO of Miami-based Flowergrower.com, which matches growers with buyers online.

U.S.A. Floral was the brainchild of Jonathan Ledecky and Roberto Poirier; both declined to be interviewed for this story Ledecky is a well-known Washington, D.C., financier and an early practitioner of the "rollup"--a risky strategy in which a company buys up regional and small enterprises to create a dominating powerhouse.

In 1994, Ledecky created U.S. Office Products, which grew rapidly through acquisitions of office supply and business service companies to almost $4 billion in annual sales. The rollup later unraveled in bankruptcy court as did other ventures backed by Ledecky. Before they hit the wall, however, the Harvard-educated entrepreneur was hailed as a financial wizard.

Joining Ledecky in the U.S.A. Floral enterprise was Poirier, a 22-year flower industry veteran whose work history included stints with FTD and 1-800-Flowers. When U.S.A. Floral Products formed in April 1997, he brought to the table a knowledge of industry players. The duo initially put together a group of seven U.S. flower wholesalers with combined sales of $175 million, profits of $2.7 minion and 32 facilities in 17 states. After an eighth company came on board, they all agreed to merge into a single entity in exchange for a promise of cash and shares once U.S.A. Floral went public.

The national flower powerhouse was born when the company hit the Nasdaq in October 1997. Ledecky and Pokier created enormous momentum behind the idea that the flower business would blossom with consolidation. Their basic sales pitch: They would provide a bridge between growers in Colombia--by and far the leading flower supplier in the U.S. market--and U.S. retailers. Huge profits would be realized. Run, ROSI, run. Investors smelled a winning idea On the first day of trading under the symbol ROSI, the stock price soared from $13 to $20.38. "U.S.A. Floral is ideally positioned to consolidate the highly fragmented market for wholesale distribution of floral products," Andrew Jeffrey, a research analyst at BancAmerica Robertson Stephens, said at the time. Jeffrey initiated coverage on U.S.A. Floral Products Inc. with a "buy" rating and a 12-month price target of $30. "As a first-to-market consolidator, U.S.A. Floral will benefit significantly from increased purchasing and operating efficiencies as it rolls up th e industry," he predicted.

The high initial share price is a key component of the rollup strategy. The consolidating company uses its high valuation to buy small, undervalued private companies. This arbitrage helps maintain the rollup's continuing high valuation, what Ledecky has described as a "gerbil wheel." Until investors begin to question the rollup company's ability to generate profits, the rodent runs.

Not surprisingly, ROSI ran. U.S.A. Floral wasted no time in making good on its bid to become the dominant force in the flower business. In less than a year, the company bought 33 wholesalers, distributors and even bouquet companies. Such was the maelstrom of attention that fruit giant Dole decided to enter the fray. It bought two closely held Miami companies, Sunburst Farms, the nation's largest flower marketer, and Floramerica, the largest grower.

U.S.A. Floral leveraged its growing fame to steal a top executive from Wal-Mart. Chris Wilson ditched his job as a division president for the world's largest retailer to help implement U.S.A. Floral's national "hub and spoke" system in the wholesale flower and floral products industry. The system was Ledecky and Poirier's answer to critics who said buying companies and leaving local brands and management in place would prevent the synergies of shared expenses from emerging. As U.S.A. Floral chief operating officer, Wilson promised to cut two or three days from the time fresh flowers spend in transit to retailers.

Wilson's vision was to ship not just via Miami, where some 70% of flowers enter the United States, but also through Atlanta and Dallas. His strategy called for a freshness date stamped on packaging and a money-back refund if flowers didn't last until that date. "We'll be able to guarantee that product because we'll know how long the flowers have been in the system and we will know how long they last," Wilson told the Washington Times.

But the company was growing faster than it could handle. In November 1997, U.S.A. Floral went global with the $66 million acquisition of Florimex Worldwide, the world's largest international importer and distributor of floral products. The deal made U.S.A. Floral a $1 billion company. Poirier's promises suddenly turned international in scope, as he cited U.S. Department of Agriculture forecasts suggesting that the total retail market in floral and potted plants in 23 key countries would grow from $45.5 billion in 1995 to $60.5 billion in 2000.

"Right up front it gives us a global footprint and entry into a marketplace in a very large and integrated fashion," Pokier told media at the time.

But the financial market didn't buy the new global story. The share price started to wither. The crisis hit full-blown proportions when Morgan Stanley Dean Witter, one of the original underwriters of U.S.A. Floral's initial public offering, downgraded the stock The price crashed through its previous 52-week low of $10.50 to, at one point, $5.87 per share.

U.S.A. Floral executives responded to the sharp drop in the stock price with a counter-offensive. They said that they met acquisition targets ahead of schedule, met or exceeded quarterly earnings targets and recorded more than $1 billion in revenue in 10 months.

ROSI gets a break. And they added another promise: profitability. "Our focus will remain upon the profitable integration of the companies within our network, building an efficient infrastructure, paring costs where possible, and seeking revenue synergies across our customer base that can fuel organic growth," Poirier told the financial markets.

With the "continued" focus came a new executive: W. Michael Kipphut. The former Evenflo & Spalding executive took over as chief financial officer, replacing Raymond C. Anderson, who was named to n newly created post: chief information officer and vice president.

And just when it looked like ROSI could no longer keep the gerbil wheel turning, Steven Berrard and several other former Blockbuster Entertainment executives announced that their company, Gerard Stevens, would buy Florafax International to create a national chain of flower stores. A rollup artist himself. Berrard's strategy dovetailed perfectly with U.S.A. Floral's, pushing the share price back up beyond $12.

The respite would be short-lived, however, because an international flower glut caused prices to tumble. According to U.S. Department of Agriculture data on imports from South America, prices on red roses were down as much as 35% in the second quarter of 1999, compared to the same period a year earlier. Chrysanthemums for the were down as much as 56% and carnations about 65%. The pricing pressure brought an earnings decline of 20% to 30%. At the time, Poirier acknowledged that "the current sustained pricing pressure has severe impacted operating margins in the first six months of 1999."

The situation steadily worsened. For full year 1999, the company reported a net loss of $3.1 million, or 19 cents a share. U.S.A. Floral suspended operations in its large distribution facilities in Blytheville, Arkansas. Selling, general and administrative expenses grew from $198.2 million, or 19.8% of net revenues in 1998, to $218.1 million, or 23.6% of revenues in 1999.

U.S.A. Floral closed many of its less profitable units as its stock continued to take a beating. Between the initial offering in October 1997 and Dec. 31, 1999, the share price plummeted more than 80%. In tandem, management upheaval ensued. Poirier stepped aside as CEO and, in November 1999, U.S.A. Floral hired Michael Broomfield, a former CEO of supermarket chain Giant Food, as his replacement. Three months later, Chief Financial Officer Michael Kipphut resigned. A month later, Ledecky and Poirier left.

The final chapter. The value of U.S.A. Floral's holdings continued to slide. In June 2000, for example, the company suffered a loss of $3.7 million on the sale of one subsidiary. That occurred about the time stock was worth just pennies a share. In August 2000, the Nasdaq delisted U.S.A. Floral because it no longer met net asset, market capitalization and net income requirements. The company was moved to the OTC Bulletin Board.

In September 2000, U.S.A. Floral reported a nine-month net loss of $185.9 million on revenues of $657.4 million. The company was no longer in compliance with its credit agreement with Bankers Trust Company. The bank agreed to postpone loan payments on outstanding borrowings of $199.6 million but required the rollup to sell its international division and its North American wholesale distribution business. U.S.A. Floral closed its Washington, D.C., headquarters and combined staff in Miami. That wasn't enough: the company was forced to file for bankruptcy.

In April 2001, it announced plans to sell Florimex, its international division, and 16 of its U.S. operations while winding down the remaining units, U.S.A. Floral has up to $10 million in assets and owes up to $10 million to more than 1,000 creditors, according to the company's bankruptcy court documents.

Creditors--from Miami and Houston to Colombia and Costa Rica-are lining up for their money. Seven of the top 20 creditors listed in the bankruptcy filing are Bogota-based floral suppliers. Shareholders will get nothing for their stock. Many of the small and regional business owners, who bought into the rollup for stock or cash or both, have also lost out.

On the face of it, consolidating the flower industry through a rollup seemed like a good idea. Disparate importers, brokers, wholesalers and bouquet manufacturers with a rainbow of inventory management systems had long dominated the fragmented industry. So why not set up a corporate entity to buy a group of large companies that could acquire even smaller firms in surrounding markets? In theory, the conglomerate could operate efficiently due to centralized buying, volume discount purchases of flowers and other savings.

But the savings never surfaced and top management turnover left U.S.A. Floral without consistent leadership.

And the company carried hefty expenses associated with the rollup. The rollup concept itself, which enjoyed mixed success at best in other industries. was not suited to the flower world--a hodge-podge collection of players handling just one type of perishable product.

"The rollup could have been executed better," says Brian Clancy, an analyst with MergeGlobal in Arlington, Virginia. "The flower industry's margins are thin, just a few percentage points. There is no room for error."

One of U.S.A. Floral's largest debtors says he knew the rollup strategy was flawed from the beginning but, as a supplier, he had little choice but to participate. "Prior to the rollup, some of the companies involved constituted more than 20% of my business, so you had to play along," says Bruce Brady, sales and marketing director for Sun Valley Floral Farms, in Arcata, California. U.S.A. Floral owes the grower nearly $400,000. "The company did not have a good integration strategy, nor did they have a good vision for where they were going, other than the desire to be the biggest," says Brady.

No chance. Poor management led to U.S.A. Floral's downfall, says Fred Vangulden, comptroller of Tampa Airlines, the company's second largest creditor, with a claim of about $600,000. "U.S.A Floral retained a lot of the same owners and managers with their own sales and accounting departments. They should have reduced overhead and streamlined operations," says Vangulden. Current U.S.A. Floral executives declined to be interviewed.

During its downward spiral, U.S.A. Floral consistently blamed high labor costs, increased competition, high sales staff turnover and an oversupply of flowers that drove down prices industry wide. It also had excessive expenses, notably warehousing, deliveries, shipping and salaries.

In the end, however, perhaps the vision of Ledecky and Poirier was simply too bold. The idea of rolling up an entire industry in less than a year sounds appealing. But as the U.S.A. Floral story shows, as fast as a "poof" company can gain a dominant position, it also can disappear.

Dying on the Vine
US$ millions
              SALES  PROFITS
1997          37.38     0.42
1998         589.03     7.74
1999         924.85    -3.07
9 mos. 2000  657.37  -185.93
SOURCE: Company reports