Resource Group Industries, Inc.

Resource Group Industries, Inc

Portfolio Analysis & Discussion

Acquisition Date:

Divestiture Date:

Held in Portfolio:

Purchase Price:

Sales Price:

% Gain:

Annualized R.O.R.:

Industry:

S.I.C. Codes:

September 21, 1978

March 1, 1980

18 months

$5,000

“Subject to Non-Disclosure”*

Computer Eqt. & Peripherals

3577

Genesis Of The Business

The genesis of RGI’s business was the result of unrelated research into a business strategy being developed for a consulting client. The client was interested in a restaurant theme that would incorporate limited menu, low operating costs, but housed in a perceived exclusivity.

The proposed element to accomplish the perceived exclusivity was the introduction of a club card with an incorporated magnetic strip. Aimed at the business lunch/happy hour crowd, the purpose of the card was to open the entry door. However, the magnetic strip was also intended to include the “member’s” name and his (or her) favorite cocktail or snack. The effect would be that the guest arriving at the hostess station would be addressed by name and the ability to provide the member’s favorite refreshment.

In the context of 1977-78, the state of magnetic strip readers was rudimentary at best. In fact, research showed that the most stable card reader was manufactured by IBM. Deciding to use the IBM card reader, an attempt was made to order one to test the premise in real life test. Unfortunately, we determined that one could not order a card reader from IBM unless it was “tied” to a computer system. Our only choice at that point was to place an order for a computer system as well as the card reader.

The order was merely a matter of sending an order letter to an IBM office. Since the IBM General Systems Division computer systems were in high demand, there was no scrutiny of who ordered what. A long queue existed so that if an order was canceled, there was always the next company in line ready and willing move up in the queue. So an order was placed for an IBM System 34 mini computer along with some monitors, a printer and the intended equipment, our card reader.

Additional research showed us that the long queue of companies interested in acquiring System 34 computers had created an entirely new industry of brokers who would serve as a middle man for companies. Some companies interested in an earlier delivery would be willing to pay a premium for exchanging their place in the queue for one closer to the top of the list.

A New Enterprise

Once exposed to the participants in this industry, and seeing the buying and selling of delivery positions, in most cases by people who had no intention of taking delivery of an actual computer system, it became clear that the broker with the most order positions would be in an excellent spot to generate revenues.

Since there was no Google, the next step was a difficult one. Scouring phonebooks for hundreds of metropolitan cities resulted in a list of IBM offices in every state. Once the list was compiled, with the personal computer yet to become a glimmer in Steve Jobs eye, hundreds of order letters had to be typed to place the orders. Luckily, IBM had already introduced its memory typewriter, which was an improvement on its popular “Selectric” typewriter, with its spinning typing head. One could input a form letter, after which the memory typewriter would insert the variable addressees and type identical

letters- without any repetitive typing. All the operator had to do was insert the paper.

With a single memory typewriter, RGI ordered, from each IBM office it could identify, two System 34 computers, along with peripherals. Shortly after mailing the letters, RGI would received a notification letter that the order was received and that the name we provided as the recipient would be placed in the order delivery queue, along with an expected ship date in the future.

On one particular occasion, an IBM branch manager called RGI to suggest an alternative. Seeing that the order was for a large System 34, he suggested that IBM was about to announce the new larger IBM System 38 computer. The idea being that the system could grow with the business. Now armed with the information about the brand new IBM System 28 computer, once IBM announced it was accepting orders for the System 38, RGI had its memory typewriter order another two systems from each IBM office on the list. The result of all this typing and mailed letters, was that RGI, technically had the largest aggregate order of IBM GSD equipment in the world.

RGI next setup a a network of dealerships that would utilize RGI’s extensive inventory of delivery positions, to both earn premiums from those companies interested in moving up in the line as well as handling the shipment and delivery of systems. Revenues and profit soared as RGI ramped up its business to include trade-ins of older systems and the general secondary market.

One of the newsworthy items occurred in May 1979 when RGI sold an early delivery position for a System 38 to Telex Corp. Telex was an electronics manufacturer that built peripheral equipment that would plug into IBM systems, selling at a discount to IBM brand equipment. It was presumed that Telex would reverse-engineer its products from a working IBM system.

Restraint of Trade

It is suspected that in early 1980, IBM began to comprehend the magnitude of RGI’s order and its place in the industry. Faced with the fact that RGI had a significant percentage of the total IBM manufacturing order book, IBM took action. Instead of requiring RGI to pay an order deposit a few months in advance of shipment, as it had done for years with all orders, IBM sent a notice from each branch office requiring that the deposit be made within 30 days of the letter. The aggregate deposit was an impossible task for RGI. Shortly after the 30 day demand, IBM in each branch office, unilaterally began to cancel RGI orders and within 60 days, wiped out RGI’s entire inventory of GSD equipment. Convinced that IBM’s intention was to remove RGI as a perceived threat, it had put RGI out of business and significantly affected the business of RGI network of dealers.

RGI met with the law firm that had represented Telex Corp. in its Restraint of Trade anti-trust suit against IBM, thereby winning a damage award of $260 million (trebled damages). According to the law firm, RGI had already won the lawsuit but, it had to be prepared for a decade of depositions and delay by the IBM litigation machine.

Faced with a long litigation in order to recover damages in a business that had already been shut down, RGI chose to call IBM’s president and suggest that in its attorney’s view the case was won 10 years out. RGI then suggested a negotiated settlement.

Finally, in March 1980, RGI and IBM settled the dispute out of court. While RGI would like to list the affect on the portfolio performance, it is bound by a non-disclosure agreement, never to reveal the details of the settlement.

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